Share markets in India are presently trading marginally lower. Sectoral indices are trading on a mixed note with stocks in the IT sector and power sector witnessing maximum selling pressure. Metal stocks are trading in the green.
The BSE Sensex is trading down 7 points (down 0.01%) and the NSE Nifty is trading up by 4 points (up 0.04%). The BSE Mid Cap index is trading flat, while the BSE Small Cap index is trading up by 0.1%. The rupee is trading at 64.05 to the US$.
In the news from banking sector, the government is looking to set up a new mechanism to speed up decisions regarding possible mergers of public sector banks (PSUs).
As per the news, this new mechanism will be in line with the alternative mechanism that has been adopted for strategic divestments.
One shall note that earlier this year, four state banks viz. Syndicate Bank, Canara Bank, Vijaya Bank, and Dena Bank made presentations to the finance ministry on their merger plans.
However, does it really make sense to merge public sector banks?
We don’t think so. While it’s true that only the fit ones should be allowed to survive, merging smaller PSU banks at this stage will make the situation even worse. Not only the merger will create cultural and autonomy issues to deal with, but will fail to address the problem of bad assets. It could even make the stronger bank suffer.
As Vivek Kaul, editor of Vivek Kaul’s Diary, states that the merger of two public sector banks, will give us a bigger inefficient bank. As he writes, ‘In this scenario, if banks are merged without the bad loan problem being solved, we will have a situation where problems of two banks are basically passed on to one bank. That doesn’t make the situation any better.’
Perhaps it may make more sense to merge the PSU banks once the clean-up exercise is done.
One shall note that bad loans at PSU banks have only been rising, as can be seen from the chart below:
