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Allay these fears

Allay these fears
Highlights

The plan to merge associate banks into State Bank of India (SBI) is part of the long heard proposal for consolidation of public sector banks. The arguments for and against the mergers are equally strong. 

The plan to merge associate banks into State Bank of India (SBI) is part of the long heard proposal for consolidation of public sector banks. The arguments for and against the mergers are equally strong.

Mergers will enable public sector banks to scale up their operations to transform into a much larger bank. The big is beautiful theory rests on the logic that such an amalgamation is essential to face the eventual competition from mighty multinational banks. Bad loans are increasing. The balance sheets are worrisome.

Big banks will have the capacity to tide over the vulnerabilities. The globalisation of finance capital invariably exposes Indian public sector financial institutions also to the cross-border capital flows. In the post-merger scenario, the big banks can further diversify their fiscal operations to provide greater stability to the business.

The Indian banking business cannot be seen in isolation. The international financial environment reveals that the largest bank of India, State Bank of India (SBI), is relatively much smaller than some of the foreign banks. The time has come for the emergence of a true multinational bank of India. This can only happen if we give up the old fashioned thinking and resistance to change.

The basic principle of economics tells us that the larger scale of economy and business means lower operational costs.
However, the critics of banks’ merger fear that consolidation is an eventual recipe for easy privatisation. The amalgamation of banks is done to make them look prettier for sale.

The opponents of this proposal argue that merger and consolidation need not be the only route to grow bigger. There may be too many banks in India. But each of them has a historical legacy and specific character of its own. Making them into one large bank would only mean abrogation of this unique identity, customers and practices.

Despite unprecedented expansion in the post-nationalisation period, public sector banks continue to enjoy significant regional flavour. Such a regional identity helped them acquire unique loyalty with the customer. Consolidation destroys this loyalty built over decades of service.

Larger banks are prone to technological redundancies and hidden shocks. Internal vigil is often a casualty due to the mammoth size of operations. The experience of American financial system that resulted in recession testifies to this.

The financial sector has to prioritise many other reform measures. The rapacious players need to be weeded out. The phenomenon of toxic debt that drove the American banking sector to the brink of collapse has started creeping into the Indian banking sector, too. The credit portfolio should be detoxified. The mounting problem of non-performing assets (NPAs) is not due to size but is the result of bad banking practices.

However big the banks may be after the merger, they cannot compete with the top international banks due to still prevailing asymmetry. It is the regulation that can enable the Indian public sector banks to compete with foreign players. The concentration of business can also lead to curtailment of spread of credit portfolio and clientele which may lead to unbanking of financially disenfranchised. Muddy issues need to be tackled before the mad rush to merger. Allay the concerns.

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