How? Confusing? Yes it does, at least the merging of the loss making banks, which accumulated huge non-performing assets (NPAs) with strong flourishing healthy banks, portrays exactly the same logic.
Two years ago we had 27 public sector banks and with the announcement of the merger by Finance Minister Nirmala Sitharaman it has come down to 12. Optimists hope the mergers will provide scale economies, and improve management in the worst performing banks. Early this year, the strong Bank of Baroda was merged with the weaker Vijaya Bank and Dena Bank, but post-merger performance shows little obvious improvement, and its share market reflected as the price of the share dipped from Rs 150 a year ago to Rs 92.
For years, these loss-making banks were put under prompt corrective action by the Reserve Bank of India, which means that they could collect deposits but could do sparse commercial lending, primarily because of their track record of irresponsible lending resulting to high NPAs. To soak up past losses and recreate lending ability, the government has pledged to inject Rs 70,000 crore to banks’ re-capitalisation. However, pundits believe that will be a short-term reprieve and only structural changes can prevent the public sector banks from sliding downhill. The question also is being asked as to “will the few rotten apples spoil the whole basket?”
Restricting of lending by the non-performing banks can never be a long-term solution to this crisis as they could have been closed too. Or, the bulk of bad loans of the whole banking system could have been transferred to a separate bigger bad performing bank, letting the system lend freely again. However, Finance Minister Sitharaman has opted for merger of the non-performing banks with the better-managed bank in a hope to escalate upon the quality of management and better and safer lending abilities.
But will this move effectively stem the culture of giving away suspicious loans? Even banks do have to dwell with political pressures on lending. By merger the aim is to make banks more professional, hiring of risk managers at high commercial wages from the private sector. However, past records exhibit that several efforts to make banks professional have failed because that is simply not compatible with the political and bureaucratic culture of the public sector undertakings.
With mergers the confidence of the customers of the banks are shaken and majority of them are asking whether their money is safe and also where and how would they operate their accounts and at what rate of interests. There are several grey areas which are not clear to the bankers at local level and hence questions raised by customers cannot be answered with full conviction leading to suspicion and ambiguity.
In all fairness, while these steps are meant for taking a right direction to stem the economic slowdown, they are minor short-term ‘band-aid’ fixes that ignore the structural reasons. As compared to many countries around the globe, India has some of the most costly land, capital, labour, electricity, railway freight, corporate tax and income tax. Poor quality of education and with the emergence of ‘unskilled’ labour is adding to the woes of the industry which require efficiency for better production.
The present Union government is unwilling to acknowledge the structural problem, let alone tackle it. Prime Minister Modi believes that incremental reforms in his first term sufficed to produce 7 per cent growth in Gross Domestic Product and win re-election. In case the government believes that the same approach will succeed in his second term, it is heading to receive a rude shock in coming years.
Simple economics is based on demand and supply which makes it running. Demand can only be generated if people have the power to buy. Automobile, real estate industries are facing one of their worst period ever. Auto companies reported their steepest fall in sales in July after reporting their worst quarterly fall since 2000-01 in the April-June quarter of this fiscal. Honda Cars India reported a huge 49 per cent decline in July car sales while Maruti Suzuki, India’s biggest carmaker saw sales volume declining by 37 per cent in the preceding month. Sales are down which means production is down and several companies have taken the route of ‘block closure’ to balance the inventory. This also means giving away more pink slips leading to joblessness.
Noted economists have aired their views that common honest taxpayers must have money to spend in the market, which help generate demand. This can only happen if the income tax slabs are lowered or new tax avoiding people are brought into the net, which will increase the tax base. Consumption, which is the main life-line and the driving force of the Indian economy, has considerably slowed down in the recent months in the absence of credit supply to the informal sector and weak rural economy. The trend is worrisome and immediate realization has to happen. No wonder why the overall GDP has fallen from 5.8 per cent to 5 per cent.
