Act In Haste, Repent In Leisure

Updated: Jul 31 2004, 05:31am hrs
Markets have given their thumbs up to the merger of IDBI and IDBI Bank announced Thursday. Share prices of both the term-lending institution and the bank rose on the news. Understandably so. For IDBI, the merger will help ease the burden of its non-performing assets (NPAs). As did the merger of the erstwhile ICICI with ICICI Bank that came to the rescue of the then-beleaguered institution. With this the government has only one major all-India financial institution IFCI left to deal with.

According to news reports, there is some doubt over whether the merger with Punjab National Bank, which was cleared by the NDA government, will stand. Even if it does not, chances are we will see some action here as well since the government seems to be on a spring-cleaning spree in the financial sector. It would be foolish, however, to assume that the mergers per se will resolve the underlying problems in the financial sector. At best they can paper over the numbers and make them look better than they are. NPAs, for instance, will not get transformed into good assets overnight. What a merger does do, however, is that it gives the weaker entity breathing space. It prevents it from going under. But that is all.

The fact is as long as political interference, poor work ethos, lack of commercial drive (in the case of the public sector) and inadequate regulatory oversight remains, there is no way the health of financial sector players will improve. This is what the newly merged entity must guard against. IDBI is already labouring under the weight of its NPA legacy. It cannot afford to take on any more.

Some months ago, the government was reportedly toying with the idea of merging IFCI with IDBI. Given the staggering amount of NPAs that IFCI is already saddled with, this would be disastrous for the newly-merged entity. If it comes to the crunch, it must say a firm No, thank you. The government has already provided Rs 9,000 crore of taxpayer money for a Stressed Assets Stabilisation Fund to clean up IDBIs balance sheet. It cannot afford to spend any more. Yet this is what it may have to do if it tries to push through another shotgun marriage of IFCI with IDBI.