Are mega bank mergers well thought out? (The Hindu)

Mains Paper 3:Economy
Prelims level: Bank mergers
Mains level: Effect of delaying the bank mergers

Context:

• The government’s plan to merge 10 public sector banks into four, in order to create stronger entities, seems to be getting delayed. This has raised questions again over the usefulness of the whole idea.

Effect of delays:

• It seems issuance of the enabling notification may be delayed, as a result of which the declared schedule of getting the balance sheets merged by April 1 may not be adhered to.
• Since the primary need is to get things right as you go along, some delay may not be a bad thing.
• The losses of the merged entity can even be higher than the sum of the parts.
• The weak banks know that they are going to lose their independent identity, their staff can feel orphaned. Then, the efforts to recover dues lose momentum.
• The losses of BoB will reflect the asset classification norms followed by it, which can be different from that of the two weak banks.

Size doesn’t matter:

• Merging the weak with the strong can initially lead to a big loss recorded by a hitherto profitable, strong bank.
• This is really par for the course (BoB’s latest quarter loss is because of higher provisioning).
• If the political masters are worried over the red on the books of a hitherto strong BoB, then the far bigger question is whether they properly understood what such mergers are all about. To clarify the issues at stake, it is necessary to go back to the basics.
• The government had somewhat simplistically assumed that the problem of weak banks could be solved by merging them with strong banks.
• The latter would thereby become bigger and more capable to fend for themselves. Also, those who want to see India big on the global stage (the current political masters are foremost among them) want it to be able to flaunt a few names which are prominent in the global banking pecking order.
• There is nothing intrinsically great about a bank being big. If a big bank has loads of large non-performing assets, then it is no better off than a small, weak bank.
• All size does is give a bank some balance-sheet strength, on the basis of which it makes large loans to large corporates. 

Addressing the problem:

• If they can be given a new professional top management have them write off unrecoverable loans and recapitalise them.
• But if the government does not have the patience to go through this whole process of restructuring and nurturing, then it is better for the weak smaller banks to be liquidated. The weak part of their loan portfolio can be transferred to a holding company created for taking over such assets.

Conclusion:

• The good assets can be taken over by strong, large public sector banks. Or, the government may simply bring the weak public sector banks under the IBC.
• But, the worst thing we can do is get cold feet after going through a part of the merger process.

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Prelims Questions:

Q.1) With reference to the Jet streams, consider the following statements:
1. They are narrow bands of strong winds that flow over thousands of kilometres from west to east.
2. In India, the Tropical jet stream influences the formation and duration of the winter monsoon.

Which of the statements given above are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) None of the above

Ans: A
Mains Questions:
Q.1) If the Centre has developed cold feet over bank mergers, it suggests misplaced notions on what big banks are meant to achieve. Justifying the statement with your argument.