The Public Sector Banks (PSBs) holds about 70% of Indian banking industry and its profitability has been shrinking from last few years. The paper intends to provide the insights on the impacts of PSBs mergers on the Indian economy amid global coronavirus outbreak.
The worldwide economic slowdown due to Covid-19 crisis hasn’t left the Indian economy untouched with India’s GDP fall to lowest 5% in the last six years. With Indian economy at stake, the mergers of major public sector banks (PSBs) in India on 1st April, 2020 has set alarm bells ringing for the Indian government. The Punjab National Bank has been merged with Oriental Bank of Commerce and United Bank of India; Indian Bank with Allahabad Bank; Union Bank of India with Andhra Bank and Corporation Bank; while Canara Bank has amalgamated with Syndicate Bank. It has reduced total PSBs from 27 (in 2017) to 12 only. The Indian government is the majority shareholder in the PSBs so it becomes its responsibility to resuscitate the weak PSBs through infusion of capital in times of need to financially strengthen the PSBs.
Rationale Behind The Mergers
The financially-stricken PSBs in India have shown lessened credit-creation growth with waning lending capabilities in recent years. The huge pile of Non-Performing Assets (NPAs) and low asset qualities have hit badly their capital ratios with increased provisions for NPAs due to high risk weighted bad loans eroding their profitability. Rising bad debts has shrieked their exposure to big corporate lending like real-estate, steel and infrastructure with limited access to capital market.
The capital adequacy ratio is the ratio between bank’s capital and risk weighted assets and requires huge capital to meet it. The capital requirements under Basel III norms by Reserve Bank in India require minimum capital adequacy ratio to be 8% for banks to eliminate default risks. Expanding credit need in the economy also requires more capital for PSBs for lending purposes.
The Reserve Bank of India’s Prompt Corrective Action (PCA) plan for weaker PSBs to prevent default risks has constrained their lending capacities and requires more growth capital for them. The Insolvency and Bankruptcy Code,2016 also forces public sector banks in India to accept default payments lesser than the lending amounts. All these causes have forced the government to resort to mergers as the only viable option.
Government’s Vision Regarding PSBs Mergers
The Indian government is aiming to achieve USD five trillion economy in the coming years and considers amalgamation of PSBs as favorable move. It has proposed the mergers with the idea to improve operational efficiency of PSBs as the mergers will provide regulatory as well as growth capital.The mergers has been projected to create banks with stronger national presence and international reach. It will also improve their abilities to raise market resources with next generation banking technologies.
The move will help in reduction in lending cost and will help smaller and weaker banks to fulfill the Basel III capital requirements and will bring the merging weak PSBs out from the PCA framework. The Indian government has based its decision upon recommendations of Narasimham committee and PJ Nayak committee which suggested that India only requires few major banks than fragmented PSBs. The central bank, Reserve Bank of India has also proposed that the merger banks will become lenders of global scale through cutting edge technology and state of the art payment systems.
The Indian government is planning to increase the leverage ratio of public sector banks by augmenting their money creation powers. It aims to fulfill the objective to have multiplier effect on the Indian economy.It will result into manifold gains when loans by these banks will result into continuous cycle of consumption, production and income. But the repercussions of this move can’t be ignored and need proper assessment.
Impacts On The Indian Economy
The merging public sector banks in India exhibit varying financial strengths. The most profitable Indian bank among 10 PSBs with NPA of 3.2% has been merged with Allahabad bank with NPA of 5.2%. It will adversely affect the health of Indian bank’s profitability and efficiency. The share prices of Indian bank had also fallen down after the announcement of proposed mergers and the future efficacy of mergers is very plutonian in current economic conditions. By diluting the management of stronger banks, the forced mergers will be deteriorating for the whole banking industry in India.
The Indian government has claimed that no jobs of employees will be lost after the merger. Given this, it is very unlikely that efficiency of banks will improve by getting rid of redundant and underutilized labour as the government also fears severe strikes and protests by the bank unions’ employees. The claim is duping as closedown of many branches will result in retrenchment of many employees and will increase the cyclical unemployment rate in India.
PSBs mergers will not per se decrease the amount of their bad loans. It can improve only if banks improve their recovery processes or if loans are written off against balance sheets. Mergers do not address these significant structural problems as bad debts’ recovery process is slow due to inefficient judicial system in India and banks are unwilling to show them in balance sheets due to mounting losses.
The move also doesn’t deal with the problem of political interference in the management of PSBs – a major cause for increasing bad loans. The banks are forced to extend loans to big businesses without securing any payment guarantee.It will impede the goal of financial inclusion by the government to reach the unbanked poor. Minority shareholders will be more affected than dominant shareholders i.e. the government as it has also other revenue sources.
The credit growth has deteriorated drastically in India and post- mergers, the banks will face severe challenges related to staff integration, synchronizing accounting, bad loans’ recognition policies, rationalization of branches and culture compatibility. For instance, the Punjab National Bank (PNB) who is grappling with 16% NPA can’t be expected to revive the weaker Oriental Bank of Commerce and United bank in India,.
The government has initiated the idea that through recapitalization of PSBs through mergers, credit deployment would increase but the credit flow also depends upon economic environment and bankers’ propensity to take risk. So the increased financial health may be necessary but not the only sufficient step for reviving the credit crunch in the economy.
The government fiscal deficit gap is already increasing and recapitalization funds for mergers will further aggravate the problem. Instead of multiplier effect, the deficit will compel government to more borrowings and this will lead to crowding out of private investments. The Indian government debt will rise up and it would only be intergenerational transfer of funds without yielding optimistic results.
The sole criterion used for classifying banks into recent mergers was selecting banks operating on common banking technology solutions. This would ease integration but it can’t be the only rationale for merging banks. The infusion can temporarily solve the problem but will not address deep structural woes faced by the PSBs.
Through mergers, instead of the strong banks lifting the weak PSBs, the weak ones may sink the strong. Past mergers of weak banks with strong ones have not shown riveting results in India. The merger of Punjab National Bank with the New Bank in 1993 failed to create any significant cost synergies. The State Bank of India‘s merger with its associate banks also affected the SBI’s credit growth after the merger with depressed operating performance and reduced share prices. Last year, the strong Bank of Baroda was merged with the weaker Vijaya Bank and Dena Bank, but post-merger performance showed little improvements and its share prices has also collapsed from Rs 150 a year ago to Rs 92. The weaker banks also suffer as Dena bank’s share swap ratio was much lower than expected by their shareholders.
The government has based its whole justification upon the success of the State Bank of India (SBI)’s merger. But the same effect can’t be expected from recent mergers as the SBI merger was only internal reorganization exercise as associate banks enjoyed common identity with SBI for long and SBI also had operational control over them from inception. The banks were operating under the same information technology platform so the merger had more positive impacts. While SBI had more trained employees’ pool and larger capital resources, managing 2-3 banks would be nightmare for other current PSBs as economy is already facing recessionary problems.
In previous PSBs mergers, anchor banks had better asset qualities and strong capital stocks but major banks under recent amalgamation plan are themselves not in good health. Like, both gross bad loans and net bad loans for PNB and Union Bank of India are at over 15% and 7% of assets. So, further strain from weaker banks would prove detrimental for the major banks.
The PSBs in India have also previously shown lending bias to big corporate businesses and venturesome customers only. The mergers will add fuel to this problem rather than healing it out. It is more likely that consolidated bigger entities would use their pricing power to push for greater credit to big businesses than needy small customers. The Marginal Costs of Lending rate (MCLR) of merged bank is decided by the anchor banks only and the inclusion of weak banks in operations becomes minimal. The consolidation of banks may lead to the monopolistic pricing behavior of large banks and will left out the regional banks.
The current Indian economy requires instant remedy solution but the new mergers will have more long run impacts than near-term growth. The meaningful cost synergies from banks are unlikely in the short run as they would focus more on integration and restructuring of their banks rather than lending more funds.
This merger will be a short-term reprieve and only structural change will prevent public sector banks from sliding downhill again.
As PSBs are foundational for growth of Indian economy, the analysis of this government move becomes necessary. The researcher opines that based on previous merger repercussions and current state of Indian economy, the mergers will not be healing but detrimental to Indian banking industry. It is only short term relief measure intended to distract the attention of people from the slumping economy. For achieving expected merger benefits, the corporate governance through Banks Board Bureau needs to be emphasized. The government should develop more infrastructure development banks to relieve existing PSBs from infrastructural bad loans. The PCA framework also needs to be administered efficiently.
Role of WTO in Regularization of International Trade
International trade is one of the main features of the globalized world and global economy. There it needs also a well-organized institutional mechanism to regulate it. World Trade Organization is an international organization established in 1995, whose main objective is to facilitate trade relations among its member countries for their mutual benefits. Currently 164 states are its members. The activities and works of WTO are performing by a Secretariate of about 700 staff located in Geneva, Switzerland, led by the Director General. English, Spanish and French are the official languages of World Trade Organization. The annual budget of WTO is about 180 million dollars.
Since its creation it is playing an important role in the regularization of international trade. It offers a forum and facilitation for negotiating trade agreements in order to reduce the barriers in the way of smooth international trade among member countries. Thus, the role of this organization is playing very important role in the regularization of international trade which is contributing to economic development and growth of member countries in this globalized world. The World Trade Organization also offers an institutional structure and legal framework for the execution and supervising of the international trade related agreements which are very helpful in regularization of international trade. It also settles disputes, disagreements and conflicts occurring during the interpretation and execution of the components of the international agreements related to international trade. During the past 60 years, the World Trade Organization and its predecessor organization the GATT (General Agreement on Tariffs and Trade) have assisted to establish a solid and flourishing global trade system, by this means helping to extraordinary international economic development.
The WTO is regularizing international trade more specifically through negotiating the decrease and finally elimination of barriers to trade among countries and try to make smoothly the working of the rules and principles governing the international trade e.g. tariffs, subsidies, product standards, and antidumping etc. It also administers and monitor the execution of the World Trade Organization’s determined guidelines for trade in services, goods as well as intellectual property rights related to international trade. It also monitors and review the member states international trade policies as well as make sure the transparency in bilateral and multilateral trade agreements. Likewise, it also solves disputes arising among members related to trade relations or related to the explanation of the provisions of the trade agreements. It also offers services to the governments of the developing states in the fields of capacity building of officers in matters related to international trade. WTO is also doing research on matters related to international trade and its related issues and collect data in order to find better solutions of the problems and obstacles in regularization of international trade. It is also trying to bring into the organization the 29 states who are yet not members of the organization aimed to assist and regulate their international trade according to the international standard.
One of the main barriers in way to international trade is disputes between the engaged parties. Since long this was a very critical issue limiting the trade among states. The WTO is playing very good and instrumental role in the solution of trade related disputes. Since the establishment of WTO in 1995 over 400 disputes related to trade have been brought by its member countries to WTO. The increasing number of bringing trade related disputes to WTO is showing the faith of member countries in the organization. Close trade relations have massive advantages but also create disputes and disagreements. With the increase of international trade, the possibility of its related disputes also increases. Previously, such problems and disagreements have caused in severe disputes. But at present, in the era of WTO the international trade related disputes are decreased because the member states have now dispute’s solution platform, and they are turning to the World Trade Organization to solve their trade related disagreements and disputes. Before the World War Second, there was not any such international organization or forum which could facilitate international trade and its related affairs, and there was also noany legal framework for solving trade related disputes among states of the word.
One of The World Trade Organization’s guiding principal is to continue the open boundaries for trade, ensure the Most Favoured Nation (MFN) status among member countries and stop discriminatory behaviour of members towards other member(s) and bring transparency in doing international trade. It is also assisting counties to open their indigenous markets to global trade, with justified exemptions or with suitable flexibilities, promote and support to durable growth, reduce trade deficit, decrease poverty, and promote economic stability. It is also working to integrate different international trade policies and principles. The member countries of WTO are also under the compulsion to bring their trade related disputes to this organization and avoid unilateral actions. WTO is the central pillar of the current international trade system.
Russia and France to strengthen economic cooperation
On April 29, Russian President Vladimir Putin held videoconference with leaders of several French companies-members of the Franco-Russian Chamber of Commerce and Industry (CCI France-Russia) to discuss some aspects of Russian-French trade, economic and investment cooperation, including the implementation of large joint projects as well as the prospects for collaborative work.
Putin noted that the Economic Council of the Franco-Russian Chamber of Commerce and Industry is still operational in spite of difficulties, and the late April meeting was the fourth time since 2016. From the historical records, France has been and remains a key economic partner for Russia, holding a high but not sufficiently high, 6th place among EU countries in the amount of accumulated investment in the Russian economy and 5th place in the volume of trade.
Despite a certain decline in mutual trade in 2020 (it went down by 14 percent compared to 2019) the ultimate figure is quite acceptable at $13 billion. French investment in Russia is hovering around $17 billion, while Russian investment in France is $3 billion.
Over 500 companies with French capital are operating in various sectors of the Russian economy. French business features especially prominently in the Russian fuel and energy complex, automobile manufacturing and, of course, the food industry. “It could have been more if the French regulatory and state authorities treated Russian businesses as Russia is treating French businesses. We appreciate that in a difficult economic environment, French companies operating in Russia have not reduced their activity,” Putin pointed out.
The Russian Government established the Foreign Investment Advisory Council, which includes six French companies. Further, there is an opportunity to discuss specific issues related to the economic and investment climate in Russia, and that opportunity is traditionally provided at the St Petersburg International Economic Forum, which will be held on June 2-5.
French companies are involved in the implementation of globally famous landmark projects, such as the construction of the Yamal LNG and Arctic LNG 2 facilities and the Nord Stream 2 gas pipeline project. This, Putin regrettably said “We are aware of and regret the amount of political speculation concerning the latter. I would like to point out once again that it is a purely economic project, it has nothing to do with present-day political considerations.”
Russia intends to increase assistance to the development of science and technology. Funds will be directed primarily to innovation sectors such as pharmaceuticals and biotechnology, nuclear and renewable energy, and the utilisation of carbon emissions.
“We are interested in involving foreign companies that would like to invest in Russia and in projects we consider high priority. In order to do this, we will continue to use preferential investment regimes and execute special investment contracts, as you know. A lot of French companies successfully use these tools on the Russian market. For example, more than one third of 45 special investment contracts have been signed with European, including French, partners,” he explained during the meeting.
He also mentioned continuous efforts to attract foreign companies to localise their production to state purchases and to implementing the National Development Projects, as well as existing opportunities for French businesses in special economic zones. Today there are 38 such zones created throughout the Russian Federation.
Russia pays particular attention to attracting high-quality foreign specialists. Their employment is being fast-tracked, and their families can now obtain indefinite residence permits. There is a plan to launch a special programme of ‘golden visas’ whereby to issue a residence permit in exchange for investment in the real economy, a practice is used in many other countries.
Taking his turn, Co-Chair of the CCI France-Russian Economic Council, Gennady Timchenko, noted that the pandemic has changed the world, people and business, and that French companies in Russia are responsible employers and socially responsible members of Russian society.
Despite the crisis and the geopolitical situation, a number of French companies have launched production in 2020–2021. Companies such as Saint-Gobain and Danone have renewed their investments. French companies have increased their export of products manufactured in Russia; they are investing in priority sectors of the Russian economy. For example, this year the French company Lidea is launching a plant called Tanais to produce seeds. Russia is dependent on the import of 30 to 60 percent of these seeds, according to various estimates.
Despite the current geopolitical conditions and information field, there are important signals for French business and the Russian side to strengthen economic cooperation, attract investment, and create partnerships on a new mutually beneficial basis.
Co-Chair of the CCI France-Russian Economic Council, Patrick Pouyanne, noted that the meeting has become an excellent tradition, the presence of 17 CEOs and deputy CEOs of French companies shows the importance of these joint meetings, and further reflect the deep interest of French business in Russia.
In addition, Patrick Pouyanne further offered some insights into Russia-French cooperation. By 2020, twenty members of the Economic Council invested a total of 1.65 trillion rubles, supporting 170,000 jobs. These companies have operated in Russia for decades and continue investing in the Russian economy despite the sanctions and the epidemic. These companies help France maintain its status as the second largest investor in Russia. In 2020, France invested over $1 billion in Russia despite the economic difficulties caused by the pandemic.
Concluding his remarks, Patrick Pouyanne stressed that the economic operators believe everyone will benefit if Russia, France and all of Europe are not divided or isolated. This is the challenge today. Indeed, diplomacy has to continue playing an important role in settling differences, and businesses are convinced that meetings like this create bridges between Russia and France to strengthen investment and economic cooperation.
Iran’s Economic Diplomacy through CPEC
U.S. sanctions against Iran are characterized by strategic flexibility and adaptability. They are designed to have maximum negative and deterrent effect on Iran’s military, economic and diplomatic growth. Tehran is exploring ways to counter these sanctions most probably by economic engagements with the regional countries. Iran’s perception of CPEC lends some credit to this argument.
Since the initiation of CPEC, the regional perception has already started to change as many countries have begun to see the project within the domain of their national interests. Iran has expressed its long-standing interests to join the CPEC viewing the corridor as a cornerstone for the country economic prosperity and regional connectivity.
Iran solely focuses more on the economic aspect of CPEC. Regional connectivity through CPEC can boost Iran’s stake in the global output. In 2015, on the sidelines of the United Nation General Assembly (UNGA) address, Iran’s President Hassan Rouhani expressed a desire to be the part of CPEC. He emphasized the importance of connectivity projects for the region. Iran’s initial reluctance to CPEC was transformative in nature and heavily came down with the unfolding of new geoeconomic realities.
Iran’s inclination for the CPEC project even becomes the part of official discourse. Iran’s ambassador to Pakistan Mehdi Monardost showed keen interest to participate in the CPEC and named it as one of the greatest projects in the history of the region. He envisioned a great boost to bilateral trade between Pakistan and Iran under the framework of this regional connectivity corridor. In 2017, Iran’s economy minister Ali Tayyebnia participated in the New Silk Road summit. He praised the New Silk Road concept for regional connectivity.
Iran’s economy is already clutched due to the international sanctions invoked by the Trump administration after pulling back from the Iranian Nuclear Agreement formally known as the Joint Comprehensive Plan of Action (JCPOA) in May 2018.Downplaying the perception of geopolitical competition between Gwadar and Chabahar, Iran higher officials negated the impression of competition falsely exaggerated by International and India media and insisted on the complementary nature of two ports.
In 2016,Iran and India signed an agreement for the development of Chabahar port and it was view as the counterweight to Gwadar port. Without explicitly mentioning India by name, Iran’s ambassador to Pakistan Syed Mohammad Ali Hoseeni defended the decision of his country to drop out India from the project in Chabahar by stating “when some foreign governments found reluctant in their relations with Iran and need other’s permission for even their normal interactions, for sure they would not be capable of planning and implementing such long-term cooperation contracts”.
The same rhetoric appears in the views of Chinese leadership. Brushing aside the allegations of Iran’s perceived resistance to CPEC and Gwadar port, Iran’s foreign minister Jawad Zarif dismissed the allegations and supported growth and development anywhere in Pakistan.
Chabahar is often seen as a rival to Gwadar port. However, Indian discourse has got an altogether different lease of life in the media compared to the Iranian one. Iran’s ambassador to Pakistan Mehdi honardoost utterly disregarded the narrative of competition of two ports. He invited both Pakistan and China to closely work in Chabahar port.
China considers Iran as an important country for its energy security, BRI and in the larger context of global competition with USA. China dual role both in Gwadar and Chabahar, according to the analysts, will likely reduce the impression of competition between two ports. Chinese stance on the Chabahar port also complement the Iran’s position on Chabahar. Chinese premier Le Keqiang rejected the notion that Chabahar port is in competition with the Gwadar. He is convinced with the idea that both ports have the potential to complement each other.
Tehran global status goes upward with the emerging financial and diplomatic backing of China. Beijing openly backs Tehran in the face of U.S. might. On March 26, 2021, China and Iran signed an agreement expressing a desire to increase cooperation and trade relations over the next 25 years. Wang Yi, Chinese foreign minister, said that USA should rescind the sanctions against Iran. The 25 years deal is considered as part of the Belt and Road Initiative (BRI). According to Tehran Times analysts Peyman Hassani and Ammar Hossein Arabpour, this deal is considered a relief to Iran’s gas and oil sector against USA sanctions.
USA sanctions forcefully bar the countries from purchasing oil from Iran. The US Department of Defense’s report notes that China Pakistan Economic Corridor (CPEC) focus on pipelines and port construction. Pakistan’s reluctance to follow the Iran-Pakistan gas pipeline which is stalled due to American pressure can be reviewed, too much sigh of relief for Tehran’s energy export.
Triangular relations of China, Pakistan and Iran will likely put Iran on the strong footing. Richard Caplan, a professor of international relations at the university of Oxford, notes, “The agreement which predates Biden, undercuts U.S. efforts to isolate Iran economically and, to some extent, diplomatically.
Diplomatic and economic isolation remain at the center of Iran’s foreign policy under the severe U.S. sanctions. Iran’s perceptions of CPEC revolves around the same fact that through regional engagements under CPEC and BRI, it can tackle its global problems to some extent.
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