Editorial: Banking on consolidation

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Published: March 6, 2015 12:57:58 AM

Unviable branches will have to be shut

With the government setting aside less than R8,000 crore in the Budget to capitalise banks in FY16, it is apparent that the Centre no longer wants to be infusing funds into the weaker lenders. In the last round of capitalisation too, an amount of only R7,000 crore was distributed between seven banks—of the original outlay of R11,000 crore—a move interpreted to mean the government would ‘reward’ only the more efficient banks or those whose return on assets was higher than the median. To be sure, ensuring that the stronger players are fed more capital so that they stay that way makes eminent sense and weeding out the weak is not a bad idea at all. After all, banks need to be able to offer customers services at lower costs and, therefore, stay competitive. While the government is willing to lower its stake in banks to 52%, it is unlikely the more infirm lenders will be able to access the stock markets adequately to be able to shore up their capital adequacy. Over a period of time, therefore, incremental lending will shrink, putting the business in jeopardy. Since the government will not want to put public money at risk, it will, at some point, nudge the more robust lenders in the system to acquire some of the weaker banks. In other words, the government is ushering in consolidation.

While buyers may not have much of a choice in the matter, an acquisition or merger can be an economically viable proposition only if it is accompanied by forbearance on several counts. To begin with, the acquirers must be allowed to prune the number of branches of the bank acquired because driving down costs is important. More important, while the labour unions can be expected to protest, the government must help the buyers negotiate some cuts in the workforce, perhaps by funding a VRS programme. The flab that has accumulated over the years at some of these lenders cannot be carried forward; it needs to be shed. Else, it will defeat the very purpose of making the banking system and bank balance-sheets stronger. Fortunately, there will be a fair bit of natural attrition at the public sectors lenders in the next couple of years which is a favourable factor. But, despite this, the workforce may yet remain large enough to disrupt the business model of the buying bank and it is the government which must address this issue by funding the retrenchment schemes. While it may be a hefty cost, it will be a one-time expense and in lieu of annual capital contributions. The government is already initiating structural reform—an independent board will oversee senior appointments and the holding company will be in place soon. But none of this is material if banks are not well-capitalised; so if the government can’t provide it, it must at least facilitate viable consolidation.

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