 Hello and welcome to NewsClick. Today we have with us Professor C.P. Chandrasekhar from the Centre for Economic Studies and Planning at Jawaharlal Nehru University. Thank you for joining us, Professor. We would like to discuss the whole idea of these bank mergers that are happening. The government has announced that they would be merging Vijaya Bank, Dina Bank and Bank of Baroda. And they say that it would be a way of tackling the problem of NPAs. So, how do you see this? Well, you know, I mean, we must realise that this comes in a context in which the government has tried many things in the past to try and address this problem of non-performing assets. The problem itself is quite substantial and got revealed in large measure over the last three to four years when the sort of guidelines with regard to recognition of these bad assets were tightened and therefore, suddenly you saw this mushrooming of bad assets. Now, normally when you have bad assets, what you need to do is you need to try and first write-off, it's a technical write-off and then recoup as much as possible and to the extent that you don't, obviously you need to provision for these bad loans and that eats into the capital of the banks and you've got to recapitalise them. Now, over a long period of time, the government has been recapitalising, but two things have now sort of shorted that process. First, of course, is the fact that the volume of recapitalisation required. And we had an Indra Dhanush plan, for example, for four years starting from 2015-16, which is about 70,000 crores. Now, we are talking about, the government was talking about some 2.2 lakh crore recapitalisation. Now, obviously if this is occurring in a period in which the government is increasingly adamant about the fact that it is going to stick by its fiscal deficit norms because the very day after the merger was announced, the finance minister also said, we are not going to budge from our fiscal deficit target, which essentially means that you're going to keep spending down so long as you're not willing to tax, which obviously this government is not willing to. So, if you cannot recapitalise the banks, then obviously you need to find a way of dealing with these assets. And the second sort of, I mean, not that they occurred sequentially, but second attempt was to try and create asset reconstruction corporations where you sell the bad assets against receipts very often, against actual cash at some discount to a reconstruction corporation, which then tries to peddle these assets, recoup a certain amount of money and then replace these receipts with actual money. But the issue there is how much of a haircut are you willing to take? And it became clear that the demands which were being made by these asset reconstruction corporations was extremely high. And finally, of course, there was talk about setting up a bad bank, which finally would have had to be a public sector bad bank which means that the budget was anyway going to carry the, the tax pay was anyway going to carry the burden. So, in essence, this is this merger or this beginning of a process of merger is an attempt to try and create a situation in which the government need not touch its sort of budget in order to be able to recapitalise. So, it's in that context that we need to look at this effort and revive this whole, because it's been spoken of before, idea of merging banks, consolidating banks. And it's almost clever by half. You take a small bank like Denner, which is in very bad position, which would possibly have had to be completely recapitalised by the government. It had 11% plus net NPA ratio. And you take a bank which is also a small bank, but bigger than Denner, which is Vijaya Bank and which is not doing too badly. It has about a 4% net NPA ratio. You put them together and the average NPA ratio comes down to about 6.5% and you hand it over to Bank of Baroda, which has got a 5-point something, but it's so big that when you add it on, Bank of Baroda's net performing assets ratio does not change. Now, there are two or three questions and I'll just stop with that, posing those questions. The first question is what makes the government think that Bank of Baroda doesn't have its own problems? See, because the idea is what you're going to do is give it a little bit of a carrot, which is Vijaya Bank, in order to be able to take over something which no bank would want to take over without it being recapitalised. So what is the perception or what is the understanding that Bank of Baroda itself, like most public sector banks, is in a situation which is extremely troubled and should be at the moment focusing on addressing its own 5.6% or whatever it is, net NPA ratio. The second is that, you know, the point is this is a process that has been credit which has been provided over time and if there is credit which is provided over a particular period, let us say the period from 2006, 2007 to 2008, 2009, for example, which has gone bad now, there's no guarantee. In fact, there's a strong likelihood that as we go further, there would be other assets which would turn non-performing, including in the books of Bank of Baroda. So if you say that this is going to be a way of without providing money from the government's budget by taxing those who can afford to be taxed and putting your banking system back on shape, that's not clear because this problem might not go away. It might just now reappear in an intensified form in the books of Bank of Baroda in time to come. And the second is that even to the extent that it remains where it is, the perception that this is going to actually unleash a whole credit wave because the whole idea is credit isn't going fast enough, so we need to do something. So my own perception is that the way the government is planning, what the government's plan possibly is, is that it has been wanting to get these banks off its hands. And if it wants to get these banks off its hands, there's no way it can do it if the books are not relatively clean. So for example, if you take the Southeast Asian Crisis of 1997, Indonesian banks went bust, the government took them over, cleaned their books using taxpayers' money and then handed it over to the private sector. So I do think that the government cannot convince itself that this problem is not going to remain, so that it will constantly recur if they happen to be public banks. But if you want to convert these public banks into private banks, you've got to find these, you've got to indulge in all this kind of manipulation to try and fix it, that the balance sheet improves a bit so that you can actually privatize these banks. So I think that's what is on the annual. But then the NPAs are not really going anywhere. Yes, but what you're trying to do is you're trying to reduce, because finally you're looking at the average NPAs, you're trying to reduce the average NPAs. Let's be clear, these are ratios. The volume of NPAs is not going anywhere, as you said, because you're just adding up the NPAs of Dana, Vijaya and BoB. So they are not going away. But the point is you're trying to make it, because you're really looking at it relative to the total advances. So when you take this merged entity, you're going to give it, this is an amalgamation, it's not even a merger. So you're actually going to have a new entity, a bank of, I don't know what. And that entity is going to have, well, not too bad. So the whole perception is let me take the ones which there's no way I can sell, and fold it in with some, you know, a little bit of gravy like Vijaya Bank, fold it in into a bigger bank, so that it would become possible for the government to actually wipe its hands of this problem, because once you got rid of your development finance institutions and you needed big projects to be financed, you were going to have to push the banks to do it. And if the banks are in the public sector, you would do it and you end up with this problem. So you leave it to the private sector and that is obviously have growth implications, but that's tomorrow. Today you'd have it off your hands. And how would this play out for, say, the customers of these banks? You see, there are two kinds of issues involved here. One is, of course, there would be a transition period when they've got to integrate their systems. One advantage is, of course, most banks now or almost all banks are, you know, or the bigger banks are in the sort of, under the co-banking system. So integrating it becomes, integrating the accounts becomes easier, but till such time as the accounts get integrated, there would be some delays, some minor hitches, etc. But the larger issue is going to be that, you know, you're going to have to, you're going to have to, cleaning these books is also going to mean you're going to cut costs, you're going to replace, so there's, what are you going to do with all these people who come as employers? The employee base is going to be now that much larger. The employee base is going to be that much larger without the volume of NPAs having, you know, gone down. So you'll be looking for ways of cost-cutting, etc. And, you know, there's an officer carder, there is senior management who's going to ask to work under whom, etc. So there would be these problems which would obviously affect client service in different ways. But as of now, there's no reason to believe that it would involve a financial loss. It could involve some degree of inconvenience. And it's only when the government decides how exactly it's going to resolve the rest of the problem. You know, that there was the FRDI bill in which there was a whole idea of a bail-in, which obviously was threatening depositors, which is why the government had to go back on it. And so you mentioned about the employees. Do you see a possible similar situation to when the SBI mergers happened? Yeah, even in the SBI, I don't think it's played out in full because what you do is that, you know, if you consolidate, create larger banks. Now, let's be clear. Vijay Bank is a small bank. So you can't say that small banks are bad because Vijay Bank is doing okay. That's why you're giving Vijay Bank along with dinner. So the evidence is clear. There is no relationship between whatever you want to call it, some notion of efficiency, whatever that might be, profitability, etc., and size. There is no direct relationship. You can have small banks. And in fact, most countries have banks of different sizes which operate in different niches. And, you know, they operate to reach credit to very different kinds of people, etc. So the point is that the idea would be you consolidate and use technology to reduce costs by shrinking the manpower base. But that means that you shift to a different kind of banking. It becomes a kind of banking which is, you know, in which accessing, you know, a human voice is only possible through a telephone if you manage to get through after waiting in queue, etc. And so it's going to change the very nature of service. But it also means much for these employees, you know. The point is that fortunately we happen to be in an organized sector which still has some, you know, some rules which apply to trying to retrench workers who have regular contracts. But then, I mean, things are changing. It's a different kind of government. It's a different kind of economic philosophy. So it's all being done in ad hoc manner step by step. But the direction is clear. The direction is one in which you finally don't want banks to play the social role as instruments of development which are given them. And then you might as well have, why should it be in the public sense? You hand it over to the private sector and hope that they make a better deal as far as the bank is concerned. Thank you, sir. And thank you for watching NewsClip.