Money & Banking
Bank Consolidation: An Idea That Is Long Overdue
It is a 25-year old idea, but anger about the loot of public funds and fear of adverse court orders may finally lead to mergers among public sector banks
 
The more things change, the more they remain the same. When it comes to legal and economic reforms or infrastructure projects, we discuss issues for decades, without any urgency to implement even the most obvious reforms. Consolidation of public sector banks is one such issue. The finance ministry closed its second Gyan Sangam by pulling this rabbit out of the hat. Finance minister Arun Jaitley announced, on 5th March, that an expert group would be set up to look into the issue of consolidation.
 
We learn that bank consolidation was discussed, and buried, at the earlier Gyan Sangam because chiefs of public sector banks (PSBs) were not in favour of such mergers. This seems strange, because nearly a dozen banks were headless those days and it was probably the best time to undertake reconstruction and consolidation before the separation of the posts of chairman and managing director, which was done subsequently. The more likely scenario is that the government was so focused on getting PSBs to focus on opening millions of jan dhan accounts that everything else was relegated to the background. 
 
Why did this Gyan Sangam adopt a different tone? There are multiple reasons. One, several PSBs have declared embarrassing losses, or a significant erosion in profits; two, there is public outrage over bad loans burgeoning to Rs8 lakh crore; three, a massive illegal forex transfer scam engulfing several top banks has been unearthed (Rs6,100 crore in Bank of Baroda alone, but no estimate of the total size of this scam involving over a dozen banks); and four, the judiciary has expressed repeated displeasure at national resources being used to paper-over non-performing assets (NPAs). 
 
Bankers were told that infusion of capital by the exchequer would be linked to their willingness to merge and consolidate, effectively leaving them with no choice. In this situation, industry would have lobbied to scuttle the plan; but, with public anger against bad loans at such a high, it will be politically disastrous for the government to give in to such pressure. 
 
But why set up an expert group, again, to discuss bank consolidation? Why not dust down the second Narasimhan committee report (Nara-II), the PJ Nayak committee report and check out what worked, what failed and what is still needed and feasible? 
 
One newspaper reports that the Bank Board Bureau, set up under Vinod Rai, former Comptroller & Auditor General, may be asked to look into the issue of bank consolidation, in addition to selection of the board of directors of PSBs. This is beyond the board’s current mandate; but given Mr Rai’s background and record, he is capable of delivering a workable plan in a very short time without being influenced by corporate lobbies. 
 
Here is a quick update on Nara-II which was set up in 1997 for banking reforms. 
  1. The committee frowned on recapitalisation of banks. Yet, in the past two decades, recapitalisation of PSBs by the exchequer is almost an annual feature with no attempt to increase accountability and responsibility of top management for bad loans. 
  2. It recommended that the 27 PSBs should be reconstituted into three-tiers. Strong Indian banks should be merged to create three or four large banks, capable of supporting international trade; there should be a second level of 8-10 large national banks and a larger number of smaller banks. After the global financial crisis, the world has become wary about very large multinational banks, so the second tier, of 8-10 national banks, has become more attractive. These may not necessarily be PSBs anymore. While PSBs have been piling on bad loans while resisting consolidation, the ‘new’ private banks licensed in the early 1990s, have grown rapidly through mergers & acquisitions. HDFC Bank, ICICI Bank and, more recently, Kotak Mahindra Bank (licensed in 2002) grew bigger and stronger by acquiring other private banks (Times Bank, Centurion Bank, Bank of Punjab, ING Vysya, etc) and, in the process, also covered up embarrassing licensing decisions of RBI.
  3. Nara-II wanted the government to move away from the pre-1998 practice of forcibly merging weak banks with strong ones as a bailout measure. This, too, was ignored. Bailout mergers continued. Global Trust Bank (GTB), which was deeply embroiled in the Ketan Parekh scam, was force-merged with Oriental Bank of Commerce and the promoters of GTB were allowed to go scot-free; United Western Bank was similarly merged with IDBI Bank, which is itself under investigation today for dubious lending to Vijay Mallya’s Kingfisher Airlines.
  4. Nara-II had identified ‘priority’ sector lending as the main reason for bad loans. The All India Bank Employees Union (AIBEA) has recently opposed privatisation of IDBI Bank with the claim that most NPAs are due to loans to private-sector companies. Clearly, behest-lending and crony capitalism only mushroomed in the semi-liberalised environment following half-hearted financial reforms. 
  5. Nara-II recommended the creation of asset reconstruction companies to take over bad debts of banks and allow them to clean up their balance sheets from time to time. This was promptly implemented, but is largely ineffectual, like the SARFAESI Act 2002 was, in handling bad loans. So the government has now cobbled together a flawed Bankruptcy Law and is holding it up as the answer to our bad loan problem. Hopefully, it will not be cleared by parliament in this form.
  6. Nara-II had also deliberated on which banks are best suited for a merger, based on their corporate culture and geographical spread. This part of the report was subsequently dropped from the official version. And the idea of bank mergers was itself abandoned by policy-makers in the face of opposition by aggressive bank unions.
 
Why has the government always given in to banks’ reluctance to merge or consolidate? The answer is crony capitalism. It is no secret that Indian industrialists lobby and fix bank chairmanships as well as post-retirement sinecures, including board directorships, with lucrative perks and sitting fees. The quid pro quo is for their repeated support for corporate debt restructuring (CDR), issue of fresh loans, ever-greening of non-performing accounts and turning a blind eye to siphoning of funds or their diversion to other projects.
 
Banks and industry have also colluded to ensure that there is no formal process to share data on bad loans and borrowings by industry groups, despite all the hand-wringing about this issue for 25 years. RBI has also been complicit in not pushing for it; after all, credit information companies to monitor individual borrowing have been operational for over a decade. This time, however, things are different. The finance ministry estimates that PSBs will need capital infusion to the tune of Rs1.8 lakh crore for the four years ending March 2019 while the government plans to infuse only Rs70,000 crore in these four years. The recent Economic Survey has also offered a solution in the form of four ‘Rs’: recognition, recapitalisation, resolution, and reform. The government needs to think differently now and show some quick results.
 
We have a very capable governor in Dr Raghuram Rajan. If the political establishment is supportive, the consolidation of banks with implementation of the four ‘Rs’ is possible. But it requires strong government will to accept recommendations of the Bank Boards Bureau, clean up the boards of PSBs and give more autonomy to the top management, making them accountable. This is the fount of crony capitalism and neither politicians nor industrialists will give it up very easily. A lot depends on how the Supreme Court responds to the Vijay Mallya case. The National Democratic Alliance (NDA) government, despite its pious posturing, is as keen on retaining its hold on PSBs as were all political formations since bank nationalisation. Although public outrage over bad loans is high at the moment, experienced politicians know that it will die down as soon as Mr Mallya stops featuring on ‘breaking news’ on prime-time television. What happens thereafter will be worth watching.

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COMMENTS

C H VENKATACHALAM

1 year ago

What India needs is banking expansion and not consolidation. Banking density is much lower in India compared to many countries. Public sector Banks should be fully transformed into mass banking. What India needs is strong banks and not big banks which will move away from the common man. Is there any guarantee that big banks will not suffer from bad loans or mismanagement. The experience is otherwise. Consolidation is an utopia and not a panacea from the ills the banks are suffering from. The present move of consolidation is driven by vested interests.
C.H. VENKATACHALAM, AIBEA

C H VENKATACHALAM

1 year ago

What India needs is banking expansion and not consolidation. What India needs is strong and vibrant banks and not big banks. Too big to fail is a myth already exposed. Big banks will move away from the common man. In no way the proposed consolidation will serve the purpose to reach the common man. Consolidation is an utopia and not the panacea to save our banks from corporate delinquents who are making the PSBs to bleed. Hope wiser counsel will prevail on the advocates of consolidation.

C.H. VENKATACHALAM, GS. AIBEA

PRAKASH D N

1 year ago

Hats off to Ms.Sucheta Dalal for speaking the truth about appointment of CMDs in PSBs. Consolidation like the slogan of Garibi Hatao, retaining its charm for ever. No politician would ever like to leave its milking cow (PSBs). From the appointment of CMDs, tenders in PSBs etc. the party in power would like to have its share of the cake. What is needed is complete autonomy to Bank's Boards and make them accountable to the Parliament. The regulator also is responsible for the today's mess. When RBI conducts annual supervision of accounts, it owes an answer to the public why suddenly things have gone bad. It is not Vijay Mallya alone, there are industrial groups like Bhushan Steel, Essar. Videocon etc. who have heavily debt ridden and got the money from PSBs without any hitch and some of them have turned NPAs. There should be a forensic audit of all the NPAs as the AQR is aimed at one time cleansing the Balance Sheet. It will throw more KFAs from the cupboards of PSBs. Fix accountability for those who had thrown public money without relevant questions being asked.

D N PRAKASH
RETIRED BANK MANAGER

Suketu Shah

1 year ago

Vinod Rai wl superceed NaMo's expectations.Super move by NaMo.

Let Mr Rai handle bank consolidation and get 27 to 10 in 2 yrs max.

vnrao

1 year ago

Commercial banks should not be allowed to deal govt based lending like to agricuture small farmers artisans and susidised loans etc it haa dubious intension to play with the funds of innoccent deposit holders if govt wants to uplift these catagories mentioned above let them estblish a seperate institution using consolidated funds.Otherwise these merges will not help

S.S.A.Zaidi

1 year ago

we need to have more of Raghuram Rajans----if we have the entire financial sectors landscape will undergo tremendous welcome change that will ensure its integrity , transparency and viability

Tomy Sebastian

1 year ago

Consolidation will reduce unhealthy competition and also duplication of costs ; hence will improve efficiency. Why are the pandits and media repeatedly trying to tarnish the PSBs of this country. Pl check whether anybody has been benefitted by the so called efficient private sector banks? May be a handful of investors and top 10-15 executives. Employees are harassed, common men don't have access, priority sectors are neglected. They resort to cherry picking only as pointed out by Mr. Varrier. PSBs, no doubt, needs improvement, but the contributions made by them in many sectors can't be ignored. Even the present govt resorts to appointing their nominees to crucial positions. PSBs still have the best talents in the industry. The govt, instead of training their guns to the PSBs, shall take concrete steps for recovery of huge sums from the corporate defaulters .

B. Yerram Raju

1 year ago

Certainly a good recall as referred to in my article on Consolidation of Banks - no cure to the present ills published in these esteemed columns.

Narasimham 1 and 2 did point out at Directed lending portfolio in the shape of priority sectors then as the source of NPAs in 1991 and 1993. He also upheld the need for special dispensation for both agriculture and small scale industries and suggested a relook at the percentage allocation for such sectors and rationalisation. While committee after committee examined priority sector allocations they only helped distancing the farmer and the micro and small industry from effective lending.
The public sector classification following the Bank Nationalisation has lost such character post liberlisation with their direction more towards profits than attaining the priority sector goals. That not a single year the 18% for agriculture and 7-8 percent for the manufacturing SSI was achieved during the last fifty five years bears ample testimony to my conclusion.
When NR-2 recommended reclassification of directed lending portfolio the status of the economy was different. Second, today as the NPA position revealed, which figure keeps changing with every analyst (as the correct figure is mystic) the source is huge corporate credit portfolio and this also is in a way a directed credit portfolio but not specifically mentioned as such.

It is true that India needed big banks but was set aside as the then government wanted to promote private sector banks of such size.

Post recession when 'too big to fail' caused tremors in the global financial sector and in its wake prompted governments to re-natiioonalise some of them and governments to pump in capital is this the right time to take on this move?

We no doubt need sufficiently big banks but we should be clear whetheer they should continue with the patronage of the government, is the question.

Create big banks but let the government keep an arms length in governance and management. Committees prepare report in accordance with the mandate and let such mandate be issued without pre-judging the issue.

MG Warrier

1 year ago

A timely recall of Narasimham Committee recommendations. As an additional input for taking the debate forward, copied below excerpts from my article on the subject published in The Global ANALYST, March 2016:
"Wholesale restructuring and revamp

The need for restructuring and revamp of the banking system was recognised within a decade of nationalisation of major private sector banks. In 1991, the Committee on Financial System (Narasimham Committee) visualised a structure for Indian Banking System with “three or four large banks that could become international in character; eight to ten banks with a network of branches throughout the country engaged in ‘universal banking’; local banks whose operations will be generally confined to a specific region and rural banks (including Regional Rural Banks) whose operations will be confined to the rural areasand whose business would be predominantly engaged in financing of agriculture and allied activities”.

There is no point in arguing now that the overhaul and professionalization of public sector banks (PSBs) should have happened along with bank nationalisation and there should have been regular ‘health checks’ and ongoing corrections. Just as a ‘health check up’ does not change the condition of a person, the re-classification of more loans as NPAs does not alter a bank’s ability to change. The need of the hour is to support banks to recover their dues from borrowers who have the capacity to repay, infuse professionalism in the banks’ working and restore the faith in the banking system. As private sector banks have failed to perform their responsibilities and are not too willing to grow (their share in banking business is less than 30 per cent), privatising the existing public sector banks is no solution. The failure of Global Trust Bank and merger of several private sector banks with PSBs during the four decades that followed bank nationalisation are fresh in our memory.
Considering the emergence of new banks in the private sector like small banks and payment banks and the likely event of new bank licensing becoming an on-tap affair- in the context of the long gap between the last bank licence issued and the issue of a couple of new bank licences last year, RBI is working on procedures and processes necessary to make this happen- restructuring the banking system cannot wait any further. In this context, revisiting the Narasimham Committee recommendations referred to above and evolving a national policy for mergers and closures as also opening of new banks/branches become relevant. At present same categories of banks compete among them in the same pockets for business. The extent of competition necessary for efficient functioning of the system is a matter of policy perception.
The background for bank nationalisation was that the banking sector which is dependent on public deposits and should remain subservient to ‘public interest’. Perhaps, GOI should also consider nationalising private sector banks which are shying away from social banking and are averse to penetrating to rural areas. Allowing some private sector banks to pick and choose clientele can create imbalances in resources mobilisation, outreach and business profiles of banks. The lament by certain quarters about taxpayers’ money being used to ‘bail out’ PSBs need to be discounted to some extent considering the fact that pay-out to government from banks by way of dividend and taxes more than compensate for the outgo on account of capital infusion."

Investment strategies post budget
Debashis Basu, editor of Moneylife explained implications of changes in Budget proposals on personal finance like EPF, HRA exemptions, dividends, sovereign gold bonds, sector outlook, Indian stock market and global market
 
Moneylife Smartsavers (MSSN) conducted a seminar “Budget & Your Investments” sponsored by Kotak Securities. The event was conducted by Debashis Basu, editor of Moneylife magazine, who has 30 years of experience as an analyst and journalist. Decoding the implications of the budget on investments, he explained implications of changes in Budget proposals related to personal finance (EPF, HRA exemptions, dividends, and sovereign gold bonds), sector outlook, Indian stock market and global market.
 
Explaining rural consumption should pick up, for the market to return to a bullish stride, he explained that budget proposals on different sectors such including roads, FMCG, automobiles, cement, fertilizers and airlines. He said that the proposal of additional loan deduction on housing loan interest to first-time buyers with loan amount less than Rs50,000 will greatly benefit Housing Finance Companies (HFC's). “The proposal to open up the transport sector in the passenger segment is an incredibly major step”, remarked Debashis Basu.
 
On the negative side, Mr Basu explained how the government revenue numbers on disinvestment, spectrum spectrum, direct taxes may not meet the targets. He also pointed out that the even after NPS becoming tax-free to be extent of 40%, it is still not attractive. 
 
 
He threw light upon the correlation between Sensex and EPS growth, and Sensex and price-to-earnings multiple (PE). The historical returns from the benchmark index are a useful to gauge the future returns. He delved into these historical returns and then went on to explain the outlook towards different sectors ranging from financials capital goods. 
 
In the present inter-connected world with money moving across nations, investment analysis would incomplete unless we analyse the global scenario. With the emergence of China as a financial superpower, he decoded the impact of the slowing down of economic activity in China and the commodities meltdown. Mr Basu answered questions from the audience regarding specific companies and the markets in general in the midst of the session. 

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COMMENTS

Anish Abdullah

7 months ago

I paid for the video, but i cant access it. what is the problem?

Karnataka government seizes 62 Uber two-wheeler taxis
Bengaluru : The Karnataka government on Friday seized 62 two-wheeler taxis belonging to app-based cab aggregator Uber for violating the Motor Vehicles Act and continuing to operate without requisite permission.
 
"We have seized 62 Uber bikes (two-wheeler taxis, uberMOTO) today (Friday) for operating illegally. We will take stern action against them (Uber) in accordance with the Motor Vehicles Act.," Karnataka Transport Commissioner Rame Gowda told IANS.
 
Gowda pointed out that white number plated uberMOTO two-wheelers do not comply with the rules and the drivers also lack a badge which a commercial vehicle driver should have.
 
The transport commissioner clarified that any commercial vehicle must first make an application to the Road Transport Authority (RTA) in their respective district or area to start business operations.
 
He said a committee including the deputy commissioner of a particular district or area as the chairman, RTO as the secretary and SP or DCP as the member will consider the application and deal with it according to the requirement.
 
"Without doing all these things, it is an illegal operation. Everybody should know what they (Uber) are doing, what business they are doing, how they are conducting," said Gowda.
 
"Let them follow the rules, we are not coming in their way. It should be transparent. If anything goes wrong ultimately who is responsible. It is not fair on their (Uber) part," Gowda told IANS.
 
On being asked if there would be any monetary penalty on Uber, Gowda said the court will decide.
 
According to media reports, Uber's rival Ola stopped its version of two-wheeler taxis Ola Bike which was also confirmed by Gowda leading to only Uber two-wheeler taxis being seized on Friday.
 
Despite several attempts by IANS to elicit the reasons for halting the two-wheeler taxi services and whether it received a notice from the government, Ola did not respond.
 
Interestingly, IANS succeeded in booking and cancelling an Uber two-wheeler taxi from the Bengaluru Press Club near Cubbon Park in the heart of the city.
 
The app confirmed a bike taxi to IANS reporter being operated by one Harish using a Bajaj Platina motorcycle to deliver the service.
 
On being asked if Uber informed the driver that the two-wheeler taxi service he is listed for is currently illegal, Harish, the bike driver said: "Uber did not inform me that the service is illegal."
 
He disconnected the call on being questioned further while Uber did not respond to IANS despite several attempts.
 
Uber and Ola launched pilot on-demand two-wheeler taxi services uberMOTO and Ola Bike, respectively, on March 3. Ola Bike later stopped its services and even removed the option to book a bike taxi on its app.
 
uberMOTO's minimum fare is pegged at Rs.15 per km followed by Rs.3 per km and Re.1 per minute of travel.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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