Bank Mergers again at the Most Inopportune Time Raise More Questions than Answers
A strong economy and weak banking can hardly coexist. We have been stuck with weak banking for the past eight years in a row despite executing reforms such as the introduction of the Insolvency and Bankruptcy Code (IBC), the drive for financial inclusion through schemes such as Pradhan Mantri Jan Dhan Yojana (PMJDY) and the introduction of Micro Units Development and Refinance Agency Ltd (MUDRA). 
 
There were 40 bank mergers and takeovers during the post-nationalisation period, including the State Bank of India (SBI) merger.  One wonders whether we have drawn lessons from these experiences or otherwise.
 
Looking at the immediate past, the SBI merger with its associates is yet to deliver the intended results. About 5,000 branches were wound up, guillotining the reach to the rural clientele. Decision-making is at its lowest speed. Informed sources say that the merged associate bank staff at all levels are looked down upon by the pre-merger SBI. Motivation is at its lowest level. 
 
 
Even this was getting settled, the second bout of merger took place with the Bank of Baroda (BoB), Vijaya Bank and Dena Bank. While the SBI balance sheet took two years to come back to profit, that of BoB jumped to profit at the end of the first year itself. Obviously emboldened by the apparent frictionless mergers in the immediate past, the ministry of finance (MoF) announced merging 10 banks into four. 
 
 
Could this have been at any worse time than now, when headwinds of slowdown are blowing hard and global uncertainties are on the rise, with trade wars raging between the US and China and our own economy’s GDP growth tanking to 5% this quarter, the lowest in the past eight years? 
 
Twenty five years have passed since the Narasimham Committee recommended merger for six large banks but warned that it should not be a combination of weak banks. 
 
Watch out: just eight months ago, all the targeted banks were under the prompt corrective action plan (PCA). Nine out of the 10 have net non-performing assets (NPAs) above the danger level of 5%. Further, all these banks are to be recapitalised meaning that they are weak upfront on capital. 
 
Further, lately, their balance sheets are saddled with derivatives and guarantees that may move up and add to the losses. Therefore, those targeted for merger are weak banks and not strong ones. 
 
Dr YV Reddy, D Subba Rao and Raghuram Rajan on one occasion or the other have cautioned the government over consolidation of Indian Banks as a panacea for the ills of the banking system. 
 
While past accomplishments are no guarantee for future success, past failures can serve as good foundation for enduring success. Financial analysts like Anil Gupta of ICRA feel that the merging banks require harmonisation of asset quality and higher provisioning levels among the merging banks.  
 
Every merger or acquisition is expected to create value of some kind from synergy, and yet all the statistics show that successes are in the minority and failure can be quite expensive. 
 
Excepting that all the targeted banks have technologies in sync, no other synergies are seen on the horizon. Each suffers from a heavy baggage of NPAs with several of them in the uncertain National Company Law Tribunal (NCLT) window.
 
Banking is all about financial intermediation. People both before and behind the counters are at the epicentre of banking. Culture of institutions is intertwined with the diverse cultures spread across the country. Success of mergers across periods and nations is elusive with respect to human resources and cultural issues. 
 
Canara and Syndicate Banks are of the same soil and they have better prospects than the rest to derive advantage from the merger. All the other merging banks would struggle to synergise on cadre management, incentive system, risk practices, etc. 
 
Let us not forget that there is a 74% higher spurt in bank frauds in PSBs (public sector banks) than others and several of them emanated from system weaknesses. 
 
 
It is therefore, important that the big banks start becoming humble and learn lessons instead of becoming conglomerates of an unwieldy nature. Banking basics and customer service can hardly be bargained. 
In hindsight, the government decided to start the development banks to fund infrastructure projects and relieve the PSBs from this window as experience amply demonstrated that they are not cut out for that job due to their system of funding long-term projects with short-term resources. 
 
McKinsey has recently warned in an article: “Today’s environment is characterized by rising levels of risk emanating from the shift to digital channels and tools, greater reliance on third parties and the cloud, proliferating cyberattacks, and multiplying reputational risks posed by social media. Faulty moves to make risk management more efficient can cost an institution significantly more than they save.” Will the new CROs, when appointed, be capable of taking care of this concern? 
 
In another study on mergers and acquisitions (M&A), Becky Kaetzler et al. argue for a healthy post-merger organisational health index where they say that unhealthy acquirers destroy value, while healthy acquirers create value and tilt the odds toward success. 
 
Leaders considering mergers should first assess their organisation’s own health to better gauge whether or not to take the merger plunge. In the instant case, all the organisations in the target are not at the expected standard of health in the financial sector.
 
Leadership for transformation and good governance is critical for financial mergers to be successful. These emerging Big Four out of 10 should prove on these two counts that they hold these necessary virtues.
 
The announcement on governance improvements simultaneously released by the finance minister need a lot more assurance on the selection processes for the independent directors and non-executive chairmen and their roles. 
 
It would, in fact. be prudent to introduce a declaration in 250 words annually for each director detailing his contribution to the organisation so that the board and the directors can measure up the achievements against such statement. 
 
The bigger reform required from the owner is a pledge not to interfere in loan sanctions and move a resolution in the Parliament that no party would indulge in loan write off either for the farm or other sectors unless the areas are affected by severe natural calamities. 
 
Further, higher capital allocation with or without Basel III cannot prevent bank failures triggered by systems, people and processes. 
 
Capital infusion should be done after specific commitments from the capital-deficit banks on the credit flow to the prioritised sectors, revival and restructuring of viable enterprises in accordance with the Reserve Bank of India (RBI) mandates and the recovery of NPAs. 
 
There can be no energy without friction. The envisaged mergers are bound to have friction and it is the future that decides whether this will bring positive or negative energy. Let us not forget the dictum—‘too big to fail’ would eventually require the government to bail them out of any failure that ordinary citizens would not like to see or wish.
 
(The author is an economist and risk management specialist. The views are personal.
 
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    COMMENTS

    Kodukula Subrahmanyam

    3 days ago

    Good. I don't understand why Punjab and Sind bank was not proposed for merger.

    Harish

    2 weeks ago

    Well-written

    Dr.Dhananjaya Bhupathi

    3 weeks ago

    https://www.moneylife.in/article/bank-mergers-again-at-the-most-inopportune-time-raise-more-questions-than-answers/58084.html
    1. Unless & until the Duds of Ad-hocism in PMO/UFM are replaced by visionaries of bright future, hasty mergers shall result in chaos.
    2. XI BPS talks for wage revision + retirees issues are yet to be addressed-kept pending for past 2 years by PMO/UFM/IBA.
    3. IBA & UFM/PMO, SHAMELESSLY, DENY WAGE REVISION AND PENSIONARY BENEFITS ON PAR WITH CENTRAL GOVT. PAY SCALES; WITH LAME EXCUSE ‘MOUNTING NPAs’.
    4. SBI closed 6000+ branches after the merger of subsidiaries.
    5. Notwithstanding the colossal size of NPAs created at apex level in PSBs, by & large PSB staff up to Scale VII-GENERAL MANAGERS ARE HONEST TO THE CORE & HARDWORKING.
    6. Writing on the wall: Most of PSB staff plan to exit due to low wages & pension + lopsided Govt. policies-resulting in cardiac issues with extreme work pressure.
    7. REMEDIES:
    8. A. Issue an ordinance to bring PSB salaries & pensionary benefit on par with Central Govt. Employees. So that those who want to exit on VRS may be permitted & go in for recruiting youth in vacant posts to attract the most talented.
    B. Prudent to involve UFBU in decision making on mergers.
    9. https://www.youtube.com/watch?v=T7fOf8rUrdw.
    10. SATYAMAEVA JAYATHE!!!

    tapan sur

    3 weeks ago

    Once we mismanage an economy & then do not recognize the same for rectification, it leads to cancer, and to cure it we use expensive measures which become more dangerous & unpredictable. Yesterday alone inverters lost rs.2,65.00 crores in the market. Bad? well there are pickings of Gold but only for those who have enough cash, but the retail investor is on tenterhooks. My prediction on that fateful day at 12 am of a Teratogenic effect on the economy is falling into place. BOL.

    Shrikant Dattatraya Sahasrabuddhe

    3 weeks ago

    Great Article. Correct Diagnosis.Pl. give Authors Introduction in few words.

    REPLY

    B. Yerram Raju

    In Reply to Shrikant Dattatraya Sahasrabuddhe 3 weeks ago

    www.yerramraju1.com

    K V RAO

    3 weeks ago

    The writer, inter alia, has suggested a short write up not exceeding 250 words by board directors about their contribution to the bank.

    While I have no arguments with other points (most of which sound good and so are welcome), the abovementioned point is highly theoretical.
    The writer's suggestion can be accepted and implemented. But it doesn't serve any purpose. All directors will submit such notes and would get neatly filed.

    REPLY

    B. Yerram Raju

    In Reply to K V RAO 3 weeks ago

    All I can say is, you are presumptuous. Once a Director gives a statement of how and to what extent he intends to contribute value to the firm/Bank during the year, it will be easy to have self evaluation at the end of the year. Second, Board will have opportunity to assess the functioning of the Directors. It will also help the Bank to insure the Director at appropriate level instead of a blanket insurance policy. Fourth Board can evaluate itself. In our country, Board Directors invariably think they are superior persons and that they should not be subject to such self assessment even!

    K V RAO

    In Reply to B. Yerram Raju 3 weeks ago

    Merely a statement or declaration cannot create value. The writer's assertion indicates value creation is easy.

    Regarding Board's opportunity for evaluation, the writer assumes that board is separate from the constituent members.
    Board is a set of members and vice versa. There has not been any instance in India (abroad, I am not aware), where board has found fault with itself or with any of its members. Even where the Chairman (mostly ex-officio CEO or Chairman of the Company)has mismanaged the company, the board remained as a mute spectator. How can members find fault with a person who has appointed them?

    Ditto for writer's opinion on board's self evaluation and self assessment.

    I have complemented the writer for his other points but I still don't agree with him on the point under reference.

    K V Rao Bengaluru

    B. Yerram Raju

    In Reply to K V RAO 3 weeks ago

    It is available in Netherlands and implemented successfully. I introduced in the NBFC - presently owned by Government of Telangana and even the Government nominated Directors did not raise any objection. Out of 4 independent Directors three independent Directors gave the statement and this is the first year of such move.
    Value creation is not easy. But efforts to create value must flow to the firm from different directions. Directors are not meant just to meet once in a quarter and review what the management places before the Board. Board should also discuss on strategies and give direction. According to a survey presented at the Institute of Directors' Conclave recently, it was revealed 78% of Boards devoted 90% of time on just regulations and less on Business Development and Strategies or innovations in the Companies. Banks are management led Boards and that is the reason for the huge NPAs we see. The Directors should set some goals for themselves.

    K V RAO

    In Reply to B. Yerram Raju 3 weeks ago

    Dr. Y Raju himself agrees that bank boards have not contributed to value creation and instead are engaged in administrative tasks. The writer opines that board is has created NPAs in banks and in companies they merely spend time on regulations etc etc.
    Then how come the directors will get into the new habit of brief notes about their functioning? I think we should close the discussions without getting into ideal situations. I request the Dr not to take the feedback on only one point of his write up as a reflection of his ability to bring out an outstanding paper.

    B. Yerram Raju

    In Reply to K V RAO 2 weeks ago

    I sincerely thank you for the compliments despite the point of difference. Unless I have the patience to listen, improvement will not come. I respect your difference. Change that is resisted most is the change most needed.

    K V RAO

    In Reply to B. Yerram Raju 2 weeks ago

    Thank you too! If you happen to be in Bangalore, let me know (9980145573)and we can meet.

    IDBI to receive Rs9,300 cr capital to meet CAR
    The Union Cabinet here on Tuesday approved infusion of over Rs9,000 crore capital in the IDBI Bank to meet the regulatory capital requirements by raising the capital adequacy ratio (CAR), said HRD Minister Prakash K Javadekar.
     
    IDBI Bank shareholders—the government and the Life Insurance Corporation (LIC) of India—will infuse Rs 9,300 crore in the bank. Of this, the government will infuse RS 4,557 crore and the LIC Rs 4,743 crore. 
     
    The IDBI Bank's capital base has got eroded with the CAR at 8.1 per cent. The government and the LIC own 49 per cent and 51 per cent stake in the bank, respectively. 
     
    While announcing the bank merger plan recently, the government said Rs 55,250 crore capital would be infused into the merging banks and also the Bank of Baroda. But the IDBI Bank did not figure in the list.
     
    The capital infusion "will help both the IDBI Bank and the LIC and show the government's commitment to take banking to a sound level", an official statement said.
     
    The move is aimed at supporting the credit growth and the regulatory compliance by lenders. In the budget, the government had announced RS 70,000 crore recapitalisation for PSU banks.
     
    Of the fresh capital support, the PNB will get Rs 16,000 crore, Union Bank Rs 11,700 crore, Canara Bank Rs 6,500 crore, Indian Overseas Bank Rs 3,800 crore, Central Bank of India Rs 3,300 crore, Bank of Baroda Rs 7,000 crore, Indian Bank Rs 2,500 crore and UCO Bank Rs 2,100 crore. 
     
    IDBI Bank has been a poor performer on many metrics. Its non-performing asset (NPA) is at 29 per cent and has reported loss in the 11 straight quarters. The bank is under the Reserve Bank of India's prompt corrective action (PCA) framework.
     
    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.
  • User

    COMMENTS

    Ramesh Poapt

    2 weeks ago

    ICU/comma patients since long....IDBI & India Airlines...

    tapan sur

    3 weeks ago

    We are entering into a mad state of mind, not knowing what to do & in a panic situation have started dipping into our reserves accumulated over the years in our strong institutions.BOL

    Anchor banks in PSB merger may see book value erosion: ICICI
    Following the latest announcement on merging state-run banks, ICICI Securities (I-Sec) on Tuesday estimated that Syndicate Bank shareholders would get 140 shares of Canara Bank for every 1,000 shares of Syndicate Bank, while Allahabad Bank shareholders would get 176 shares of Indian Bank for every 1,000 shares of Allahabad Bank.
     
    An I-Sec report also estimated that while Oriental Bank (OBC) shareholders would get 1,130 shares of Punjab National Bank (PNB) for every 1,000 shares of OBC, United Bank shareholders would get 160 shares of PNB for every 1,000 shares of United Bank, as part of the merger swap ratios.
     
    Similarly, Andhra Bank shareholders would get 330 shares of Union Bank for every 1,000 shares of Andhra Bank, and Corporation Bank shareholders would get 320 shares of Union Bank for every 1,000 shares of Corporation Bank. 
     
    According to the financial services firm, the merger appears to be a positive measure in the long-term. 
     
    The report said that while the respective banks' boards will need to approve the contours of the swap ratio along with the timeline for completing the merger, the estrimatred swap ratios are based on current market prices while final ratios could differ on account of future price changes.
     
    I-Sec also said the broad calculations indicate dilution for anchor banks. In the cases of the Indian Bank-Allahabad Bank, as well as the Canara Bank-Syndicate Bank mergers, anchor banks are expected to witness 15-20 per cent impact on Adjusted Book Value (ABV). 
     
    Therefore, Canara Bank with a 15 per cent impact on ABV, and Indian Bank with 18 per cent impact on ABV, are expected to witness negative pressures, ICICI said. The impact has been estimated after factoring fresh capital infusion of Rs 2,500 crore and Rs 6,500 crore, respectively, for the merged entities. 
     
    In the cases of PNB and Union Bank, dilution due to merger will not impact ABV, the reeport said. Fresh capital infusion is seen leading to substantial positive revision in ABV by 20 per cent for PNB and over 40 per cent for Union Bank. 
     
    Non-performing asset (NPA, or bad loan) concerns in merged bank may arise in future and result in different estimates. 
     
    UCO Bank, Indian Overseas Bank (IOB), Central Bank of India and Bank of Maharashtra (BoM), with high NPAs and left unmerged can see a negative reaction, the report said. 
     
    Capital adequacy, geography and technology were core factors behind the selection of banks for merger. Post the earlier three-way merger of Bank of Baroda, Vijaya Bank and Dena Bank, the government has moved quickly with more amalgamations with this decision to downsize 10 public sector banks (PSBs) into four larger players. 
     
    Overall, the number of PSBs will reduce from 18 to 11. Other PSBs—Uco Bank, Bank of Maharashtra, IOB, Punjab and Sind Bank, Central Bank of India, Bank of India—will continue to operate as independent regional entities.
     
    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

    Ramesh Poapt

    2 weeks ago

    cost reduction by merging/closing branches/admin offices and staff
    reduction, capital infusion etc should offset some negatives.

    Abhisek Munda

    3 weeks ago

    Abhishek.munda

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