With cabinet approving the ministerial panel, the proposed merger of PSBs moves ever closer. FM Arun Jaitley, who will head the panel, outlined that the objective would be to create strong banks. To better understand this vague goal, we must first define what a strong bank should be and then determine if merger has any merit.
Keeping with times, let us drop any pro people sentiments and analyze the situation from purely a business perspective; in hope that it may help us perceive the government’s rationale, if any exist. A strong bank, or any business for that matter, would be one that is able to meet the market's demand, with the most efficient and appropriate productive processes extracting maximum profit. The modern market, post the 80s, has moved away from the towering economies of scale that characterized the fordist era. Demand, including the demand for credit, is highly diversified and is met by flexibility in supply. This is not to say that mega entities are non-existent but their emergence and continued existence is based on careful assessment and adaption to market forces. An ad-hoc creation of mammoth entities, like the government’s drive to create 5 super banks from the existing PSBs, cannot be characterized as market motivated. Not to say that the post merger banks will be absolutely unable to meet demand, but their high degree of centralization and massive overheads will make the process inefficient, which coincidentally is the core critique of the public sector.
This merger constitutes a systematic step towards sabotaging public banking by making it unwieldy and cumbersome in its response to Indian credit needs and private sector competition. The resultant poor PSB performances caused by organizational inflexibility and overhead over-burden would then be used as grounds to divest and privatize. When these banks are eventually acquired by private parties, a large portion of which will be foreign in origin, rest assured that the gargantuan organizational structures currently envisaged will be dismantled on the basis of flexibility and efficiency.
The merger is an exercise in futility, at least from the perspective of improving PSB performances and the government is well aware of this fact. However, as the end game is to privatize Indian banking, depriving the population temporarily of robust credit mechanisms is unfortunately considered a small price to pay.
The news could be read here.