ECONOMIC HIGHLIGHTS
New Delhi, 5 September 2007
Don’t Play Politics
CREATE MEGA BANKS
By Dr Vinod Mehta
(Former
Director, Research, ICSSR)
The Government has been mulling over the idea of merging
the State Bank of India
with its seven associate banks for
the past few years to create a mega bank. So that it can withstand competition
from other banks and play an active role in the international banking business. In fact,
it also wishes other Public Sector banks to take the initiative to merge and emerge
as mega banks of international standard.
However, the Government has hesitated to move forward
on its proposal because of strong opposition from a few political parties and
trade unions. Globalization demands we have six to seven strong mega Indian
banks which can not only withstand competition from mega international banks
but also play a significant role in the international financial markets.
The shares of the State Bank of India which were held by the Reserve Bank of India have now
been transferred to the Government of India.
The Government is now in a position to offload a part of it in the
equity market. But it can realize a better
price if the associate banks of the State Bank of India like the State Bank of
Saurashtra, the State Bank of Patiala etc. are merged with the main bank.
Notwithstanding, the associate banks have been there
for historical reasons but have all been functioning under the State Bank of India’s administrative
control. Therefore by merging the associates with the State Bank of India prior to
offloading a small part of its equity in the equity market the Government would
kill two birds with one stone: Create a mega bank and get maximum value for its
equity.
This also holds true for other nationalized and
private sector banks. In the next three to four years a number of foreign banks
will enter India
thus the Indian banks too should be ready to enter foreign countries. In fact, the Narasimham Committee in its Second
Report on Banking Sector Reforms, more than a decade ago, had set the tone for the
creation of mega banks by suggesting many sweeping changes in the banking
sector with a view to bringing them on par with the international banks.
The Report covered all the important aspects ranging
from bank mergers to the creation of global sized banks. While making these
recommendations, the Committee had kept in view the inevitable capital account
convertibility, which was likely to result in large inflows and outflows. Also,
the attendant implications for exchange rate management and domestic liquidity
which only very large banks were capable of handling. The time is now ripe to implement the
recommendations of the Narasimham Committee with some modifications keeping in
view the changes that have occurred in the banking sector in the past one
decade.
It has been stated in this column on several
occasions earlier that the finance sector, which was to be reformed at a much
faster pace is the one which is still lagging behind. None of the present Indian banks is able to on
their own stand internationally or to ward of the threat of take-over by
foreign banks. They are surviving
because of the Government backing. All
over the world the strong banks have joined hands or are joining hands to
become mega banks so that they can stand the international competition and
manage the flow of funds in a better way.
Remember, more than a decade
ago two Japanese banks, namely the Bank of Tokyo (which had more international presence)
and the Mitsubishi Bank (which had more national presence) merged to become the
Bank of Tokyo-Mitsubishi. At that time the Bank of Tokyo-Mitsubishi with assets
totaling around US $647.781 billion was the largest bank in the world.
The second largest bank in
the world, in terms of assets is the Deutsche Bank followed by the Credit
Auricle, the Sumitomo Bank and the Industrial and Commercial Bank of China. If India's
largest bank, the State Bank of India,
joins hands with its seven associate banks even then in terms of assets it
would rank 129th bank in the world.
Again if one were to merge,
say, the Bank of India, the Corporation Bank and the Oriental Bank of Commerce,
the merged entity would perhaps rank 331st in the world in terms of assets. All this is to state that we do not have a
single bank of international dimension.
It will take perhaps 8 to 10 years from now for a few Indian strong
banks to emerge as a bank of international dimension, provided some of them are
merged now.
It is in this context that we have to see the
recommendation of the Second Narasimham Committee Report. The Committee was against forced mergers
between strong and weak banks as it feared the weak bank would pull down the
stronger bank as was seen in the merger of the New Bank of India with the
Punjab National Bank more than a decade ago.
Politically, it may be difficult for the Government
to close down the loss making banks but it will have to take stern measures in
this direction. Either the loss making banks should accept the rehabilitation
package worked out by the Government or else accept their closure. The
Government cannot afford to save them all the time by diverting the tax payers’
hard earned money. Had these banks been
in the private sector they would have closed down by now.
One of the reasons for the rut in the banking sector
is the equalization of pay-scales of various levels of bank employees in the
nationalized banking sector. Such an
approach does not make any distinction between an efficient and inefficient
employee. Therefore, it hardly matters
whether the bank is earning profit or making losses since the employees are
ensured of their pay in the regular scale. After the submission of the Narasimhan
Report the bank employees have again threatened that they will resort to
nationwide strikes if any attempt is made by the Government to close down loss
making branches of a bank or loss making banks themselves.
It may be observed that the bank employees are using
their monopoly power to hold the nation to ransom by refusing to cooperate with
the Government in the implementation of financial sector reforms. Despite the Government’s
assurance that none of the existing employee would be forcibly retired. If the employees still adopt a stubborn attitude
and do not cooperate in the implementation of the reforms, the Government
should take a very strong stand and action against the employees within the
legal framework.
The change in the functioning of the banks as well as
their restructuring is inevitable because of the sweeping technological changes
in the banking industry all over the world.
With the advances in information technology, computer technology etc.
the concept of a bank branch has become totally irrelevant.
Again with the costs of real estate going up the everyday
maintenance of separate bank branches is eating into the potential profits of
the banks. All over the world bank
branches are giving way to ATMs and internet banking for carrying out a number
of the banking transactions. Then there are big financial deals to be arranged
like the purchase of Corus Steel by Tatas.
All these are reasons enough for creation of mega banks.
Some of the private sector banks which came up after
1991 have merged like the Centurian Bank and the Bank of Punjab to become the Centurion
Bank of Punjab. It is now reported that the Lord
Krishna Bank has merged with the Centurian Bank of Punjab.
But this is a merger of three relatively smaller private banks. What we need is
the merger of strong public sector banks to create mega banks.
With the economy being sucked into the vortex of
globalization many mega international banks are looking for acquisitions in India. Before
that happens we must facilitate the merger of strong public sector banks to
enable them to become strong mega banks which can stand up to international
banks. ---- INFA
(Copyright India News &
Feature Alliance)
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