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Don’t Play Politics:CREATE MEGA BANKS, by Dr Vinod Mehta, 5 September 2007 Print E-mail

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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