ECONOMIC SLOW DOWN AND SLEW OF MEASURES

There had been a slow down on the economic front due to many reasons and some of the chief contributors to this state of affairs can be pinned on the strengthening of the USD vs major currencies of the world, the stand off between USA and China, the resurgence of American economy leading to lowering the unemployment rate in USA etc.  The first quarter growth rate has slumped to a record low of 5% vis-a-vis 8% in the first quarter of last fiscal. When the nation was going to polls in the beginning of the first quarter in the current fiscal and there were lots of uncertainty on the economic front from the new government that would be formed on the outcome of the polls, the slowing down of the growth is an expected one.   The budgetary provisions after the new government took charge added its weight in no small measures to this plight. There were rumours that the budget was that of the former finance minister and the present finance minister had only presented it in the parliament. Some of the tax provisions that were pronounced in the budget were backward movement in reformist steps that made the foreign investors in the stock market jittery and there was a huge pulling out from markets leading to the crash in the market for a few successive weeks.  This created a cascading effect on the industrialists' thinking on new investments which lead to a stagnation in the growth. 

However, due credit has to be given to the prime minister and his colleagues who immediately intervened to bring in some measures to arrest the slide and one hopes the next quarter figures belie the pessimists' take on these measures.  The political pundits had been on a rampage castigating the present government and its policies which they allege lead to the slow down.  Some of the retrograde steps announced in the budget had been rolled back and a few fresh tax sops had been announced after the finance minister had a detailed discussion with the industry lobby.  The finance minister, thus, had emerged from the shadows of the former finance minister, if the rumours as above were to be believed.

One of the most daring measures announced by the finance minister is the consolidation of the banks to form a few larger banks and reducing the number of PSBs to 12 from 27 now. This consolidation will bring in the much needed reforms to finance sector which had seen many reforms in the past. When the then prime minister Indira Gandhi nationalised the banks in 1969, there were not any serious discussions on the move in the absence of electronic media and social media.  Ideally the banks should have been merged to form a fewer entities way back in 1970s itself before there was a large scale expansion from different banks with each bank competing with the other for branch expansion to staff recruitment, to business growth.  

The banks were allowed to grow and become larger entities and political interference was rampant both from the ruling party clique and local political thugs.  The indiscriminate growth of loan books without any checks and balances, the total aim only for growth of top line foregoing the healthy bottom line made some of the banks sick and at the verge of collapse.  The 1991 government of prime minister PVN Rao made some sacrifices and introduced the income recognition and asset classification norms in the banks for the first time in 1992 under pressure from the IBRD or world bank.  This put a proverbial cat among pigeons, with the banks, for the first time, slowing down in growth and a few on the borderline of loss when provisions had to be made for bad loans.  This concept brought in the new term Non Performing Asset to the banker's dictionary in India for the first time. The successive central bankers' conference in Basel, Switzerland, in which RBI as the representative of the country is a member, made lots of changes in which how the IRAC norms are applied and how the required capital is calculated and risk management became a part of the banking lexicon and a separate wing was created in most of the banks. 

The recent announcement made by the government to merge 10 major banks to form 4 larger banks of global size who will be competing globally with the other two majors, SBI and BOB in the PSB scene is a welcome sign.  However, this is not the first time a PSB had been merged with another PSB.  Earlier Bank of New India was merged with PNB but then there was no core banking solution to throw up technological challenges in merger. There had been lot of home work and study that had gone into before announcing the mergers. The banks that are on same technology platforms had been identified to be merged with each other so that technologically there will be lesser challenges.  Most of the banks employees' unions are controlled by AIBEA.  The outfit had already sounded a bugle against the proposed merger exercise and called for a nation wide strike against this move. The major banks that had been left out of the merger exercise are Bank of India and Central Bank of India for reasons best known to the government and these may remain the pan Indian single banks without being merged.  Some of the PSB that had been left out are more a regional player with only a representative presence in other states.  Therefore, the regional nature of these banks do not warrant a global scale formation.

The experience in merging Dena Bank and Vijaya Bank with Bank of Baroda and making a single entity in the last year of the previous government and the various lessons learnt from it had stood in good stead to the government to take this major step.  The main challenges of this major step will be in terms of reorganization of the branch network as there will be more overlapping presence of merged entities, having optimum work force size, growing the business and profit and continued to grow nationally and globally.  The government may already have a blue print to take forward this merger exercise smoothly to conclusion.  The employees' unions will, of course, cry hoarse as many leaders of employees' unions and officers' associations in individual banks will be losing their stature and presence in the national level and fear mongering loss of employment in the banking sector. A similar fear mongering was there when computers were introduced in the banks in mid 1980s.  

How this action of the government take the economy forward and how the banks' capital requirements will be met in this merger are to be seen in the coming few months. The infusion of fresh capital of about 56000 crores into the banking industry by the government may fall short of the requirement.  The fresh capital infusion, easing of credit to many core sectors including MSME, recovery of huge NPAs in the last few years, etc. may be the drivers for the banks to help achieve the government's target of increased growth in economy and job creation. Only the next six months to two year period will be able to help gauge the exact outcome of these economic measures, including the bank mergers of the present government in its first year.