Indian Finance Minister Nirmala Sitharaman on Friday announced her government's plan to merge 10 state banks into four entities.
The move came as India's public sector banks are hamstrung by bad loans, poor governance and a few loan scams. The latest move, thus, is seen as an inevitable one under the existing circumstances. These banks reportedly account for nearly two-thirds of banking sector assets in India.
Is the situation with the state-owned banks (SoBs) in Bangladesh anyway better? In fact, it is worse.
A few major loan scams involving the public sector lenders have shaken the country's banking industry. The size of classified loans in the SoBs is abnormally high. The situation has gone so bad that the government is required to infuse capital into these banks almost every year. However, the amount the government makes available is short of the actual requirement.
Some years back, the government as part of a reform package, suggested by a multilateral lender, brought about some changes in the management system of the public sector lenders. The top managers were appointed on contractual basis and given some specific tasks to improve the financial health of these banks. After showing some improvements initially, the situation went back to the original deplorable state.
It is not just in case of public sector banks, the situation with a good number of private banks is not any better. In fact, time has come to say: enough is enough. Something drastic and effective has to be done for the greater interest of the banking industry.
The finance minister is the person who would spell out actions involving the public sector banks and the central bank as regulator would do the needful in the case of private banks through consultations with the sponsors of private banks.
The incumbent finance minister the other day publicly expressed his strong displeasure over the ongoing developments involving the public sector banks. He made it clear that no more the government would make available taxpayers' money for recapitalisation of banks and the latter will be on their own.
But industry insiders are not taking the minister's threat very seriously. They say if the situation deteriorates the government as owner will have to come forward and rescue these banks.
So, it would be better to find alternatives. Privatisation remains to be the most feasible option. But the government is unlikely to buy the idea. It would not be willing to lose the financial institutions that prove to be handy, at times, in meeting some emergency needs, particularly of some other state enterprises. Bureaucrats will also be unwilling as it does often offer some benefits to them.
The government would not admit the fact that its control over the public sector lenders has been a source of trouble. But that is a hard reality. The governmental interference in administrative affairs and even in loan decisions has emerged as a major deterrent to proper growth of these banks.
As suggested by experts and multilateral lenders, the government should give up its control over these banks and allow the central bank to oversee activities of their boards of directors and hire and fire the managing directors/ chief executive officers. However, if the central bank takes cue from the finance ministry while handling the affairs of the state-owned banks, all the changes would bear no fruit.
The government might think of merging all the state banks into one entity. That would help expand their capital base.
A few private sector banks are also thought to be strong candidates for merger.
The Bangladesh economy does not need 60 banks. Industry people witnessed rather helplessly the entry of private banks one after another. The fallout of rash decision in the matters of new banks is very much evident. Too many banks are engaged in a cutthroat competition to attract a limited amount of deposit. Besides, the quality of lending has deteriorated.
The situation has turned so bad that many foreign banks do no more trust many of Bangladeshi banks. China reportedly has recently blacklisted at least four Bangladeshi banks and asked its financial institutions not to deal with them. Most banks are now required to do external transactions through Standard Chartered and HSBC.
It does not matter how unpalatable and harsh the reforms are, the government must go for those for streamlining the operations of the local banks, private or public. Resistance will come from powerful and vested interest groups. That needs to be ignored.
Seeing no problem in the banking or financial sector would amount to committing hara-kiri. The prevailing situation in the banking industry demands of the finance ministry honchos to be realistic and practical. The latter should take bold steps despite opposition from the vested quarters.
Allegations have it that the central bank is not as tough as it should be as a regulator. The central bank high-ups in no time would brush aside such allegations, but, for the greater interest of the country, they do need to make an unbiased assessment of their actions.