Today, thanks to the Covid-19 pandemic and the fighting between Russia and Ukraine, the entire world economy is in shambles and quite disoriented. Logistical links are collapsing and free world trade is not operational thanks to multiple sanctions – effective or ineffective.
India has already had its problems in the banking and non-banking financial companies (NBFC) space due to high levels of debt/lending gone wrong (doubtful recovery) and provisioning requirements due to failure to collect interest or principal.
One way to strengthen financial entities is to inject more capital into the entities. However, our PSU banks are not ready to raise money from the capital market as they are worried about the valuation of the shares and whether the market will be ready to invest in them. For years, there has been no significant increase in the share capital of PSU banks through capital issue on the stock market. PSU banks have become accustomed to the fact that the Government of India as the largest majority shareholder will continue to pump equity capital to offset their losses.
The only other option available in the Indian scenario is to merge the weaker PSUs into stronger PSUs so that the stronger bank can provide better management control and facilitate recovery of the weaker banks. The merger route has already been adopted with some level of success. However, we will need more mergers to reduce the number of entities and strengthen them. The other option of selling the bank directly does not seem to have much potential for success as the whole world is gripped by recessionary tendencies thanks to the pandemic and the war in Europe. At such times, getting a fair valuation of the entity becomes very difficult.
Merger of PSU banks and private banks seems to be the only option available. The merger of HDFC Bank Ltd is a clear indication of the future path and direction. India also needs to improve the health of its co-operative banks, many of which are in decline. The IV and the RBI will need to find a way to resolve the merger of the entities so that the combined entity is adequately funded and can see future growth prospects. Being stationery is not an option at this point. He hopes that judicial intervention and delay will not be allowed.
And on the international level, we will hear about mergers of large banks and financial institutions. All financial institutions are under pressure from rising inflation resulting in higher interest costs, resulting in less demand for loans and late repayment of interest and principal. As countries face economic challenges, their credit ratings and ability to manage their debt also decline. Entities will need to strengthen to ensure their survival. In such cases, there may be a geographic division and sale of the business, or there may be global mergers. In times of uncertainty, it seems size matters and a stronger balance sheet could be a lifesaver. All central banks are already on the path of narrowing the availability of funds, which will affect companies in those countries. Banks and financial institutions must have the strength to absorb shocks.
The views expressed above are those of the authors.
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