- 07/06/2019 at 9:55 am #1367946EduGorillaKeymasterSelect Question Language :
Direction: Read the given passage carefully and answer the questions that follow.
Some ideas have long legs – they refuse to die, or fade out. The idea of merging Public Sector Banks (PSBs) is one such idea in realm of economic policymaking – it has been around for a long time, debated at the highest levels, often posited as a panacea for various policy objectives (from creation of “world class Indian banks” to resolution of the current NPA issue). It is generally an idea with very variable merits, which is why its never really taken off. But it resurrects like a phoenix every now and then, as it did recently with the news of the merger of four PSB – Bank of Baroda, Punjab National Bank, IDBI Bank and Oriental Bank of Commerce – creating India’s second largest bank, with assets of Rs 16.5 trillion. Consolidating four loss-making banks into one would make it easier to tackle the NPA and governance issues in these institutions.
It is useful to test out the hypothesis, ie, bigger banks would be better, against available data. In India, PSB consolidation was first mooted by the Narasimhan Committee in 1991, in the first flush of liberalisation. Since then, there have been one-and-a-half live cases of consolidation of PSB. The outcomes have not been encouraging.
The first such exercise was the takeover of the distressed New Bank of India (NBI) by Punjab National Bank (PNB) in 1993. It was an involuntary exercise, driven by RBI to rescue NBI. PNB was a solid bank then, with a long track record of profitability, and many times larger than NBI in terms of assets and employees. Post-merger, PNB recorded its first loss (of Rs 96 crore) in 1996, and remained embroiled in employee issues for a very long time. Despite the fact that NBI was a “digestible” target for PNB, and the latter took many years before attaining equilibrium.
The second was gradual merger of all Associate Banks (AB) of SBI with the parent institution, culminating in the last tranche of the remaining five ABs with SBI in March 2017. This is termed as “half” a merger because for many critical purposes (like treasury operations, banking systems etc) the AB were largely under the operating control of SBI for a long time. While the jury is still out on the outcome of this merger, what is illustrative is that the combined losses of all the five ABs wiped out the net profit of SBI for 2016-17.
At a balance sheet level, with gross NPA of 20 per cent, the ABs significantly worsened SBI’s asset quality. How SBI digests this acquisition will give us more data on how mergers of PSB could pan out. Admittedly, past evidence on the outcomes from PSB consolidation are from a very thin sample – not enough to draw definitive conclusions from. Hence, let us look at the rationale, and test them against global evidence.
First, capital adequacy. Merging stressed, weaker banks with larger and stronger banks will enable effective management of NPA and allow for greater credit availability. Unfortunately, this is a complete red herring – PSB as a category are short of equity capital by an estimated Rs 2.5-3.5 lakh crores. There isn’t a single bank, not even the giant SBI, that has the kind of spare balance sheet capital to make even a small dent in the capital requirement of the category as a whole.
Which of the following would be an appropriate title for the given passage?
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