Mergers and consolidation leading to further concentration of economic power
by BA & Dr Venkatesh Sundaram
Despite all the socialist language used, it is clear from the developments in the Indian economy since then that the nationalisation of banks in 1969 helped big industrial houses consolidate their hold on the domestic markets. They later became even bigger and were no longer shy of investing in sectors which had long gestation periods. As part of liberalisation and privatisation, large private banks were set up too with which the government-owned banks competed to earn profits. By 2017, the stage was now set for mergers and consolidation of the competing entities.
Unlike Ms Indira Gandhi, the Finance Minister Ms Sitharaman did not use any ‘socialist’ language in the context of bank mergers. “The basic logic behind this merger is to increase the global competitiveness of the Indian banks.” It is said to be part of the push to make India ‘a $ 5 trillion economy’. The mergers are aimed at creating large banks in India, that have huge lending capacity and financial clout and can compete with big global banks internationally. All this is entirely in line with the vision of the Indian ruling circles who have a vision of transforming India into a “global power”.
The first major wave of recent mergers began with the Associate Banks of the State Bank of India (SBI) becoming merged under one giant State Bank of India. SBI is the largest bank in the country with a remarkable reach across the length and breadth of the country. The wealth of SBI is truly the wealth of the country. Many other mergers have taken place, for instance, the merger of Bank of Baroda with Dena Bank and Vijaya Bank, which now operate as Bank of Baroda, or the merger of Union Bank, Andhra Bank and Corporation Bank which now operate under Union Bank, and Punjab National Bank, Overseas Bank of India and United Bank of India, which now operate as Punjab National Bank.
Big industrial houses, and their associations like the FICCI and CII have always been calling for such bank mergers. Consolidation does not really help the small depositors or small borrowers; but it helps the large borrowers who now have a much larger liquid assets base to borrow from and at highly favourable interest rates provided such a borrower has the ability to access loans. By merging banks, clearly economic power is being further concentrated into fewer entities.
Recently, the RBI was also in the news because its internal working group recommended that industrial houses could be given licences to open banks. This was roundly criticised, among others by a former Dy Governor and former Governor of the RBI. They pointed out that giving licenses to industrial houses will concentrate economic powers in these corporates. The industrial houses could then get financing without proper scrutiny from the banks floated by them – what is termed ‘connected lending’. Connected lending is invariably disastrous – how can the bank make good loans when it is owned by the borrower?
Another crucial reason why industrial houses ought not to be entertained is that a banking license will concentrate the economic and political powers in a handful of business houses. It will give undue advantage to large business houses that already have the initial capital that has to be put up. In other words, further monopolisation, and cartelisation – a far cry from “free enterprise” and “freedom of choice” that is supposed to exist in a free market. The US example of ownership of industries by banks and bailing out of banks as was done in 2008 (see box) shows the dangerous consequences of concentration of ownership and monopolisation. Big banks in the US are heavily invested in large monopoly corporations and their fates are intertwined. It is a common practice by large corporates to hire former senior bank officials – to influence bank decisions. In fact many bank directors sit on boards of corporates and vice versa.
The Government has clearly stated that its’ current drive to merge banks – both publicly owned as well as privately owned – is aimed at “increasing the global competitiveness” of Indian banks. Already, SBI ranks 43rd in the world listings of banks ranked by assets owned, with US$ 730.54 billion in assets, while HDFC Bank Ltd with a market cap of US$ 88.435 billion ranks 21st in the world by market capitalisation. Clearly, the Government wants more Indian Banks in these listings and wants the rankings of those already in them to rise.
But what is the benefit in this drive for mergers for the common Indian? Should we rejoice if the Government succeeds in its’ plans? Even when a previous Government stated that the purpose of nationalisation was to benefit small borrowers and common people, we have seen that it was in fact the big industrial and trading houses that got benefited, while the poor and middle sections were no. So why should we celebrate when the present government does not even make such a pretence? Especially when cartelisation and monopolisation – which are inevitable consequences of merging banks or any other entities in any industry for that matter – historically, make things worse for the common person, be he a bank depositor or a telecom user! Concentration of economic power – and consequently political clout – in the hands of fewer entities can have disastrous consequences for the people economically.
Another aspect of bank mergers happening in India is that the government and established political parties have not thought it desirable to have any kind of discussion among the people before embarking on such measures with far-reaching consequences for the economy of the country and the well-being of the people. It shows the utter helplessness of people in the present system and underlines the need for people to organise and work for an economy which is oriented towards satisfying the needs of the masses rather than a few large corporates and financial houses. It highlights the necessity for all of us to work for a political system that safeguards the interests of the masses rather than of a few hundred rich families.
BOX – Some facts on banking in the US
- Mergers and acquisitions have led to high concentration of economic clout in the US.
- The global financial crisis of 2007 – 08 was a worldwide crisis caused by excessive risk-taking by some banks in their drive to maximise profits. It caused many financial institutions to fail not just in the US but elsewhere too. Thousands of people lost their jobs and homes. The total wealth of 63% of all US residents declined in that period. On the other hand the big banks responsible for the crisis were bailed out by the US government as they were “too big to fail”. Thus, the burden of the crisis caused by greed of the banks was borne by the majority of the common people of the US.
- In 2015, just five of the largest banks in the US (JP Morgan Chase, Bank of America, Wells Fargo, Citigroup, and US Bancorp) owned a whopping 45% of all industry’s assets in the US. The rest of the 55 % were divided among over 6,500 institutions – signalling extreme concentration of wealth and power in the hands of a few, and the exclusion of the vast majority of people.