Money & Banking
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.)

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COMMENTS

Simple Indian

9 months 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

9 months 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

9 months 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

9 months 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

9 months 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.

In 1990s, Best and Crompton workers called Vijay Mallya 'NPA'
Chennai : Long before some Indian banks termed Vijay Mallya, the promoter of Kingfisher Airlines, a "wilful defaulter", workers of the city based Best and Crompton Engineering had publicly called him an "NPA" -- non-performing asset.
 
They also urged Mallya to quit the company.
 
Normally, company annual general meetings (AGMs) are boring affairs with some shareholders demanding sweet packets.
 
But once in a decade or more, one will be fortunate enough to witness an interesting shareholders meeting where individual shareholders pose strong questions to the corporate emperors.
 
And one such AGM this city saw was that of Best and Crompton's held in 1990s.
 
At that time the company was part of Mallya's UB Group and was not doing well.
 
Disillusioned workers and shareholders of Best and Crompton dubbed their chairman Mallya an NPA and also asked him to resign from the board.
 
Placards with slogans against Mallya added more colours to the scene.
 
However, due credit has to be given to Mallya at the way he conducted the meeting.
 
At one point, a smiling Mallya even told the shareholders to speak one-by-one so that he can hear them all!
 
The historic AGM was adjourned as no business was transacted due to the noisy scenes.
 
Mallya later sold Best and Crompton to an Indonesian group.
 
Prior to that, he had sold Best and Crompton's stake in the elevator joint venture company Beacon Kone to the other joint venture partner Kone Group of Finland.
 
"The mood of the shareholders was aggressive. Many workers complained that the company did not remit the provident fund (PF) directions to the PF office. One shareholder pointedly told Mallya 'You have closed several group companies - (Best and Crompton). You did not open anything new'," said M. Ramesh, senior deputy editor, The Hindu Business Line, recalling the AGM meeting.
 
"At one point," Ramesh said, "Mallya was talking to a fellow board member, at which a shareholder angrily told him to listen to him rather than talking to others. Mallya coolly replied, 'I'm listening to you' and reeled out the points that the shareholders raised in their speech." 
 
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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COMMENTS

Shirish Sadanand Shanbhag

9 months ago

Vijay Mallya is shrewed person.
He owns a big land in Karnataka, on which a east west railway line connecting Hassan Mangalore railway line to be connected via Shravanabelagola to Chikka Banavara station on Arsekeri Bengalore line via Tumkur, cannot be constructed, since line passing through Vijay Mallya's land. Government of Karnataka and Railway Ministry could not do any thing, for this about 60 km vital rail link. Land belongs to his brewery, to which he has resigned now.
Government should acquire his land and proceed with completion of missing link between Shravanabelagola and Chikka Banavara railway stations.

India among most vulnerable nations to cyber attacks
Washington : When it comes to vulnerability to cyber attacks, India along with China, Russia, Saudi Arabia and South Korea is most vulnerable, says research led by an Indian-American scientist.
 
While the US is ranked 11th safest of 44 nations studied, several Scandinavian countries like Denmark, Norway and Finland were ranked the safest in the book authored by V.S. Subrahmanian, professor of computer science at the University of Maryland. 
 
"Our goal was to characterise how vulnerable different countries were, identify their current cyber security policies and determine how those policies might need to change in response to this new information," said Subrahmanian, with the University of Maryland Institute for Advanced Computer Studies (UMIACS).
 
Damaging cyber attacks on a global scale continue to surface every day. Some nations are better prepared than others to deal with online threats from criminals, terrorists and rogue nations.
 
Subrahmanian discussed the findings at a panel discussion hosted by the Foundation for Defense of Democracies in Washington on Wednesday.
 
The authors conducted a two-year study that analysed more than 20 billion automatically generated reports, collected from four million machines per year worldwide. 
 
The researchers based their rankings, in part, on the number of machines attacked in a given country and the number of times each machine was attacked.
 
Machines using Symantec anti-virus software automatically generated these reports, but only when a machine's user opted in to provide the data.
 
Trojans, followed by viruses and worms, posed the principal threats to machines in the US. 
 
However, misleading software (fake anti-virus programmes and disk cleanup utilities) was far more prevalent in the US compared with other nations that have a similar gross domestic product, the authors noted. 
 
The results suggest that US efforts to reduce cyber threats should focus on education to recognise and avoid misleading software.
 
“People - even experts - often have gross misconceptions about the relative vulnerability (to cyber attack) of certain countries. The authors of this book succeed in empirically refuting many of those wrong beliefs,” said Isaac Ben-Israel, chair of the Israeli Space Agency and former head of that nation's National Cyber Bureau, in a foreword to the book. 
 
The co-authors on the book are Michael Ovelgonne, a former UMIACS postdoctoral researcher; Tudor Dumitras, assistant professor of electrical and computer engineering in the Maryland Cybersecurity Centre; and B. Aditya Prakash, assistant professor of computer science at Virginia Tech.
 
A related research paper was presented at the 9th ACM International Conference of Web Search and Data Mining in February this year.
 
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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