You may hear some big banking decisions by government before 2019 polls

For banks, the last quarter of the financial year is usually time for consolidation rather than change. This is the time when they go full throttle on lending and beef up their top line before closing their books for the year. The year 2019 will, however, see a lot of front-ending of events in the private sector and also among state-owned lenders as the government is likely to push through some key decisions ahead of the elections. 

On the cards is a decision on transfer of surplus funds by the Reserve Bank of India (RBI) to the government. This is likely to follow the report of the Bimal Jalan-led committee, which is expected before end-March 2019. The government is simultaneously going full-steam ahead on its decision to consolidate the three public sector banks — Bank of Baroda, Dena Bank and Vijaya Bank. Management consultancy firm EY has already been appointed to help in the process. 

The other major M&A activity in the public sector that will conclude in the first quarter of 2019 will be LIC’s acquisition of IDBI Bank. LIC has said that it will pay shareholders who respond to its open offer for purchase of IDBI Bank stock on December 31. This means that the process will be completed in the third quarter. LIC’s acquisition, through infusion of fresh capital, will bring IDBI Bank out of RBI’s prompt corrective action plan. LIC plans to professionalise IDBI Bank on the lines of Axis Bank.

Additionally, the fourth quarter is when SBI’s mega qualified institutional placement of equity shares is expected. SBI aims to raise Rs 20,000 crore as it prepares itself for a surge in lending in 2019. 

Early 2019 will also see the conclusion of the last chapter in the high drama in several private banks. Justice B N Srikrishna, who is looking into the conflict of interest allegations at ICICI Bank, is expected to submit his report in the coming weeks. This will put an end to the controversy in the bank, which culminated in the resignation of Chanda Kochhar. In Kotak Bank, the Bombay high court will decide on the lender’s plea to retain its promoter’s shareholding at above 20%. Kotak Mahindra Bank has filed a writ petition challenging the central bank’s order to dilute promoter holding to 20%. 

The new year will be the most eventful for Yes Bank where the lender’s founder, promoter and CEO Rana Kapoor is expected to step down in January 2019 and make way for a new chief executive. The year is also likely to see a truce between the two promoter group’s Rana Kapoor and his sister-in-law Madhu Kapur who have been fighting in courts over the right to appoint directors. 

Axis Bank will also see a new beginning with newly-appointed CEO Amitabh Chaudhury taking charge from January 1 in place of Shikha Sharma who completes her term in December.  

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Government appoints new RBI Governor

The government on Tuesday appointed Shaktikanta Das, a member of India’s Fifteenth Finance Commission, as the new RBI governor replacing Urjit Patel, who resigned abruptly on Monday citing personal reasons. Das has been appointed the governor of the Reserve Bank of India for a period of three years.

The appointments committee of the cabinet has cleared Das’ appointment for a period of three years, said an official order issued by the department of personnel and training.

Das, who is believed to be close to Prime Minister Narendra Modi, was the economic affairs secretary when the prime minister announced demonetisation in November 2016.

A retired 1980 batch IAS officer of Tamil Nadu cadre, Das was India’s Sherpa to G20. During his career as an IAS officer, he served in various capacities for the Indian and Tamil Nadu governments.

Das’s appointment follows a damaging tussle between RBI and the government over independence of central bank and regulation of weak public sector lenders. He has the task of mending the relations at a time the role of the RBI and its policies on managing liquidity and regulation of banks have come to the scrutiny of the government.

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Finance Ministry hopes to see 3-4 banks come out of PCA this fiscal

The finance ministry hopes that 3-4 banks would come out of the RBI's Prompt Corrective Action watchlist this fiscal, following the expected modification of guidelines and apparent improvement in bottomline of the public sector banks, sources said.

Of the 21 state-owned banks, 11 are under the PCA framework, which imposes lending and other restrictions on weak lenders. These are Allahabad Bank, United Bank of India, Corporation Bank, IDBI Bank, UCO Bank, Bank of India, Central Bank of India, Indian Overseas Bank, Oriental Bank of Commerce, Dena Bank and Bank of Maharashtra.

Last week, the RBI in its central board meeting decided the issue of banks under Prompt Corrective Action (PCA) will be examined by Board for Financial Supervision (BFS) of the central bank.

The PCA framework kicks in when banks breach any of the three key regulatory trigger points -- namely capital to risk weighted assets ratio, net non-performing assets (NPA) and return on assets (RoA).

Globally, PCA kicks in only when banks slip on a single parameter of capital adequacy ratio, and the government and some of the independent directors of the RBI board, like S Gurumurthy, are in favour of this practice being adopted for the domestic banking sector as well.

However, the RBI has strongly defended the PCA framework in the past. Last month, its Deputy Governor Viral Acharya had said that any relaxation in the PCA imposed on weak banks should be avoided as it is an essential element of its financial stability framework.

"Imposition of PCA can thus be seen as first, stabilising the banks at risk, and then, undertaking the deeper bank reforms needed for long-term viability of the business model of these banks, he had said.

Sources further said various measures taken by the government, including implementation of Insolvency and Bankruptcy Code (IBC), have yielded good results in terms of reining bad loans and increasing recovery.

So, the review by the BFS of RBI, improving performance of the banks and recovery due to IBC give hope that 3-4 banks could move out of PCA by the end of March 2019, they added.

Banks have made recovery of Rs 36,551 crore during the first quarter, registering a 49 per cent growth over the last fiscal. At the same time, operating profit has risen by 11.5 per cent, while losses fell 73.5 per cent on quarter on quarter basis, he said, adding asset quality has been addressed through falling NPA slippage. Provision Coverage Ratio of banks has improved to a healthy level of 63.8 per cent.

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Govt announced merger of Bank of Baroda with two banks to form India's 3rd Largest Bank

The government has announced that Bank Of Baroda, Vijaya Bank and Dena Bank will be merged into a single bank which will become India's third largest bank. Rajeev Kumar, Secretary Department of Financial Services, said in a press conference today that employees interest would be protected in the merger process. 

The merger of five SBI associate banks was done without any job losses, he said. The three banks will continue to work independently till the merger. 

Kumar said the merger would help improve operational efficiency and customer services. He said it was time for the next generation of strategic banking reforms. 

The government had initiated numerous reforms over the last four years, especially with respect to banking and to ensure clean lending process, he said.

He said the stock of non-performing assets (NPAs) had reduced by Rs 21,000 crore in last quarter. Banks recovered Rs 36,551 crore in the first quarter of FY19. There was a need to increase scale and synergy for growth momentum to continue, he said.

Kumar talked about various steps the government had taken to clean banking including the Insolvency and Bankruptcy Code (IBC). He said now people knew that if they had taken loan, they would have to return it. He said the IBC was fundamentally changing the creditor-debtor relationship in India. He said all loans over Rs 150 crore would be monitored by a separate vertical in each bank.

"The government is keen to take steps so that history isn't repeated as far as NPAs are concerned. The government approach is to make the banking sector’s fundamentals strong," he said.  

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Govt is said to ask RBI to identify banks that can be merged

Government has asked its central bank to prepare a list of candidates for merger among 21 government-controlled lenders as it seeks to strengthen a banking system laden with bad debt, people familiar with the matter said. 

In a meeting this month, finance ministry officials also asked the Reserve Bank of India to suggest a time frame for the consolidation, the people said, asking not be named as the information isn’t public. The move is aimed at creating fewer, better-capitalized lenders and improving regulatory oversight, they said. 

India has been battling for years to clean up its banks, which have the highest bad-loan ratio after Italy among the world’s 10 largest economies. Government-controlled lenders are estimated to hold 90 percent of non-performing loans, and 11 of the 21 are operating under an emergency program, supervised by the RBI, which restricts new lending. 

A phone call to a finance ministry spokesman and an email to the RBI seeking comment weren’t immediately answered. 

State-backed lenders need to consolidate to avoid losing more market share to peers in the private sector, the outgoing chairman of Bank of Baroda Ravi Venkatesan said last month. 

Almost 70 percent of new deposits went to private banks in the latest fiscal year and they’re estimated to have cornered nearly 80 percent of incremental loans through 2020 as mounting bad debt erodes capital and constrains lending at state banks. Weak balance sheets and laws that require the state to hold at least 51 percent of their shares have left public lenders dependent on the government for new capital. 

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Finance minister warns banks against indiscriminate lending

Finance minister Arun Jaitley on Monday cautioned banks against growing credit at a high rate of 28-31 per cent, warning that this would amount to indiscriminate lending and sow seeds for future bad loans. “If we have growth on the basis of 31 per cent or 28 per cent credit offtake, history will record it as growth on the back of indiscriminate lending. One lesson that all of us must learn — moderation, rather than just running after numbers,” said Jaitley, addressing bank chiefs through a video-conference at the annual general meeting of the Indian Banks Association.

Jaitley said that high credit growth in the past resulted in creating surplus capacities and funding projects that were unable to support debt taken for them. “The next error we did was to start dressing up and evergreening money that was owed to the banking system,” he said. “One lesson is that when we desire to have a higher growth rate — it must be supported by good macroeconomic fundamentals. For the management of the economy, growth has to be with fiscal prudence, macroeconomic fundamentals and, therefore, growth has to come with normal, reasonable credit offtake,” said Jaitley.

He said that while the macroeconomic fundamentals were strong, the country faced external risks. These include volatile oil prices and trade wars. “Though we are not participants, the impact can be seen in India, particularly when there is a tendency among large economies to devalue or undervalue their currency,” said Jaitley. He also cited sporadic issues like the ones in Turkey that impact India. “It’s incumbent on us that domestic fundamentals are strong so that we have the resilience to meet external challenges,” he said.

Pointing out that India was the only large economy growing at 7.5 per cent and was likely to move from sixth largest to fifth largest next year, Jaitley said, “Over the next few years, we have to target No. 4 and No. 3 (ranks).” Jaitley told bank chiefs that the challenges before them are of professionalism, expansion, and credibility. “The role of banking has been vital in the past and will be more vital in future and I am sure that you will introspect the journey of last few years, which has been very challenging, and search for a better road map for the banking system,” Jaitley told bankers.

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PSU Banks will come out of PCA by the end of 2018: Government

The government expects the public sector banks to come out of the Prompt Corrective Action (PCA) framework by the end of this year and will provide them adequate capital when required, Department of Financial Services Secretary Rajiv Kumar said on Thursday. He said public sector banks’ operational performance has improved in the April-June quarter, with steep reduction in net losses, increase in recoveries and significant improvement in provision coverage ratio.

As many as 11 out of 21 state-owned banks are currently under the RBI’s Prompt Corrective Action (PCA) framework, which kicks in when banks breach any of the three key regulatory trigger points i.e. capital to risk weighted assets ratio, net non-performing assets (NPA) and Return on Assets (RoA). Depending on the risk thresholds set in PCA rules, the banks are restricted from paying dividend, expanding the number of branches, staff recruitment and increasing the size of their loan book. Two lenders, Dena Bank and Allahabad Bank are facing restrictions on granting fresh loans.

“We are committed to maintain their regulatory capital. I’m sure the banks will come out of PCA this fiscal,” Kumar said at a Canara Bank branch opening event. “NPAs are by and large recognized, provisioning by and large made, the recoveries are on its course through NCLT and outside NCLT (National Company Law Tribunal). The creditor-debtor relationship is under tremendous change. The resolve of government is extremely clear that every stakeholder has to be responsible. Those who are not prudently behaving will have to face the consequences,” he said.

On August 1, the Union Cabinet a deal to allow Life Insurance Corporation (LIC) raise its stake in IDBI Bank to 51 per cent. The government argued that the deal will help IDBI Bank come out of the PCA framework.

In April-June (Q1) 2018, the operating profit of banks has risen by 11.5 per cent while their net losses fell 73.5 per cent over the same quarter last fiscal year, he said, adding that the provision Coverage Ratio of banks have now reached 63.8 per cent from around 56 per cent at the starting of last fiscal year. PSU banks net losses have narrowed to Rs 16,617 crore in April-June 2019, from a record of Rs 62,682 crore in April-June 2018. Their operating profits increased to Rs 36,632 crore in April-June 2019, from a Rs 34,329 crore in April-June 2018.

With regard to the capital requirements of the banks, Kumar said the government will capitalize banks when needed. “Some of it (capital) has already been given, as recoveries is taking place, there is possibility that some banks will not need it. As of now, there no bank is breaching the regulatory norms,” he said.

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Government's bank recapitalisation plan actually working?

Public sector banks (PSBs) have played a pioneering role in developing India's industries, but recent evidence suggests they are being shortchanged. Large infrastructure projects have been bogged down by legacy issues, regulatory overreach, and negligence on the part of banks, which has only led to the pile of bad debt becoming bigger.

The rise in the level of non-performing assets (NPAs) has consequently led to more public money being injected into government banks to meet capital requirements. Provisioning for bad loans has impacted their profitability and growth. Private banks have been relatively more successful than their state-run counterparts in leveraging market forces to raise capital.

The gross NPA ratio of scheduled commercials banks rose from 10.2 percent at the end of September 2017, to 11.6 percent at the end of March 2018. Private banks fared much better during the period under review with an NPA ratio of only 4 percent; PSBs gross NPA ratio at the end of the period was 15.6 percent.

The government had formulated the 'Indradhanush' plan in August 2015 to resolve the issues faced by PSBs, and make them more competitive vis-à-vis private banks. The seven-pronged action plan to revamp PSBs identified both structural and policy issues that were holding back these institutions from living up to their mandate.

On the structural side, governance issues, NPAs, and a homogenous credit base have held back state-run banks. The Indradhanush plan estimated that recapitalisation to the tune of Rs 1.8 lakh crore was needed to nurse these banks back to health.

This amount was to be released in a staggered manner, spread over four years. Of the total, Rs 70,000 crore would be infused into banks by the government, while the remaining Rs 1,10,000 crore would have to be raised by banks. The government has already injected Rs 59,435 crore of the total in public banks, with the residual amount to be raised through budgetary provisions.

In January 2018, the government mooted a front-loaded bank capitalisation plan of Rs 2.11 lakh crore to augment the Indradhanush plan. Of the total, Rs 1.35 lakh crore was to be infused through sale of recapitalisation bonds, while the rest would come from budgetary provisioning and through funds raised from the market.

Public banks have been the beneficiaries of government aid, especially since the market liberalisation reforms of 1991. Union budgets presented in the last five years have earmarked money for bank capitalisation, of which Rs 83,504 crore has been spent. However, the budgetary provision for FY18 was Rs 90,000 crore, much more than the expense incurred over the last five years.

The diversion of public funds for keeping state-owned banks afloat is indicative of the systemic flaws that have culminated in mounting bad debt and over-leveraged balance sheets. Institutions like Life Insurance Corporation of India (LIC) have also been used as surrogates to stave off crisis in these banks.

The quantum of direct government support to the banking sector has increased by over 450 percent over the last four fiscal years, from Rs 15,504 crore in FY14 to Rs 86,510 crore in FY18. For the current financial year, Bank of India received the most government aid, having received at Rs 9,232 crore. It was followed by State Bank of India (SBI), which received Rs 8,800 crore.

The capital infusion by the government is broadly in line with the net losses reported by state-run banks. Of all the PSBs in the country, only Indian Bank and Vijaya Bank recorded profits in FY18. Cases of financial fraud, most notably, the one orchestrated by Nirav Modi and Mehul Choksi, pulled down the performance of Punjab National Bank, which recorded a loss of Rs 12,283 crore, the highest among PSBs. In FY18, SBI and its associates received Rs 8,800 crore in cash from the government, while recording a loss of Rs 5,339 crore for the year.

Of the 21 public banks in operation, 19 reported losses this year, resulting in numerous calls for their privatisation.

Despite the government having increased its allocation for recapitalisation of these banks by a not-so-modest amount, they are still being found wanting. Their gross NPA ratios have swelled in the recent past, with IDBI Bank reporting a GNPA ratio of 27.95 percent at the end of the June quarter, up from 24.11 percent as at the end of the same quarter last year.

The same is true in the case of United Bank of India, whose GNPA ratio rose by almost 7 percentage points over the past year. PNB's bad loans also spiked, with GNPA ratio increasing to 18.38 percent of its asset base.

Factoring in possible losses from restructured assets and additional provisioning, it would be safe to assume that more money will be need to be pumped in to ensure that public banks meet capital adequacy norms.

Source- Moneycontrol

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UFBU meeting with Finance minister on 4th Aug

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Government clears bills to amend IBC and withdraw FRDI

The government is likely to withdraw the Financial Resolution and Deposit Insurance (FRDI) Bill, 2017 in the ongoing session of Parliament to calm jittery investors and avoid any popular backlash before the 2019 elections.

Introduced in Lok Sabha on August 11, 2017, the proposed bill had made depositors nervous due to a 'bail in' clause.

In a bid to prevent banks from going bankrupt, the draft bill proposed 'writing down of liabilities' (referred by many as a bail-in), which most thought had potential to harm deposits in savings bank accounts.

Authorities had also planned to raise security cover for bank deposits, amid fears over deposits being used to ‘bail in’ ailing banks in extreme situations.

At present, each depositor is protected only up to a limit of Rs 1 lakh by the Deposit Insurance and Credit Guarantee. Deposit beyond Rs 1 lakh does not have any protection and is treated at par with claims of unsecured creditors as of now.

The bill had proposed to set up a resolution corporation to monitor financial firms, anticipate the risk of their failure, take corrective action and work out a resolution plan. In case of a failure, the proposed corporation would also provide deposit insurance up to a certain limit, which was not specified.

The bill had also proposed that once a financial services company, including a bank, slips into critical category, the Resolution Corporation would take over the firm and prepare a resolution during a year, extendable by another 12 months.

government had assured depositors several times that it was committed to protecting the interest of them and financial institutions and had slammed opposition parties for triggering “a needless controversy.”

It had said that 70 per cent deposits are in public sector banks and most of the rest in well-capitalised private banks, so there's no likelihood of losing deposits for over 98 per cent depositors. The remaining will be subject to a 'bail in' only if the depositors consent.

“In an election year, the government does not want to do anything which appears to be anti-people,” said a source.

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PM Modi calls for strict action against corrupt bankers

Prime Minister Narendra Modi last week called for “strict action” against bank officials who indulge in corruption, frauds or criminal conspiracy, according to the minutes of the meeting of the multi-modal platform PRAGATI (proactive governance and timely implementation), underlining the government’s zero tolerance for any such activity. 

The minutes of the June 27 meeting accessed by ET show that the PM issued these directions after conducting a review of issues regarding the banking sector with the Department of Financial Services (DoFS). 

A few days before this meeting, on June 21, the Indian Banks Association (IBA) had condemned the spate of arrests and charge sheets by investigative agencies in alleged bank fraud cases and at an emergency meeting on June 22 sought setting up of an independent committee and inclusion of a Reserve Bank of India official as part of it to scrutinise charges against the bankers. 

A senior official in the government, speaking on condition of anonymity, however said that the two developments — IBA’s complaints-cum-emergency meeting and the PM’s review meeting — were not linked. 

VG Kannan, IBA’s CEO and a former State Bank of India official had told on June 21that the association had already taken up the matter with the DoFS in Delhi and the Maharashtra government. 

The minutes of the PM’s monthly review meeting on various sectors of the government, held six days later, say, “Strict action should be taken against bank officials/officers involved in misbehaviour/harassment/fraud/criminal conspiracy/corruption etc.” 

The IBA had raised the red flag after Pune Police arrested five Bank of Maharashtra officials, including its CEO Ravindra Marathe, for allegedly colluding with a real estate developer to divert money and cheat shareholders. 

In January, former IDBI chairman Yogesh Agarwal and four executives were arrested in a case linked to fugitive liquor baron Vijay Mallya’s loan default. Several other officials of state-run banks face charges too. 

At the June 27 PRAGATI review meeting, the PM also directed the DoFS to fix a time limit for disposal of insurance claim under its various schemes such as the Pradhan Mantri Jivan Jyoti Bima Yojna and Pradhan Mantri Suraksha Bima Yojna. Nearly 5.4 crore people have enrolled in the first scheme and nearly 14 crore in the latter.

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RBI grants licence to Bank of China to set up branch in India

The Reserve Bank of India (RBI) has issued licence to Bank of China to launch operations in India, official sources said on Wednesday. 

Prime Minister Narendra Modi had made a commitment to Chinese President Xi Jinping to allow Bank of China to set up branches in India when they met on the sidelines of the SCO summit in Chinese city of Qingdao last month. 

"The RBI has issued licence to Bank of China to set up its first branch in India. It was a commitment made by the Prime Minister to the President of China," said a source.

Bank of China is one of the very few state-owned commercial banks in China.

India and China have been focusing on expanding their economic ties notwithstanding differences on several sticky issues including on the boundary dispute.

After last year's Doklam standoff, both the countries have stepped up dialogue at various levels to reset the ties.

Meanwhile, the sources said Chinese Defence Minister Wei Fenghe is scheduled to visit India soon and both sides are in the process of finalising the dates.  

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Govt accepts 5-point plan to resolve NPAs, rules out bad bank

The government on Monday agreed to a five-pronged strategy to resolve toxic loans, with the larger ones among them going to an asset management company (AMC) or an alternative investment fund (AIF).

Finance minister Piyush Goyal, who accepted the report by a committee of bankers set up in this regard, told reporters that the strategy, called Project Sashakt, will help retain the value of the asset through operational turnaround. The finance ministry had set up the committee, led by Punjab National Bank chairman Sunil Mehta, in June.

There is no proposal to create a bad bank, and Project Sashakt does not require any regulatory forbearance, Goyal said.

Project Sashakt outlines the resolution of bad loans depending on their size. Bad loans of up to Rs. 50 crore will be managed by a focused vertical to be set up at the bank level itself, which will ensure the loan is resolved within 90 days. For bad loans of Rs. 50-500 crore, banks will enter into an inter-creditor agreement, authorizing the lead bank to implement a resolution plan within 180 days, which includes appointing turnaround specialists. If the lead bank does not complete the process in time, the asset would be referred to the National Company Law Tribunal (NCLT).

For loans above Rs. 500 crore, the committee has recommended setting up an independent AMC supported by institutional funding in stressed assets or an AIF. The idea is to help consolidate stressed assets under the AMC model for better and faster decision making.

“There can be more than one AMC. It will be completely market-driven. Small equity required. No capital required from the government. Investors can come and invest. It’s an open process.” Goyal said.

Bigger loans which cannot be resolved through any of the above methods will be transferred to the NCLT for resolution under the Insolvency &

Bankruptcy Code (IBC). The committee also recommended an asset trading platform for both performing and non-performing assets.

“It should create a more vibrant market and each sector requires specific skills. For instance, institutional investors can decide their sector of interest,” Mehta said.

Besides Mehta, the committee included State Bank of India chairman Rajnish Kumar, Bank of Baroda managing director and chief executive officer P.S. Jayakumar and SBI deputy managing director C. Venkat Nageswar.

“Having an AMC will consolidate the bad loans of all lenders at one place,” a banker told Mint. “However, what is crucial is where the AIF is going to get funding from to invest in these stressed assets,” he said on condition of anonymity.

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Public money extremely safe in PSU banks, says Goyal

Public money is "extremely safe" in state-owned banks, Finance Minister Piyush Goyal said today against the backdrop of several cases of frauds, including the USD 2 billion scam at PNB, unearthed recently. 

Speaking to reporters after meeting several heads of PSBs, he said the government is open to the question of giving more powers to the Reserve Bank for effectively regulating public sector banks. 

"Public money is extremely safe in PSU banks. Government stands behind them 100 per cent," Goyal said. 

He stated however that he was not "sure" as to how safe the public money is with private companies which have huge income tax dues. He said the frauds were perpetrated by private companies and not the PSBs. 

In reference to recent suggestion by RBI Governor Urjit Patel that the central bank lacked powers to effectively deal with the PSBs, Goyal said RBI has powers, but if additional powers are needed the government was open to the idea. 

He also said that PSBs would support credit needs of genuine companies, and focus on MSME sector. Various investigating agencies are probing the over USD 2 billion fraud allegedly committed by diamond jeweller Nirav Modi and his associates. Several other scams too have surfaced in the recent past involving PSBs.

Source- Economictimes

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Centre plans amalgamation of Regional Rural Banks(RRBs) at the State level

The government has decided to start the consolidation process of Regional Rural Banks (RRB) after a gap of six years and bring down the number of such entities to 38 from 56 now.In a communication to the chiefs of public sector banks, which are the sponsors of the RRBs, the finance ministry asked them to amalgamate the RRBs within a State. 

The ministry, in its letter in the first week of this month, also mentioned the list of RRBs which could be merged.The letter also asked the lenders to obtain a no-objection certificate from the board for the merger.“It is envisaged that the RRBs within a state could be amalgamated. Accordingly, GoI, in consultation with Nabard, has approved the road map for amalgamation of RRBs, which will bring down the number of RRBs to 38 from 56,” the letter said.

The ministry expects that the consolidation process would enable RRBs to minimise their overhead costs, optimise use of technology, enhance capital base and area of operation and their exposure.“Further, this will bring about better scale efficiency, higher productivity, robust financial health of RRBs, improved financial inclusion and greater credit flow to rural areas. It is expected that amalgamation will bring about better functional entities,” it said.

Third phase 

This is the third phase of consolidation among Regional Rural Banks(RRBs), but the first attempt by the present NDA government which came into power in 2014.The first phase of consolidation was in 2004-05 when Regional Rural Banks(RRBs) of same sponsor banks, within a state, were merged. As a result, the number of RRBs came down from 196 to 82. The second phase was in 2011-12, when RRBs with geographical contiguous areas of operation within a state were merged, across sponsor banks. As a result, the number of RRBs further declined to 56.

While Regional Rural Banks(RRBs) have taken deep roots in the last four decades of their existence and become an important entity for rural credit, their financial viability became a matter of concern since 1980, just five years after their existence.

As a result, the government decided to start merging Regional Rural Banks(RRBs) with commercial banks.

While consolidation among public sector banks remained at the drawing board, the government was successful in merging five associate banks of State Bank of India as well as Bharatiya Mahila Bank, with SBI in 2017-18.

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Government weighs various options to bring down stake in one PSB

The government is weighing various options, including Qualified Institutional Placement (QIP), to bring down its stake in IDBI Bank. 

The government currently holds 80.96 per cent stake in the Mumbai-based bank. 

"Three-four options are being looked at, including private placement of shares to institutional investors through QIP route," a finance ministry official told . 

The proposal for the issue of equity capital through various alternative modes, including QIP, is listed as one of the agenda for the annual general meeting of the bank to be held in August. 

A decision in this regard will be taken in the next few months, the official said, adding the government has already started the transformation process of the bank like re-balancing of its assets along with shedding of stake in the non-core business. 

In addition, the bank is getting adequate capital support to strengthen its financial health, the official said. Earlier this year, the government infused Rs 10,610 crore, the highest to any public sector bank. Out of this, Rs 7,881 crore was allotted by way of recapitalisation bonds, and Rs 2,729 cr as the direct capital infusion for FY18. 

It is to be noted that Finance Minister Arun Jaitley in 2016-17 Budget had announced that the government will take it forward and also consider the option of reducing its stake to below 50 per cent in IDBI Bank. 

Jaitley had said that India is not ready for privatisation of PSU banks and their present characteristics will continue except for IDBI Bank. 

"We are trying to consolidate some of the banks, which may otherwise find it difficult in a competitive environment ... In one case we are thinking of reducing the government stake to 49 per cent, IDBI Bank," he had said. 

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Government’s plan for PSU banks: Stability first, consolidation later

The government wants state-run banks to stabilise by resolving their bad loans before embarking on a plan to consolidate them. A senior finance ministry official said it is also not the right time to privatise IDBI Bank. 

“Most banks are adhering to the new guidelines under the reforms agenda. The bad loans are being identified and dealt with. Once this cleansing happens, public sector banks will emerge as much stronger entities and then we will look at consolidation,”the official said, adding that the current reform process includes measures for prudential and clean lending, enhanced credit availability and better governance. 

The government is not keen to privatise IDBI Bank at current valuations. “The bank is under the Reserve Bank of India’s prompt corrective action plan. We have allocated a substantial part to strengthen the bank under the bank capitalisation programme. Besides, the bank is looking to sell its non-core assets to raise capital,” the finance ministry official said. 

IDBI Bank is the biggest beneficiary of the Rs 2.1 lakh crore bank recaptialisation plan as it stands to get Rs 10,610 crore. 

Another finance ministry official said banks had made some initial presentations but nothing has been yet formalised or brought to the panel of ministers that will steer the mergers. Last year, the cabinet had given in-principle approval to delegate a select group of ministers to oversee bank mergers but left it to bank boards to come with such proposals. 

However, some experts said it is the right time for the government to speed up the consolidation process. “Banks can resolve their bad loans through the bankruptcy code. The government should force them to look at viable options among themselves and merge,” said MP Shorawala, a former independent director with Central Bank of India.

Eleven state-run lenders – Dena Bank, Central Bank of India, Bank of Maharashtra, UCO Bank, IDBI Bank, Oriental Bank of Commerce, Indian Overseas Bank, Corporation Bank, Bank of India, Allahabad Bank and United Bank of India – are under the RBI’s PCA framework. 

The PCA framework is aimed at encouraging banks to shun certain riskier activities and focus on conserving capital to strengthen their balance sheets. 

In January, the government announced Enhanced Access and Service Excellence agenda under which banks will need to set up monitoring agencies for loans above Rs 250 crore and a vertical for nonperforming assets, apart from selling non-core assets. 

Banks Say Steps Taken to Strengthen System 

Public sector banks on said that they have checked all outstanding Letters of Undertaking and Letter of Comfort issued by them, and there are no other unauthorised instruments except for those issued earlier. They further resolved to implement a series of steps in the next six months for a more robust and secure risk management mechanism. MM Sastry, chief risk officer for State Bank of India, said that all PSBs have taken additional steps to strengthen the system which include integrating SWIFT with core banking system by April 30. 

“In some banks it was not there but they will get this implemented before the deadline,” he said. Sastry was speaking after a three day workshop of PSBS on the issues of operational and technological risk management. 

PSBs said that they are committed to providing Enhanced Access and Service Excellence (EASE) to all customers in a safe and secured environment.

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