Modi's Merger Spree

On 2 January 2019, the Union Cabinet approved the merging of Vijaya Bank, Dena Bank and Bank of Baroda. In April 2017, the Government had also merged six state banks with the State Bank of India. As we all know, our Banks are in a mess. The real question we must ponder over is this: Will mergers help in solving bank problems?

Three main issues

Firstly, these are not private banks which could sack its employees in the name of cost saving. These are public sector banks and they have the task of securing the future of around 90,000 employees. In general sense, when a merger takes place, multiple branches would have to be shut down. How this task will be achieved without terminating some employees and without resentment from them remains to be seen. Also, all these three banks have different organisation cultures. Therefore, the task of synchronising the employees into a single culture without any friction will definitely be a huge task.

Secondly, the idea behind decentralisation of banks was to cater to the specific requirements of each region. Mergers of this type will not help in reaching out to the regional audience and in the process kills the very idea of decentralisation.

Thirdly, even today, there are millions of people in the country who are not connected to a bank. There are many areas which does not have a bank. Given this situation, there is a greater need to expand the banks rather than consolidating them and if we are to expand, then we have to keep the regional ‘flavour’ alive.

Will mergers solve the problem?

Bank of Baroda has reported a loss of Rs. 2,431.81 crore this year. Dena Bank, on the other hand, has reported losses in three consecutive years (2016 – Rs. 935.32 crore, 2017 – Rs. 863.62 crore, and 2018 – Rs. 1,923.15 crore). Vijaya Bank on the other hand, has reported profits consecutively since 2014 (2014 – Rs. 415.91 crore, 2015 – Rs. 439.41 crore, 2016 – Rs. 381.80 crore, 2017 – Rs. 750.49 crore and 2018 – Rs. 727.02 crore). By merging two loss making banks with a profit making bank, the government is putting the stronger bank (i.e. Vijaya Bank) under pressure because of the weaker banks (i.e. Dena Bank and Bank of Baroda). A combined NPA of these banks will stand at Rs. 80,368 crore. This will make the combined bank more vulnerable to economic crises as the smaller ones could manage to keep its head above the water.

Most importantly, mergers are not the real answer to the banking mess. The real remedy to the mess will be reform of public sector banks without eroding its basic fabric, recapitalisation of banks and speedy resolution of NPA disputes.

But alas, in its sheer desire to make headlines, the Modi Government has turned a blind eye to the real things that has to be done. The only reprieve is that they are about to vacate office in three months from now!

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