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.

User

COMMENTS

C H VENKATACHALAM

2 years 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

2 years 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

2 years 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

2 years 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

2 years 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

2 years 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

2 years 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

2 years 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

2 years 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."

Budget provision on ARCs won’t reduce bank NPAs
Many infrastructure loans are viable only at steep 50-70% haircuts. Banks are unwilling to take such a massive hit on profitability by selling down to ARCs, says a report. Hence, the budget provision of getting FDI into ARCs won’t work
 
In his third Budget, Finance Minister Arun Jaitley had announced 100% foreign direct investment (FDI) in asset reconstruction companies (ARCs) and similar foreign portfolio investment (FPI) in security receipts used in the transactions besides providing a better tax clarity. While these steps are long term positive for ARCs, it will not ease asset quality woes of banks sitting on a huge mountain of non-performing assets (NPAs), says a research note. 
 
In the report, Religare Capital Markets Ltd, says, "We met three large ARCs operating in India to assess the impact of regulatory changes proposed in the Union Budget. ARCs are unwilling to buy large loans given the concentration risk and uncertainty with respect to timing and extent of recovery. Differential valuations are also hurting sell-downs."
 
The budget proposes that sponsors be allowed to own 100% in ARCs as against 50% earlier. This will improve the credit rating of ARCs, in turn bringing down their cost of funds and enabling higher leverage. Also, foreign investors (mainly debt) will be allowed to own security receipts (SR) of ARCs, helping the latter diversify fund sources. "In all, the proposed changes (see table at right) are expected to address ARCs’ capital needs, but we believe the impact will be seen over the longer term. Thus, medium-term pain on the NPA front will continue for banks," the report says.
 
However, Religare Capital Markets feel that the capital constraints of ARCs are unlikely to ease in a hurry. It says, two key changes like allowing the sponsor own 100% in ARCs and allowing FPIs to own SRs, will need amendments to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act where the support of opposition parties is critical. "As per our meetings, the combined net worth of all ARCs is about Rs3,500 crore and assets managed around Rs40,000 crore. Many conservative ARCs are operating at low leverage and do not wish to increase this," it says.
 
"Sponsor capital will only flow after changes to the SARFAESI Act," the report pointed out, adding, "ARCs do not have the scale to buy out lenders in large companies in steel and infrastructure. They argue that buying small stakes from one or two lenders will not help, as recovery or implementation of the restructuring package becomes difficult with a minority stake."
 
According to Religare Capital Markets, India’s ARC model is best suited for retail, small and medium-sized enterprises (SME) and mid-size corporates where legal issues are more manageable and the recovery amount and timeline largely predictable. In contrast, large corporates have complex legal issues and the timing or extent of recovery is uncertain. Most large companies have cross guarantees for group entities and unfunded exposures that are difficult to assess. Working capital funding for revival is also a problem given the large amounts involved, even as finding a suitable buyer (bank) for the debt post-turnaround may be hard. For ARCs, a delay in recovery by even a year can materially impact return ratios, it says.
 
 
There is a wide valuation differential for infrastructure loans and so far, there have been very few ARC deals in the infrastructure space where asset quality stress is the highest. Many infrastructure loans are standard or restructured (provision cover of 5%) in the books of banks. As these loans are viable only at steep 50-70% haircuts, banks are unwilling to take such a massive hit on profitability by selling down to ARCs.
 
Religare Capital Markets feels that the transition to without-recourse model a distant dream in India. It says, "ARCs are of the view that under the existing 15:85 structure, they can generate an ROE of 18-20% if they are able to recover 25-30% of the debt over and above the actual amount paid by them to banks. Valuation is a contentious issue for without-recourse (all-cash) buyouts. ARCs are willing to pay half the price for a cash deal as compared to 15:85 structures, whereas banks are reluctant to sell assets at very low valuations." 
 
While remain underweight on the sector, the reports states that corporate lenders are in its avoid list and it prefer playing the sector through private retail banks.

User

COMMENTS

Sunil Rebello

2 years ago

Budget provision on ARCs won’t reduce bank NPAs.
why should we pay more TAX?
ONLY CRIMINAL PROSECUTION OF WILLFUL DEFAULTERS WILL SOLVE THE PROBLEM.

vswami

2 years ago

To ADD;

Link to look-up:

http://www.thehindubusinessline.com/opin...

vswami

2 years ago

May you be Invited to look up :

https://vuukle.com/redirect.aspx?host=thehindubusinessline.com&uri=thehindubusinessline.com%2fopinion%2fthe-4-lakh-crore-bomb%2farticle8314670.ece (writer, a Rajya Sabha MP)

Among several suggestions as given vent therein, 'swayam' by a MP, the one that may deserve some in-depth consideration is as stated under: “There is also a need to create a public asset reconstruction company (ARC) which will allow banks to focus on lending, rather than recovery of stressed assets. Consolidation of bad loans can simplify resolutions. It has been seen that consortiums currently make things complicated. A public ARC made by political will and backing and with the support of the RBI can lead to faster resolution of NPAs.”

As underlined, however, "tax-payers are the ones left holding the NPA bill. Hence, a PSU clean-up is a matter of public concern."

With that in critical focus, as the problem itself pertains to mainly banks in public sector, how well the idea of creating another public sector entity i.e. a PARC will be kindly taken, or be largely acceptable, as a matter of prudence, also be gone ahead with against abundant caution, is a big daunting question; not so easy to be pressed forth, to find favour, with enough courage of conviction to be acted upon.

Of contextual relevance hence calling for a mention, at least in passing, is the, “3Rs”; which has correlation to elementary education, but having been neglected in formative years, that has boomeranged. The result is that newer and newer ideas, though not backed-up by any homework, worthy of any serious thought, have come to be floated around.

One such idea, it is noted, figures in the latest economic survey report; strangely, with one more ‘r’ added, it is styled as, - 4R solution, set of, - “recognition,recapitalisation, resolution and reform”. But there is no knowing whether those (4Rs), prima facie abstract concepts, have been adequately elaborated, with sufficient clarity, in order to easily follow, in an attempt to have anyone or more of those effected / implemented, to the end of a reasonably successful outcome.

PRAKASH D N

2 years ago

It is the experience of PSBs that ARCs is another area where public assets are sold for peanuts. Even though the NPA is backed by Assets like mortgage of property, the ARCs would not take unless you offer them a 60% to 80% discount of the upset price of the property. Here those corrupt officials at the top make a deal and sell it on the plea that today's Rs.2/- is better than tomorrow's Rs.10/-. It is only the private ARCs make profit at the cost of PSBs. If the PSBs can identify and lend money to the borrower, the onus of recovery should be on them. ARC is not a remedy for the problem of bulging NPAs.


D N PRAKASH
RETIRED BANK MANAGER

vswami

2 years ago

Response (in all humility,to share a poser (albeit not an answer anyway):

“....it will not ease asset quality woes of banks sitting on a huge mountain of non-performing assets (NPAs), says a research note. “

Having boldly ventured a guesstimate, with no painful time-consuming research of any kind needed, why not, instead of a ‘cut’, make it easy, with a clean shave of 100%; obviously, that should not matter much, for anyone concerned or unconcerned – will it ?

B. Yerram Raju

2 years ago

The skill sets of ARCs to recover better than the legatee institutions are no different. Second, legal provisions do not provide for any specific leverage for the ARCs. Ever since these institutions came into being they did not evoke greater confidence than the parents as the quality of underlying assets and their valuations are highly suspect. FDIs have their preferred routes for investment in a growing economy other than the assets that came under pressure due to government interference at the credit origination points.

SuchindranathAiyerS

2 years ago

To find buyers for proven non bankable assets assumes that there are as many junk bond buyers as salesmen, It is a matter of demand and supply. I am surprised that there are takers at 50 to 70% hair cuts. Surely the profligacy and corruption of the Indian State since sixty years would have seen the value of Bank Assets follow the same trajectory as the Rupee as a function of M-2 (Money with the Public and the Banking System)? This would mean an average of more than 80 to 90 per cent.

Why consolidation of Indian banks is no cure to the ills
Government would do well to promote development banks to fund infrastructure projects and relieve public sector banks as experience amply demonstrated that PSBs are not cut for that job of funding long-term projects with short term resources
 
Recently, Gyan Sangam (Intellectual Confluence), the second one after the formation of the present government, discussed ways to revamp the banking system at Gurgaon. It has not offered any better wisdom than loud whispers of consolidation of banks. Is consolidation of banks the right solution?
 
The messy Indian banking at the moment due to huge pile up of non-performing assets (NPAs) in public sector banks (PSBs) in particular, caused by more of funding long term infrastructure projects through short term resources, trying to seek a bail out through mergers and acquisition route, history would not spare the government. 
 
Reserve Bank of India (RBI) Governor Dr Raghuram Rajan rightly warned recently that the merger move is risky without cleaning up the beleaguered banks’ balance sheets. Finance Minister Arun Jaitley hinted at the consolidation of unwieldy and economically weak state-run banks even as he kept the door open for lowering the state's stake in them below 50%. He has also spread a red carpet to multi-national asset reconstruction companies (ARCs) providing scope for sale of distressed assets. 
 
I recall what Thomas Koenig, Kansas City Fed Reserve President said on 8 September 2011 in an interview to Oklahoman – mega banks needed break up.  He rightly felt that individual institutions should not grow to a size that would let the nation fail going by the experience of Penn Square Bank failure in Oklahoma. “The Oklahoma City bank's sketchy energy loans eventually led to the collapse of Chicago-based Continental Illinois, the largest bank failure in US history until 2008.” He did not at all support the theory of Fed Reserve ‘too big to fail’ in the aftermath of 2008 recession. 
 
Banking Reforms Committee in India (Chairman M Narasimham, 1991), however, desired for creation of at least six mega banks in India. Attempts were made later to allow the size of ICICI Bank grew in the private sector and State Bank of India (SBI) in the public sector, grew through a few mergers and acquisitions. When there was a near run on the ICICI Bank in September 2009, the Government asked the SBI to pump in Rs400 crore and allow free operations on all the automated  teller machines (ATMs) to give confidence to the customers and the RBI assured the economy that nothing went wrong with the Bank. The RBI in its Financial Stability Report (FSR) of June 2015 also identified these two mega banks as banks posing systemic risks along with four others.
 
Among the 38 mergers and acquisitions (M&A) since nationalisation of banks, a few posed severe problems. The inefficient New Bank of India merger with Punjab National Bank (both public sector banks) and takeover of the failed private sector bank – Global Trust Bank Ltd by Oriental Bank of Commerce, another PSB, took no less than a decade and over for makeover of balance sheets of the merged banks. In the case of former, human resource and cultural issues posed severe discomfort while in the case of the later, technology of GTB being the most sophisticated compared to that prevailing with the OBC the later took more than a decade to assimilate it.
 
Smoother among the takeovers was that of Bank of Madura Ltd with the ICICI Bank. Even the merger of a couple of associate banks with its parent, the SBI had problems in merger of hierarchy and scales of pay as also pension settlements for over a decade. No two merger formats had similarities.
In fact, the drivers of consolidation among banks should be synergies, efficiency, cost saving, and economies of scale. Proactive communication, organisation structure revamp, and appropriate human resource integration would smoothen the course to integration. Several Indian bank mergers in the recent past seem to belie these factors. 
 
Some recent research studies into ICICI and SBI mergers 2008-10 point to least improvement in the share price on NSE and BSE, the return on assets, return on equity, earnings per share and net profits. Indian banks did not secure new customers post merger in most cases. 
 
Quite a few of the PSBs, aping the west, went in for universal banking and incentivised cross-selling as a major business strategy. The incentives for such cross-sold products were so attractive that several executives could care little for the regular banking products and customer service. 
 
Amidst domestic pressures, politics playing spoilsport on the PSBs, due diligence took a beating and global impacts added fuel to the fire in creating NPAs of over Rs6 lakh crore by the end of December 2015 requiring recapitalisation to a degree of Rs1.18 lakh crore. Government chose to pump in a meagre Rs25,000 crore in its latest Budget. This gave rise to the expectation of mergers and acquisitions as a possible route to come out of the capital vows. 
 
It is not size that is the solution to the problems as much as good governance and the government maintaining arm’s length distance from the governance and management of PSBs. By the time, the Bank Board Bureau starts functioning, it may be six months from now. 
 
Cleaning up the boards and balance sheets would depend upon the Bankruptcy Act’s effective implementation. It is past experience that such Acts requiring rules to be framed would take another minimum six months after receiving the President’s assent. Speed of action has always been a casualty in Indian governance and regulatory mechanisms and this shall be the key area of focus of the government.
 
It is also important that the big banks start becoming humble and learn lessons instead of becoming conglomerates of unwieldy nature. Banking basics and customer service can hardly be bargained. Government would do well to restart the Development Banks to fund infrastructure projects and relieve the PSBs from this window as experience amply demonstrated that they are not cut for that job well due to their funding long-term projects with short term resources.
 
Simon Johnson, a former chief economist of International Monetary Fund (IMF) arguing in his Project Syndicate column on ‘the End of Big Banks’, strongly supports Kashkari’s view point that the time has come for review of ‘too big to fail’ theory and breaking big banks would hold better financial stability in a fragmented world.
 
(Dr Yerram Raju Behara or Dr B Yerram Raju  is a former senior executive of SBI and an economist and risk management specialist. The views expressed in the article are his personal.)

User

COMMENTS

Simple Indian

2 years ago

I am no financial expert, but from a layman's perspective, it does make sense to consolidate PSU Banks and have only 4-5 large ones which collectively address Banking needs in the country. Not all Banks have everything going for them. Some are strong in certain geographies while others are strong in certain sectors / industries, perhaps due to their strategic push over the years. Hence, apart from govt holding in these Banks being the key criteria, PSU Banks should be consolidated keeping other key factors like strategic benefits, staff strength, geographic spread, etc. Ever since Banks were nationalized, Govt after Govt has been using them to either fund financially unfeasible projects for political gains, or use its resources to give loans to shady corporate houses without adequate collateral, as in Vijay Mallya's case. Ideally, Banks or FIs like IDBI, IFCI should focus on sectors they were supposed to address originally, instead of having PSU Banks also jump into the fray needlessly. Finally, there's a reason most private Banks have much less NPAs compared to PSU Banks. It's their focus on profitability. This is missing in PSU Banks, and needs to be pushed hard. Like any govt job, Bank job offers a high job security, and low a/ctability of staff. Unless this work culture changes, even retail consumers will be wary of associating with PSU Banks (many have already moved to private Banks like ICICI, HDFC, Axis, etc.).

V. Jaganmohan

2 years ago

There used to be a concept of Consortium Loaning among Banks in 1980s and 1990swhere all banks used to form a consortium to finance a corporate if its credit requirements exceeded Rs.25 crores. That was the RBI stipulation. All member banks of Consortiums used to take a comprehensive view of the Corporate borrower and finance the corporate jointly led by leader bank of consortium. There used to combined credit appraisal and common documentation. Somewhere, on the way after Economic Reforms, this concept of consortium lending was given a go-by by RBI which encouraged a multiple lending for corporates by each bank with its own risk assessment, credit appraisal and monitoring and documentation. This led to competition among each banks to get big ticket business loans. In the process, each bank started taking individual credit exposure to corporates without any exchange of information with other banks. There is no unified view among Bankers while dealing to corporate. That is how Vijay Mallya and his Kingfisher Airlines could get independent loans to the extent of Rs. 7500 crores from so many banks who unmindfully took such a high exposure without consulting other banks. And each of them lent hundreds of crores without ensuring the end use of funds and credit monitoring. . Bankers have done similar thing earlier while giving such huge loans to MFIs in the past leading to MFIs defaults to Banks. Similar approach was adopted by Deccan Chronicle Ltd while taking Rs.4000 crores loans from multiple banks. All big corporates of the country have been doing the same for last few decades with their loan outstandings to banking sector are more than their sales turnover. That is the most significant reason for today's huge Corporate NPAs in the banking system and each bank is grappling with corporate in its own way. Such a calamity would not have occurred if the concept of Consortium Lending was continued and insisted by RBI. Apart from other measures like Bankruptcy Laws, the concept of consortium lending should be brought back to the banking system where credit exposure to Corporates or Corporate Groups exceed Rs. 500 crores. If the Consortium Lending is brought back, there is NO need for consolidation of Banks as number of Banks in the country are as such much less to the banking requirements of our growing economy.

Gopalakrishnan T V

2 years ago

Issues in Consolidation have been well brought out but consolidation of strong banks is essential to have a few very strong banks of international stature. This can be made possible by merging strong banks and offering VRS to the Staff who oppose. The criteria should be NPAs, Capital adequacy Ratios, Government's share of equity, performance of the Directors and top management, spread of branches, cosmopolitan nature of staff Resources etc. There cannot be two opinions on the need for consolidation.

P b Sarma

2 years ago

The disease affecting PSBs is political interference and political manipulation.How consolidation can cure the disease.Govt is trying to shift public attention from the root cause of the problem.Mega banks may breed mega problems and mega inefficiency and mega pilfer ages also.

MG Warrier

2 years ago

A well-researched analysis.There is sense in the argument that merger is no solution for the kind of problems banks in India are facing today. But, we skipped an essential phase in banking reforms post-nationalisation, which was rationalisation of banks and offices of PSBs. If Narasimham Committee recommendations on reorganisation had been given a thought during 1990’s, this aspect also would have been taken care of and efficiency of the banking system in India would have improved. RBI and GOI have been dodging this issue under pressure from various corners. In some pockets, several branches of different banks with similar skill, efficiency and outlook are trying to exploit the same clientele base. Before it is too late, some policy on merger of branches, offices and where possible banks (here, private sector banks and PSBs should be guided by the same rules of game) acceptable to all stakeholders including employees should be evolved.

We are listening!

Solve the equation and enter in the Captcha field.
  Loading...
Close

To continue


Please
Sign Up or Sign In
with

Email
Close

To continue


Please
Sign Up or Sign In
with

Email

BUY NOW

The Scam
24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
Moneylife Online Magazine
Fiercely independent and pro-consumer information on personal finance
Stockletters in 3 Flavours
Outstanding research that beats mutual funds year after year
MAS: Complete Online Financial Advisory
(Includes Moneylife Magazine)