Why is meger so important?

Central Government has been building pressure on banks to make best efforts for merger and acquisition. But I am unable to understand the motive behind it in Indian perspective. Finance Minister has said that through consolidation, financial powers of banks will improve and they will not only be able to augment efficiency and help in GDP growth but also get success in competing with International big banks.

Here the million dollar question arises whether Late Indira Gandhi had nationalized banks to compete with International banks, whether banks are meant to extend credit in thousands of crores to a few hundred merchants or manufacturers only?

Have government forgotten the social objective of banks completely?

Is it possible for a government to survive by discarding the interest of common men, farmers, and small traders in India?

Is it necessary for India to have bigger banks to extend credit to farmers and small traders who together constitutes 95% of population and without whose support even economic viability of large projects would be at stake?

It is important to mention here that there is sharp rise in loan portfolio or visible growth in advances of banks in general is not due to financing made by banks to small traders and farmers but only due to bulk financing made to big corporate houses, to real estate developers and to infra structure developers.

Does any one in the government or in RBI mean that by merger and enhancing powers of banks, there will be equitable GDP growth in country like India?

Even in America where big banks are many, one out of every seven Americans starves and struggle for earning their bread and butter for at least survival. In India the position is worse than that in USA. In India nine out of every ten Indians are unable to earn sufficient money even for respectful living. Considerable large proportion of Indian population is suffering from mal-nutrition; they die of curable diseases in want of proper medical assistance and they remain unemployed in want of adequate opportunities.



This is India where even federal structure of the country is at stake due to largely growing unemployment and where person like Raj Thakre has been trying hard to disallow Non-Marathi to seek employment in Maharashtra and Shiv Raj Chouhan CM says he would not give employment to Biharis and North Indian in the state of MP. Besides, in majority of villages, small towns and cities there are inadequate and improper sanitation facilities, acute scarcity of water and electricity, crisis for medical treatment and what not. This is why I reiterate that Indian environment is different from other developed nations and hence need unique treatment.

It is worthwhile to add here that USA government has realized after fall of big banks and financial Institution during last year that management of big banks is very difficult compared to smaller ones. Still there are about 8000 smaller banks functioning in USA to serve common men. It is also true that 125 banks became bankrupt or closed their shutters during the current year in USA.

If we talk of India we have less than 30 public sector banks and they are said to be in better health position. They are well scattered in every nook and corner of the country to serve Indians in general. They have to be encouraged to extend maximum help to small borrowers. They cannot extend any better help to poor person after merger of banks. Then what is the need of merger and acquisition? Why is government bent upon merger? Need of the hour is to make existing banks able to cater to the needs of common men.

Even if government feels the necessity of having large banks with huge capital to compete with foreign banks, they can choose to have one or two like SBI or PNB (after merger of SBI with associate banks I think capital size of SBI will be comparable with their foreign counterparts and similarly after merger of PNB with some suitable bank), At least other banks should be left untouched to serve common men and forget big projects, bulk financing, corporate borrowers completely and concentrate only on small and mid size borrowers i.e. credit upto ten lacs. It is also pity that though government is expressing desire of merger and acquisitions of banks, they have not yet formulated concrete policy such as minimum number of branches fit for suitable bank and minimum capital required for strong bank visualized by them.

Even if we leave aside the social objective, it is not commercially good proposition to build pressure (frequent request by FM or RBI is enough to build pressure) on banks to go for merger and acquisition especially when government have granted economic freedom to individual banks in the era of economic reformation, liberalization and globalization When need will arise banks will themselves strive hard to grow bigger to survive. As of now banks in India are said to be safer than foreign banks. Even government has admitted it repeatedly.



Inspite of all, if government still consider it better for banks to go for merger, I would like to suggest our Finance Minister to merge all PSBs including SBI and make them one entity like Income Tax department and other departments of Government of India so that there be no unwarranted interest rate war, no case of multiple financing, no case of multiple fake accounts, no case of take over at the cost of bank’s interest and no unhealthy competition as now prevalent in banking industry. There will be unified effort to recover the money from recalcitrant borrowers. Banks will be able to check money laundering in a better way. There will be uniform and effective implementation of KYC (Know Your Customer) norms. People will not get opportunity to park their black money in different branches of different banks. Tax authorities will be able to trap the black money comfortably in shortest time. And so on ……


Need of the hour is to strengthen the existing structure of banks, make them more and more efficient and enthusiastic.



Government should make efforts for repayment of loan and for this purpose make water tight laws to ensure cent percent recovery of loan from willful defaulters so that proportion of dead money in bank’s balance sheet comes down and they can afford and generate will to make finance to common men. Present scenario is that branch manager of every bank’s branch is afraid of extending credit to small borrowers in fear of account going bad and lastly added to Non Performing Asset.



Need of the hour is to avoid political intervention in banking affairs and to resort to healthy norms for financing without any fear of target achievement. To add fuel to fire every bank is suffering from staff shortage and as a consequence there is no monitoring on existing borrower accounts and gradually service quality in banks at many branches is deteriorating in want of adequate staff. Banks are even unable to redeploy the existing surplus staff at Metro branches to branches having shortage of staff due to protest from powerful employees union. Even after huge retirement, resignation and death as also expansion of branches in all banks there is practically very poor recruitment.

Last but not the least; bitter truth is that big business houses are getting all sorts of help from the government, from the banks and from all corners but all at the cost of poor and middle family. Rich business houses are producing, hoarding and realizing maximum profit on their products and it will not exaggeration to say that the present trend of rising price is caused by these profit makers only. Government has been making promises and promises to control price, but always fail on this front because they have given undue freedom and undue privileges to these business houses. I hope government will make all best efforts to give relief to general mass who are subjected to unbearable pain on account of sharp price rise in all commodities without proportionate rise in their monthly income.

India is said to be suffering from naxalism due to increasing poverty and due to the fact that they are denied their legitimate right and they are even deprived of justice in proper time. Can merger and acquisition by banks help in ameliorating their problems of poverty-ridden Indians? I would like to draw the attention of learned FM and PM that late Indira Gandhi (Congress Party) had nationalized banks because private banks were hesitant to extend credit to common men, villagers were deprived of banking facilities and common men was afraid of even entering in to bank. Private Banks were exploiting not only staff working in the banks but were also exploiting business houses. It will not be exaggeration to predict and say that the same Congress Party under the banner of UPA is dragging banking industry in pre-nationalization era.

Please keep in minds that during reformation era 23 banks were forcefully merged to bigger banks by government of India because they succumbed to malady and irregularity they accumulated, and not because they were small banks. Giant banks, Lehman Brothers, AIG in USA failed not because they were big but they followed wrong policies and committed misadventure in delivery of credit and in making investments.

In India I doubt the honesty and integrity of government in their efforts for merger, acquisition and consolidation of banks because they know the quantum of malady and bad assets hidden behind the rosy balance sheets of PSBs. Otherwise there is no reason for providing capital infusion to various weak banks from time to time. It is their political agenda to save the banks from exposure of their reality (when the misdeeds increases to such a large extent that it punctures the tyre of running banks). They are trying to divert the attention of public from inherent weaknesses of PSBs and this is why they are not agreeable to respectable wage revision of bank employees even after two year long dialogue with union leaders. Exodus of talented employees and non-entry of well-qualified person in PSB banks is also a vital reason behind growing weakness of Banks. On the contrary private banks like ICICI and HDFC banks have grown to such a large extent in last 15 years of their existence that even 100-year-old PSBs are facing challenge for survival.

Further any merger of banks may cause more chaos and confusion than solving any problem. Different banks have different identity and its unique geographical concentration or expansion and hence merger of two banks with different characteristics and different process of promotions and transfers will create more conflicts, more industrial disturbance and more public grievances. There are banks where management gives ten promotions in 30 years and on the contrary there are banks where even one promotion is not given in 30 years. Some employees are south centered and some are confined to Metro Branches in their entire tenure in banks. There are various points of conflicts, which banks have to settle before contemplating acquisition and mergers.



Danendra Jain

Stimulus trauma

As far as I know government has provided liquidity of Rs.4.00 lacs crores to banking system after September 2008 by reducing CRR by 4.75% . After the collapse of Lehman Brothers and many prominent financial institutions including big banks in USA, Indian government also could sense the fear of global meltdown and recession and announced various stimulus packages in line with what Mr. Obama announced for USA to meet the economic crisis he faced.

Here it is worthwhile to mention that economic condition of US people and their standard of living is not at all comparable with that of India. Our banks do not extend credit as US banks were extending before eruption of crisis last year. The banks in US were facing sub prime crisis which Indian banks do not face at all. And this is why many economists predicted that Indian economy will not be affected by the crisis US government could face after giant bank like City Bank, biggest insurance company like AIG and financial institutes like Lehman Brothers started falling .

It is however true that liquidity crisis in US was grave at that time and the stimulus package announced by Obama government was necessary to save their economy. Due to such crisis in USA, other nations including India could be affected in trade related to export and import with US. As such industries in India involved in export directly or indirectly could be the victim of US economic crisis. Growth contribution done by such industries could play some role in overall GDP growth. But these industries did not need additional finance. Rather these industries could not utilize even the sanctioned credit in want of export orders. In case their export proceeds were blocked by foreign based importers, the problem of liquidity could arise for such export oriented industries. And they needed stimulus package indeed.

But our government was generous and cautious enough to announce various tax cut and reduction in CRR, repo rate and SLR. Banks could get back as much as four lac crore rupees from RBI which they had earlier parked with RBI as per then prevailing CRR rate. As a result banks could get not only surplus liquidity but also could earn additional interest of at least Rs.40000/- crores during the period Sept 08 to September 09.Had it not been so I presume banks could not have shown growth in profit , rather they could come in losses due to already existing inherent weakness .The greatest weakness of Banking in India is that there is not proper repayment of loan which they disburse due to weak judiciary , weak administration and dirty policy of the government in fear of erosion of vote bank.

Secondly banks were allowed to restructure their credit to such industries which were likely to be affected by global economic crisis. Banks in general misutilised this policy of RBI and restructured almost all hidden bad loans (which were although Non performing assets called as Sub standard assets but shown as Standard assets in their books of accounts so that they could portray attractive picture in their financial statements). As far as I know bank altogether restructured loan of value as much as two lac crores and more. In this way they could book interest income on such loans which were otherwise not eligible for booking interest as per prudential norms set by RBI for classification of assets and income recognition.
It is obvious that if above mentioned stimulus packages were not extended by RBI, banks in general could slip to red zone, not due to the effects of global economic crisis but due to hidden malady.

This is why our government is not in a position to withdraw the stimulus package inspite of the fact that there is visible recovery from the effects of so called crisis erupted in the last year. As a matter of fact most of the industries have booked considerable good growth in their annual and quarterly result. Another bitter truth is that banks are not able to extend credit as much as it is required from them by government of India and in proportion to liquidity they got from RBI as medicine to cure the sickness which was visualized to creep into the banking system after eruption of crisis in USA. This is proved by the fact that banks in general are parking their surplus liquidity with RBI at Reverse Repo Rate i.e. as low as 3%. Another bad consequence of surplus liquidity with banks is that they have reduced interest rate on deposit from 11% last year to 5 to 6% this year. The most painful effects of such sharp fall in deposit rate is the erosion in interest income of pensioners and other self employed erosion whose survival depends on interest income to a great extent.