On the face of it, we, at Moneylife, would be on the side cheering the merger of nationalised banks. Over the years, their service has been sloppy; attitude to customers uncaring (while private banks at least respond, it is a tough task getting a response even from senior management of nationalised banks); and worse, every few years, the government has re-capitalised the massive bad loans that they built up through corruption and political coercion. Also, it is not as if public sector banks (PSBs) have any empathy for the poor, the retired and the old.
We, the people, have paid the price and we are tired of it. Bad loans (called NPAs—non-performing assets) had reached the stage where they threatened the very existence of nationalised banks. So, a reduction in the number of banks from 26 to 19—with the merger of State Bank of Bank of India’s (SBI’s) sister banks and, now, with the merger of Bank of Baroda (BoB), Dena Bank and Vijaya Bank—would, logically, be a development that customers would welcome.
Unfortunately, in the last year of its term, the Modi government has, once again, rushed into a major policy decision without adequate public discussion or addressing any of the structural issues that have destroyed PSBs over the decades.
For one, the government has done nothing to ensure that the merged entities have more freedom (from political meddling), better accountability or increased responsibility. There is nothing to suggest that the merged entity will not begin to pile up bad loans all over again, needing another bailout at public expense a few years down the road.
It hasn’t even explained to us why a mere merger of three banks will lead to “a substantial rise in customer base, market reach, operational efficiency and wider bouquet of products and services for customers,” as claimed by Rajiv Kumar, secretary, department of financial services in the Union ministry of finance. After all, the only possible savings would be in rationalising of branches. But, since the jobs would be protected, even those savings would be minimal.
Does Size Matter?
Contrary to government propaganda, the move towards larger banks is fraught with risks, as was evident in the 2008 global financial crises. They had to be bailed out with taxpayers’ money. And, yet, while speaking at Columbia University in 2017, RBI (Reserve Bank of India) governor Urjit Patel had backed bank mergers saying, “The Indian banking system could be better off if some public sector banks are consolidated to have fewer but healthier entities, as it would help in dealing with the problem of stressed assets.”
He claimed that “there were cooperative banks and micro-financial institutions to provide community-level banking,” but did not mention that these fail with alarming regularity
. There are 1,618 urban cooperative banks in India, a third of them in Maharashtra and the rest in 10 other states. The RBI governor is well aware that the record of supervision and governance of these banks is abysmal
since they are, often, politically controlled.
How does a merger make banks healthier, unless there is better supervision and accountability? In India, the unravelling of Infrastructure Leasing & Financial Services (IL&FS) shows that the regulator and the government do not even have a grip on the reckless growth and borrowings of designated ‘systemically important’ institutions. Even today, as the drop in NAVs (net asset values) of mutual fund schemes exposed to IL&FS’s Rs1.2lakh crore borrowing begins to hurt investors, the government has maintained a stunning silence.
Deliberate Weakening of PSBs
India’s nationalised banks have been in a constant state of turmoil in NDA’s four years. The intense pressure to open Jan Dhan accounts and dealing with demonetisation took up the first two years. Dealing with bad loans, increased fraud and, in some cases, having their core lending operations stopped by prompt corrective action (PCA) by RBI has occupied the rest of their time.
Meanwhile, many PSBs were deliberately kept headless, as has been evident from the sudden appointment of as many as 10 managing directors/CEOs on 19 September 2018. Meanwhile, no appointments of directors representing employees and officers have been made on bank boards, eliminating a key check on the activity of senior bankers.
At the same time, all the ugly practices of the past continue unchecked. A small list of these is: political appointees on bank boards; employment of politically connected persons as internal auditors; dubious centralised purchase of bank equipment though select companies at exorbitant prices (many banks have been dumped with three-seater benches purchased centrally; under the previous government all signage of bank branches was centralised. In both cases, the costs have increased significantly).
While the government has been harping on the need for fewer, but larger, banks, the fact is that customers do not have much of a choice. Over the past 25 years, the number of banks has been reducing steadily. The entry to the business is tightly controlled by RBI, and licences are entirely at its discretion.
All, except the six new private banks allowed in the 1990s, have been bought over or merged; scores of smaller cooperative banks are shut every year after they fail; and; now; the big PSBs are being systematically weakened and merged. On the other side, a few small banks have been licensed apart from just four new universal banks over 20 years.
This has reduced, rather than enhanced, depositors’ options. Consequently, there is no incentive for branches to compete for funds by offering lower charges or better services. If that were not enough, the goings on at some of the larger private banks also has depositors worried.
RBI has refused to extend the tenure of the CEO (chief executive officer) of Axis Bank and Yes Bank. ICICI Bank remains mired in controversy made worse by the board’s unwillingness to restore credibility. The reduction of options for consumers will mean fewer working ATMs, fewer bank branches and increased cartelisation of fees and charges.
And don't forget all banks continue to earn profits through the same strategy of selling third-party insurance and financial products either through blatant mis-representation or downright cheating.
Poor Grievance Redress
Mis-selling of third-party products, especially to less financially literate depositors, has become so rampant that bank unions have been writing to management to stop the practice. Meanwhile, losses and rip-off through digital transactions have increased dramatically, while grievance redress has turned abysmal.
Moneylife Foundation, which works at grievance redress, finds that RBI’s customer services department is unresponsive and inaccessible to consumers. The Banking Ombudsman is erratic and, often, rules in favour of banks. Although RBI has clear and stringent rules about preventing harassment of customers due to digital fraud, in practice, customers are given a royal run-around.
If 78% of all deposits continue to be with banks, despite their poor service, it is because of the implied sovereign guarantee that their deposits are safe. Depositors already pay a high price for this privilege. Merging nationalised banks without putting in place accountability is bad for depositors, especially when the government has plans to shrink this space even further by merging United Bank, United Commercial Bank and Allahabad Bank and a few other combinations.