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.
Dynamics of Current Global Economic Crisis
Global economic architecture is fundamentally weak and fragile and having multiple internal contradictions which emanate in different economic and financial crisis in different time periods, H.P Minsky. Similarly, Marx asserted, sustainability of existing hegemonic economic structure depends on continues revolutionizing and modernizing of means of production and more exploitation of labor. However, because of this process the absolute and relative surplus value is generated which creates wealth. Additionally, because of the destructive patterns of the global structure the wealth shifts in the few hands, which makes and favors the global elite and sends rest of the society in the swamp of hunger and poverty.
Moreover, because of this mechanism, phenomenon of industrial reserve army emerged which creates problem of permanent unemployment and cause reduction in demand and later manifest in the form of crisis i.e. economic or financial crisis. Nevertheless, credit crisis of 1772 which was originated from London and quickly spread to rest of Europe. The great depression of 1929-1939 which is considered the worst economic and financial disaster of the 20th century begin with the wall street crash. OPEC oil price shock of 1973. The Asian crisis of 1997 which is also known as Asian flu which began from Thailand and quickly spread to east Asia and its trading partner and the most recent 2008 financial crisis can be considered as dominant examples. Howbeit, this is the basic contradiction of the existing hegemonic economic structure from where the crisis begins. In this context, Minsky highlighted that stability itself creates instability. Additionally, instability increases uncertainty and that uncertainty causes economic crisis. Though crisis hits different economies (developed and underdeveloped) differently, but it has also some universal impacts like reduction in growth, increase in unemployment, stock market crash, reduction in trade volume and currency crisis etc.
Withal, when economic crisis begins this sharpens contradictions among the capitalists. Consequently, these contradictions are converted into rivalry and manifested in different shapes like price war etc. Furthermore, this scenario has much devastating effects where small, weak and newly established businesses cannot survive and the large businesses convert into monopolies and make strong cartels or syndicates for survival and cause more exploitation of both labor and consumers. Such process can also be analyzed through the different economic crunches; For instance, during the period of financial crisis of 2008 small business went under or were forced to lay off employees, slash spending, halt expansion plans and find new ways to survive which results in the closure of about 1.8 million small businesses during the period of December 2008 to December 2010. Moreover, every year 670,000 business were created before the decade of financial crisis and this figure reached at 715,000 in 2006. But during the period of financial crisis the number felt dramatically and reached 560,000, highlighted by Barbara Weltman in his report.
It is of great importance to understand that due to the weak and fragile foundations, current economic structure cannot resist against any shock, these shocks might demand, supply or financial shock. Demand shock which can be seen after the tragedy of 9/11, supply shock which was caused by rising in oil prices in 1973 and financial shock which created the financial crisis of 2008. Besides, such shocks have more disastrous effects during the period of uncertainty and instability and result in the deep economic recession.
However, same situation can be observed due to the emergence of COVID-19 pandemic. Covid-19 has come up with triple shocks demand, supply and financial shock simultaneously. Ironically, the fragile structure was already suffering from economic instability and shrinking the world economy. under the prevailing uncertainty the various international institutions and think tanks have already been reporting about the effects of uncertainty on the global economy. in the form of conflicts among great powers, trade wars etc. For instance, before the Covid-19, world was facing growth uncertainty and there was tendency of reduction in the global output. This uncertainty created conflict among different powers where the Sino-US trade war is one of the example of those conflicts. Further these conflicts negatively affected the world macro-economic indicators and shrank global growth and trade volume. As warned by IMF “US-China trade war will cut the global growth slowest pace since 2008-2009 financial crisis”. Additionally, in November 2019 financial times highlighted that “because of trade tensions global trade balance shrank 1.2 percent”.
However, this indicates that fragile hegemonic structure unable to tolerate triple economic shock (demand, supply and financial shock) caused by covid-19 and that might lead to recession. According to the world bank global economic prospect 2020“The global economy will shrink 5.2% this year. That would represent deepest recession since second world war with the largest fraction of economies experiencing declines in per capita output since 1870.”in addition it has also been warned in the same report that “Economic activity among advanced economies is anticipated to shrink 7% in 2020 as domestic demand and supply, trade, and finance have been severely disrupted. Emerging market and developing economies (EMDEs) are expected to shrink by 2.5% this year, their first contraction as a group in at least sixty years. Per capita incomes are expected to decline by 3.6%, which will tip millions of people into extreme poverty this year.”
Nonetheless, the existing hegemonic structure is not only fragile but also complex and standing on the foundation of exploitation of state and society at larger level. Therefore, any single factor cannot be considered as the main reason of the crisis. Rather multiple internal and external factors. However, the internal and hidden contradictions of global economic structure have been playing a significant role in global economic crunch. Additionally, these contradictions have made the recession destiny of the existing economic structure. Hence, whatever may be the situation, the recession is mandatory. This may start from any sector financial or real but it affects the whole economy and the external shocks fasten the process which can be observed during covid-19.
As Michel Robert explained while discussing the Marxist theory of crisis that “Crises of capitalist production are due ‘under consumption’, a lack of spending by workers who do not have enough to spend or due to ‘disproportion’, the anarchy of capitalist production means that production in various sectors can get out of line with others and production can just outstrip demand; or it’s the lack of profitability in an economic system that depends on profit being made for private owners in order for investment and production to take place.” Similarly, H.P Minsky argued in his financial instability hypothesis “financial crisis are endemic in capitalism because periods of economic prosperity encouraged borrower or lenders to be progressively reckless this excess optimism creates financial bubbles than busts”
It can be concluded that covid-19 has severely affected the complex socio-economic structure. Nevertheless, it is not the sole reason of current economic recession as it is being appeared in the contemporary data and literature produced by the world institutions and think tanks. These publications are neglecting the role of fragile structure and its foundations which are not in position to absorb any shock. Thus comprehending the genuine causes and factors influencing the crisis is necessary to develop appropriate mechanism to contain and address the various dynamics of the existing hegemonic structure.
Pandemic “Locked Down” People’s Life in the Developing and the Poor Countries
Due to pandemic pressures, the countries around the world are preoccupied with matters of lack of human resources, medical equipment, and tamping capacity of the hospitals for coronavirus patients. For the community 40 percent of the lower middle class, especially in urban areas of developing and poor countries, large scale of social restriction in dealing with pandemic means losing daily, weekly, even monthly incomes.
Being asked to take two or three months off, that means two or three months of lost income. And their government are not ready to deal with that situation. But in developed and rich countries, with large and strong economic fundamentals, turn out that not all of them are ready to provide guarantees to affected citizens, although they can provide any kind of the provision of pocket money, the provision of food, and all forms of economic protection during lockdown.
In other side, entrepreneurs, for the most part, did not really feel the effects of tax incentives and relaxation, because it seems to be obligations that had to be paid if they were producing. Then if they do not produce and employees are asked to take a day off but still be paid, the story will be different. Entrepreneurs will also be paralyzed. The conditions are very different from the top richest conglomerates in developing countries, for example, whose reserves may be very strong.
What are about medium Enterprises, SMEs, especially micro? Countercrisis schemes have not clearly been seen at all. The countries may not be able to give it in maximum capacity because of zero fiscal support. Pushed a little to the new budget post, instead it became a fiscal deficit. The only option left is debt. And on one hand it will be politically bad for the government, but on other hand it will be new target to corrupt.
With this picture, COVID 19 attacks, economically, accept it or not, directly to the heart of the national economy of developing countries, which are largely supported by MSMEs. If these pillars fall, shake the countries economy. That’s when injections from various major countries and donor agencies are needed. So the conditions are indeed very difficult.
People who are able to buy any needs, the money in their accounts is still abundant, may be angry, even condemning, why there are still those who work or roam around looking for a living. But for them, (daily working class or micro business owner), stay working is also part of saving life, or actually starving to death. On the other hand, they have not yet been able to be certain about what guarantees they will get from the relevant authorities if they are not active.
If there is no more room to work, then asked to take a day off, the choice to survive is to return home to countryside. In the villages, they can make a living in various ways, even if they stop working, for a few months at least. And it turns out that even then the mobility was banned, because it was considered to be expanding the pandemic to the villages. Then what else can they do? The situation is actually already locked down and stand off. The people economy is locked up. The more it moves, the more it twists.
What people requests from the government are to anticipate the spread of the corona virus on the one hand while anticipating an economic downturn that will stop many people from earning income, the business stop moving, then there will be an explosion of unemployment, poverty, living improperly, lack of food, including the needs of any installment, the educational needs, risk of education lost of the children, ect, on other hand
In what ways can the already collapsed economy be brought back, which plunges many people under such poverty, unemployment and hopeless lines? Especially if unemployment and famine spread? No body wanna answer. For example, in Indonesia, the 1997-1998 crisis plunged no less than 10 million people into the abyss of unemployment, which to this day is still unemployed, displaced after being laid off, competing for work with a new workforce, which makes them unsold in the eyes of job providers. Fortunately, there are online motorcycle taxis or online taxis, so now some of them can join in making a living. But in pandemic stand off, all of that little hope is gone.
The crucial note for this pandemic case is that the humanitarian affairs are not just a matter of health, but a matter of the survival of millions of people in decent conditions, not in tragically frightening conditions, without hope and certainty. To be healthy, there are costs. The problem, it is not borne by their state. And for independent isolation, there are also costs, and it is not borne by their government. The best way, it’s best not to judge or blame each other about people who insist on their hearts to keep struggling for a living. The developing countries government should take action to protect them with any health equipment needed.
The second, the majority of people, everywhere in the world, work hard, go home early at night, the reason is the economy, to become more prosperous, so that the need to be able to live healthier and more worthy can be fulfilled, so that the future of children born is more secure because there are costs for education and health, so that their lives in the future are better.
But there are many government of the developing and the poor countries clearly have no “more ability” to deal with poverty and unemployment well amid pandemic. More over if the 60 percent of the countries workers are informal workers, live in vulnerability, just above the poverty line. Let’s assume that their government wish to do all of that, but they have no capacity. So what if they have the authoritarian and non democratic governments?
Conversion of Local Business into E-Business by Effective Use of Social Media
The spread of coronavirus (Covid-19) has affected almost all areas of life. The whole world is facing a crisis because of this pandemic issue. A lot of people have lost their jobs and many are struggling to survive in this situation. All businesses whether working at a large scale or a small scale are facing problems due to the unavailability to resources to operate businesses successfully. The developed countries are somehow managing this situation because of the successful implementation of online businesses from a long-time period. So, for those countries both customers and businesses are relatively ok with the situation by not going in the markets to buy things and place orders online and get it delivered at the doorsteps easily.
Whereas many developing countries like Pakistan have certain barriers in the full acceptance of e-business offered by the local and international companies. As per many studies on this topic, there are a lot of factors that pose hindrances in full acceptance of e-commerce in Pakistan. However, there is one thing worth mentioning that these hindering factors are related to all stakeholders. A few of those factors include insufficient technological resources, Government Policies, legal issues, social acceptability of the online shopping trend because of trust issue between companies and customers whether in terms of provided customer information at online shopping platforms, payment security, or the difference in shown and finally delivered product at customers doorstep, etc. But there has been seen a change in this trend in a couple of years with the development of the telecommunication industry. As most of the people now days have internet access at their places and are following social trends all around the world. So, the trend on online shopping from official brand stores’ websites has developed rapidly due to the trust of customers in brands’ shown and delivered products on their official online websites. But as far as local businesses and third party online shopping websites are concerned they are still a certain group of people consider taking a chance to shop online.
In the pandemic situation, as all the markets were closed due to the lockdown in the country, everyone was worried about the situation whether a businessman or a customer. In this crucial time of survival, there has developed a new trend of conversion of local businesses into e-businesses by using social media effectively. Here are those businesses are under discussion who are owned by the people who are not mostly educated enough to know the value of effective use of social media or those people who even being educated at a certain level didn’t think before that they can utilize social media for their businesses to operate when everything was closed. Talking about the customers who were conscious about all the factors of trust and all before were just considering one thing and that was the availability of their desired products at their doorstep in their required time frame. Somehow, like big brands and businesses, many small businesses managed it quite well and provided online shopping facilities to the customers.
In the period of locked down, these small local businesses used social media i.e. Facebook, Instagram, what’s app, LinkedIn, etc. to display their products online offering discounted prices and free home delivery. This step not only provided them the opportunity to earn money in the time of crisis but also put the foundation of new trends in online shopping i.e. the acceptability of online shopping in the society even in the smaller and backward areas of Pakistan. We hope that this conversion of local businesses into e-businesses will continue to flourish successfully in the future and the acceptability of online shopping in Pakistan will grow over time. Here, in the end, one thing that matters is that all the stakeholders should play their effective role in this growth especially the Government should make policies to support the effective implementation of online business trends in Pakistan.
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