The big bank theory

The government has opted for a convenient tactic to address the Rs 10 lakh plus crore mess in public sector banks (PSBs). Dena Bank — one of the worst performing PSBs — was forbidden by the RBI from extending new credits under its stringent prompt corrective action (PCA). But it has now received a fresh lease of life by the recent three-bank merger. With this deft move, the government has effortlessly shifted Dena Bank’s liabilities to two healthier siblings — Bank of Baroda and Vijaya Bank. The logic is appealing. Two strong banks will absorb a weak bank and create India’s third largest bank with much greater lending power. The government seems unmindful of the fact that rogue banks such as Dena got into trouble because of indiscriminate, often farudulent,  lending. Will the merger absolve Dena Bank of its misdemeanours? If not, who are the culprits for the sorry state of Dena Bank? Will the merger become a cover to conceal a financial crime and protect the offenders, including irresponsible bank officials, forever? The people, the ultimate owners of public sector banks, must be informed unambiguously. 

In its hurry to contain the rising non-performing assets (NPAs), the government should not commit another blunder. It should professionally evaluate the State Bank of India experiment before proclaiming it as a universal solution. The net profit of SBI has dropped alarmingly after it was forced to absorb five of its associate banks besides the Bharatiya Mahila Bank. Similarly, the takeover of the ailing IDBI by LIC cannot be termed as a sound business decision.

There is nothing wrong in mergers and acquisitions (M&A) per se. They are acceptable tools for corporates to expand and consolidate their businesses. M&As must, however, happen purely on commercial considerations and must not be politically imposed. While PSBs are promoted by the government, they are run by their respective professional boards, which alone should take such decisions. Their state of affairs suggests that the right approach should be to change their governance structure to eliminate excessive political interference that resulted in unmanageable NPAs.