Can There Be Anything More Daft Than Merging Four Loss-Making PSU Banks?

That the government has run out of ideas on what to do with India’s tottering public sector banks is clear: Mint newspaper suggests that a merger of four banks is one of the proposals doing the rounds. The four in question are Bank of Baroda, IDBI Bank, Central Bank of India, and Oriental Bank of Commerce.

These banks collectively registered losses of over Rs 21,600 crore in fiscal 2017-18, and three of them are in the Reserve Bank of India’s ICU – the so-called prompt corrective action (PCA) category. The only one outside PCA is Bank of Baroda, which, too, can hardly be said to be in rude good health, having just reported its biggest quarterly loss in history – Rs 3,342 crore in March 2018.

The commonsense point for anyone plotting the revival of sick banks is this: can aggregating four under-performing or sick ones create one healthy bank?

At best of times, mergers underdeliver on synergies and costs. Failure rates are two out of three, and the primary reason for failure is people-related. Companies with different cultures spend most of their initial years trying to square human resources and culture issues, and in the case of the public sector, where you can’t even hand thousands of employees the pink slip, culture issues essentially result in continued underperformance.

The banks need strong managements focused on essentials; what they don’t need is to be given additional worries on how to manage the resultant excess staffing, grade fitments and outplacement.

The PCA cases are, anyway, barred from expanding their balance-sheets, since the Reserve Bank expects them to close high-cost deposits, stop the chasing of new businesses, and chase down bad loans.

When four big losers are put in one ward, it is daft to expect a miraculous recovery. Its like putting TB, Nipah, SARS and Ebola cases in one room and hoping they will all recover.

Between them, their gross bad loans – or non-performing assets (NPAs) – add up to nearly Rs 1,75,000 crore, and merging them is like asking for bigger trouble than what you already have now.

A much better proposal is the one to make a strategic sale of IDBI Bank, which, having been set up under the Companies Act, apparently does not need legislative changes to enable privatisation. But, as usual, this is going to be tough in an election year, where opposition politicians (and the unions) will pretend that the crown jewels are being sold for a song.

IDBI Bank had gross NPAs of over Rs 55,500 crore at last count, which constitute 28 per cent of its total advances. This means more than one rupee in four lent has gone sour. So, anyone who thinks IDBI Bank is worth the trouble will expect to get it for a song, since he will have to put in all the new capital to give it a fighting chance of success.

Like Air India, there will be no takers for IDBI Bank at any positive price – unless this is done after the government pours in several thousand crores of more capital down the drain. The right strategy is to cut the taxpayers’ losses by offering 51 percent of IDBI Bank to any willing private sector buyer at a nominal price. The government can recover some of the losses if there is a turnaround by selling the balance shares (around 30 percent), provided it does not interfere with the new management.

One wonders why IDBI Bank should yet get a valuation of over Rs 18,700 crore on the stock market; this probably reflects the market’s assumption that the government is behind it.

So, what is the way out?

Three things need to be done.

One, government can guarantee deposits (to prevent a run), and force these three banks (excluding Bank of Baroda) to sell salable assets and chase bad loans till they fall below 7-8 per cent of advances. After that, they can obtain capital from the market.

Two, government should finance a targeted voluntary retirement scheme for all four banks till they slim down to levels comparable with private banks.

Three, managements must be asked to close superfluous branches, and shift most business to the digital mode.

At least three of the four are bad banks, with only Bank of Baroda having a snowball’s chance in hell of mending its finances. These three should be downsized, and sold once it is possible to change the relevant laws that would allow privatisation of public sector banks.

Merger is the road to ruin.