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BoB-Dena-Vijaya Merged Bank to get growth capital
The government will provide an additional capital cushion to the proposed merged bank to be formed by amalgamation of Bank of Baroda, Dena Bank and Vijaya Bank to start the new bank on a stronger footing, a senior government official told ET.
“We will like to have a cushion of at least 50-100 basis points
above the existing regulatory capital requirements. The bank will be
provided with that growth capital,” he added. The actual capital
infusion requirement in money terms will be available only after
financials of the July-September quarter are available.
In September, the government had proposed a merger of the three banks to create the country’s third biggest lender.Capital adequacy ratio (CAR) will reach 11.5% in 2019 under Basel III
norms, and according to government data, the proposed combined entity
had CAR of 12.25% by the end of June 2018.
“This may be further impacted as these banks finish their due
diligence and make provisioning for other requirements. If we want the
combined entity to have a credit growth of 15%, we will need growth
capital,” the official quoted earlier, said.
The amalgamation will be the first three-way consolidation of banks
in India, with a combined business of Rs 14.82 lakh crore. The
government expects synergies to lead to larger distribution network and
more business for the new lender. The government has started the
exercise to look at capital requirements of all PSBs and has been
holding meetings with their top deck.
“We may have to give some support to Dena Bank in this fiscal if it
falls short of regulatory requirements. For now, the other two lenders
look good in terms of provisioning requirements,” said a finance
ministry official.
Last year, the government had announced a Rs 2.1 lakh crore bank
recap plan of which Rs 1.35 lakh crore was to be given through
re-capitalisation bonds, and the balance Rs 58,000 crore was to be
raised from the market by the banks.
So far, the government has infused Rs 70,000 crore through recap
bonds, and the balance Rs 65,000 crore will be given in this fiscal. In
July 2018, Rs 11,336 crore was infused in five PSBs to help them
maintain regulatory norms.
Source- Economic Times
BoB, Vijaya Bank, Dena Bank set up panels to merge operations
Bank of Baroda (BoB), Dena Bank and Vijaya Bank have decided to set up internal committees, which will help integrate their functions before the merger happens, said a person familiar with the development. In a meeting on Wednesday, the bankers also decided to appoint three separate valuers to arrive at share swap ratios, the person said, adding that the valuer appointed by one bank will also evaluate the other two banks, before a common ratio is arrived at and sent to the government. This was the second meeting after the merger announcement.
The committees will comprise the chief executive officers (CEOs) and executive directors of the three banks. “We have decided to form a few internal committees to integrate functions in the three banks. They include committees on credit, human resources (HR) and information technology (IT),” the person said, requesting anonymity.
Mint had reported on 3 October that although the three banks use the Finacle core banking solution developed by Infosys Ltd, they have different versions of the software. While Dena Bank and Vijaya Bank are on Finacle 7.2, Bank of Baroda had recently upgraded to Finacle 10.2.
On 10 September, the government had proposed the merger of the three state-owned banks. The merged entity, comprising two relatively stronger banks and a weak one, will be the third-largest lender in India, after State Bank of India and HDFC Bank Ltd, with a total business of ₹14.82 trillion.
Following the merger announcement, the managements had assured the staff that the government has decided to retain the banks’ individual identities even after the bank merger.
Analysts were wary of the human resource complications. A research report by Kunal Shah of Edelweiss Securities said challenges on human resources, process integration, branch rationalization and management bandwidth, will pose integration risks. “Roadblocks, for example, due to agitation from employees cannot be ruled out.”
A Kotak Institutional Equities note said that the merged entity will have 2,205 branches in western India, while the south and north will have 846 and 713 branches, respectively.
This is the third major restructuring in the public sector banking space by the government. The first was the merger of the five associate banks of SBI with itself. The merger had resulted in a sharp jump in the combined entity’s bad loans portfolio, crimping its profit. The associate banks made a loss of ₹5,792 crore for the March quarter of 2016-17 and ₹10,243 crore for the entire year. This resulted in the consolidated net profit of SBI going down to a mere ₹241 crore, while the stand-alone net profit was ₹10,484 crore.
Source - Livemint
Is there any PSB left that can absorb weaker banks for merger?
Over half the 21 listed PSBs are unfit to absorb weaker state-owned banks : Last week, the Central Government announced the merger of three public sector banks — Bank of Baroda, Dena Bank and Vijaya Bank — setting off speculation that similar mergers of public sector banks may be around the corner.
But given the deteriorating financial health of most public sector banks (PSBs), the fundamental question is whether there are any healthy PSBs left that can absorb the weaker ones. Of the twenty-one listed PSBs, eleven banks namely Dena Bank, 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 and Bank of Maharashtra have been placed under the Reserve Bank of India (RBIs) prompt corrective action (PCA) framework, making them unsuitable candidates to absorb other PSBs.
This leaves another 10 possible contenders. But analysts that Business Standard spoke to say that the financial position of several of these banks is also in a precarious position. “While eleven banks are currently under PCA, another six PSBs namely, Andhra Bank, Union Bank, Canara Bank, Punjab and Sind Bank, Punjab National Bank and Syndicate bank meet some of the conditions laid out by the RBI in its PCA framework,” said Anil Gupta, sector head, financial services ratings, Icra. Now, five of the above mentioned six banks namely, Punjab National Bank, Canara bank, Union Bank, Syndicate Bank and Andhra Bank have net NPAs of more than six per cent.
Punjab and Sind Bank barely makes the cut with net NPAs at 5.9 per cent. Moreover, the capital adequacy ratio of some of these banks is also lower than the desired levels. So, with Bank of Baroda, Dena Bank and Vijaya Bank being merged, this leaves only two banks — State Bank of India (SBI), and Indian Bank as possible contenders for anchor banks around whom the merger can be structured. SBI has already taken over its subsidiaries, leaving it with little room to absorb the bleeding banks. “I don’t think SBI will absorb any of these other public sector banks,” said a former chairman of a public sector bank.
This leaves only Indian Bank. “The only possible contender to absorb other weaker public sector banks is Indian Bank because of its better capital position and asset quality,” said Gupta. - Business Stnadard.
PNB and Canara bank were on government's list for next merger, with which bank?
Bank of Baroda’s healthier
financials, strong brand, technology and international presence helped the
finance ministry settle for it as the anchor for an amalgamation with Dena bank and Vijaya Bank, instead of Canara Bank and Punjab National Bank, among
others, which were considered for carrying forward the first consolidation
exercise in the public sector space.
PNB was ruled out as its recovery is seen to be a
few quarters away after a Rs 14,000-crore fraud, allegedly orchestrated by Nirav Modi and Mehul Choksi, leaving Canara Bank
as the other option to anchor the amalgamation. But it was seen to be weak on a
few financial parameters. Besides, the new entity would have been focused more
on south India.
Financial services secretary Rajiv Kumar said, “We did not want consolidation
for the sake of it. The first guiding principle was to create a healthy bank
that was large in size. The second principle was to have an entity that had a
strong brand, technology and a good reach.”
The
merger of the three banks is one of the many ways through which the government
is trying to deal with the bank NPA crisis. The merger of three banks clearly
unveils a formula - that the government decided to merge the three banks
in accordance with their financial health. Among the three, Bank of Baroda has
least NPA problem, followed by Vijaya Bank and Dena Bank. The bank merger
formula, thus, will be Very big bank+ better bank+worst bank.
In Dena bank, Vijaya and BoB, the government found the right fit. “Dena bank has a strong
CASA base with a good retail and MSME presence. Vijaya Bank has been sensible
in its lending, while BoB offers a good international presence, a strong brand
and a good tech platform. It’s a win-win deal for the three banks and will
result in a massive cost rationalisation,” the secretary added.
While consolidation has been on the government’s radar, the fraud at PNB pushed
back the plan by a few months. But it has been in the making for at least
four-five months, with the team at the department of financial services looking
at various permutations and combinations. A source said, “It was an in-house
exercise. Secrecy had to be maintained at all costs.”
Two
sets of probable bank mergers in future. It said that the government is mulling
the merger of more banks. However, this year there will not be any further
merger as the amalgamation of the first lot of three banks will itself take 3-6
months.
1. Punjab National Bank, Indian Bank, Indian Overseas
Bank
The
current business of PNB, Indian Bank and Indian Overseas Bank range in Rs
10,45,650 crore, Rs 3,74,550 crore and Rs 3,61,928 crore respectively. The
deposits in three banks are Rs 630311 crore, Rs 210170 crore, Rs 213168 crore
respectively.
The
Net NPA of PNB is 10.58%, Indian Bank 3.80% and Indian Overseas Bank 15.10%.
The number of branches of these three banks are 6,993, 2,819 and 3,326
respectively.
2. Canara Bank, Syndicate Bank and UCO Bank
The
total business of Canara Bank, Syndicate Bank and UCO Bank is Rs 8,63,359
crore, Rs 4,74,976 crore and Rs 2,76,784 crore respectively. Deposits in the
three banks are Rs 5,00,866 crore, Rs 4,05,939 crore and Rs 1,78,211 crore.
Government likely to announce the merger of another three banks
After deciding to merge Bank of Baroda (BoB), Vijaya Bank and Dena Bank, the government is likely to announce the merger of three other banks before the end of the year, according to a report by TickerNews Service.
The three public sector banks (PSBs) are likely to be Punjab National Bank (PNB), Oriental Bank of Commerce (OBC) and Andhra Bank, the news service reported.
"Government is analysing the merger of PNB, OBC and Andhra Bank, as it wants few large banks in the country," a source was quoted as saying.
The government is reportedly holding talks with banking officials to examine the feasibility of such a merger and will likely announce the move before December 31.
On September 17, the central government announced the proposal to merge three public sector lenders -- BoB, Dena Bank and Vijaya Bank.
The cabinet is likely to approve a scheme of amalgamation of Dena Bank, Vijaya Bank and BoB next week, the news service reported.
The three state-run banks would work on strict timeline and necessary regulatory process is expected to be over by the end of 2018-19, they said, adding that the merged entity should be operational from April 1, 2019.
Will employees of three banks get VRS option as part of merger deal?
Voluntary retirement may become a way of life for many as part of the proposed merger scheme between three state-owned banks -- Bank of Baroda, Dena Bank and Vijaya Bank.
Although Union finance minister Arun Jaitley promised that employees of these banks will be protected, but banking experts said there would be areas of overlaps and flabs post-merger which the new management of the amalgamated bank would need to look into.
If the merger of State Bank of India and its associates is any precedence, then voluntary retirement scheme is most likely to be the part of the amalgamation process. About 4,000 employees at SBI and associate banks had opted for VRS. Bank of Baroda, Dena Bank and Vijaya Bank have about 85,600 employees between them.
We don't think the merged entity comes off terribly worse off, at least on paper, though a smooth three-way merger is always a tall ask,” said Jefferies India in its research note on bank.
The government said a scheme of amalgamation will be formed and laid before the Parliament. While it will be interesting to see whether VRS becomes a reality, but senior employees of the merging banks have started anticipating such a prospect.
“The situation in today’s banking is vicious. No one’s willing to take any business decision in fear of going wrong and getting punished. I would be happy to take VRS if it comes my way,” a banker in his mid-50s with Bank of Baroda told ET, requesting anonymity.
The proposed merger has created a psychological divide between seniors and juniors as well: while younger employees see the possibility of working in bigger bank as a better career opportunity, seniors have become somewhat apprehensive.The government on Monday said that employees would be protected and they would get the best package prevailed among the three banks.
AIBEA press release against merger of three PSU banks
“There is no evidence that merger of banks will
strengthen it or make it more efficient," AIBEA General Secretary C H
Venkatachalam said soon after Finance Minister Arun Jaitley announced
the decision to merge Dena Bank, Vijaya Bank and Bank of Baroda.
"We have seen the example of five associate banks
merging with SBI. No miracle has happened. On the other hand, it has
resulted in the closure of branches, increase in bad loans, reduction of
staff and business. For the first time in 200 years, SBI has gone into
loss,” he added.
Venkatachalam also said the total bad loans of five
associate banks as on March 2017 was around Rs 65,000 crore and that of
SBI at Rs 1,12,000 crore. Now in 2018 bad loans of SBI has increased to
Rs 2,25,000 crore.
“So it is clear that merger has not helped to recover bad loans,” he said.
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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.
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.
IDBI Bank employees oppose proposed take over by LIC
IDBI Bank officers have opposed the proposed 51 per cent acquisition of the bank's stake by LIC, saying this is a clear move to privatise it, bypassing the assurance given to Parliament.
"The subjective move of the Government of India tantamount to reneging on the solemn assurance given by the then Finance Minister of the NDA Government on the floor of Parliament on December 8, 2003 that post conversion, the government shall at all times, maintain not less than 51 per cent of the issued capital of the Company.
"This solemn assurance given on the floor of Parliament forms part of the records of the Parliamentary Committee on Assurances formed the very basis for the ultimate passage of the IDBI (Transfer of Undertaking and Repeal) Bill, 2002," All India IDBI Officers' Association General Secretary Vithal Koteswara Rao said in a representation to Union Minister Arun Jaitley.
Taking into consideration the fact that the bank has been consecutively posting healthy operating profits, burgeoning provisioning to NPAs and write offs are acting as a drag on the bottom line of the bank, he said.
"While we demand of the Government of India to put in place stringent measures for recovering the Non-Performing Assets and fix accountability on all the concerned for the burgeoning Non-Performing Assets and mammoth write offs, we fervently urge upon the Government of India to rescind its contemplated move to divest its equity in IDBI Bank below 51 per cent in contravention of the solemn assurance given by the NDA Government to Parliament," Rao added.
As the contemplated decision which is only a facade for virtual privatisation of IDBI Bank will adversely impact the interests of the officers and workmen staff, the United Forum of IDBI officers and employees through this letter registers unequivocal opposition and protest over the reported decision of the government to dilute its stake in the bank in favour of LIC leading to privatisation of the bank, he noted.
In the unfortunate eventuality of the government failing to review its stand in the matter, the officers and employees of IDBI Bank will be left with no other option but to take recourse to organisational forms of action which on our part are anxious to avoid at this juncture, Rao said.
When an insurer(LIC) buys a bank(IDBI bank)
Reports of state-owned LIC planning to buy the government’s holding in the troubled IDBI Bank to become a majority shareholder have triggered a debate around whether LIC should be using policyholders’ money to buy a controlling stake in a troubled bank. LIC’s bid to acquire controlling stake in the bank may give it an entry into the banking space, while allowing the government to raise around Rs 10,000 crore — thereby helping it meet the disinvestment target for the year.
What is the proposal to increase LIC’s stake in IDBI Bank?
Having been unable to find a suitable private sector buyer for IDBI Bank, the government has initiated discussions with Life Insurance Corporation (LIC) of India to pick up a controlling stake in the bank. According to sources in the government, the proposal involves LIC raising its stake in IDBI Bank to 51% from the around 11% that it had at the end of March. The deal is expected to cost LIC around Rs 10,000 crore, and the Corporation is likely to take the proposal to its Board for approval after getting clearance from the Finance Ministry. LIC has presented to the government a number of synergies and mutual benefits. While IDBI will get the requisite capital, LIC will get a controlling stake in a bank, and is learnt to be preparing to bring in a professional management to run it.
But can LIC enter a new business to begin with?
In 2013, LIC Housing Finance had applied to the Reserve Bank of India for a universal banking licence. The RBI, however, chose IDFC Bank and Bandhan Bank for licences out of a list of 26 applicants. LIC owns 40.31% stake in its housing finance arm. In its discussions with the Finance Ministry, the Corporation has argued that the Life Insurance Corporation Act, 1956 permits it to enter an unrelated business that it is capable of running — and it can, therefore, pick up a controlling stake in a bank. Section 6(2)(h) of the Act (on the “Functions of the Corporation”) says that “without prejudice to the generality” of the provisions that make it the “general duty of the Corporation to carry on life insurance business”, it can “carry on any other business which may seen to the Corporation to be capable of being conveniently carried on in connection with its business and calculated directly or indirectly to render profitable the business of the corporation”.
Will it require changes in regulations as well?
The existing rules of the Insurance Regulatory and Development Authority of India (IRDAI), the autonomous, statutory regulator of the Indian insurance and re-insurance industry, do not permit LIC to raise its shareholding in a single listed entity beyond 15%. Since LIC already holds 10.82% stake in IDBI Bank (as on March 31), it would require exemption from the IRDAI to pick up a majority stake in the bank. The insurance regulator has laid down this condition to ensure that the Corporation does not put policyholders’ money at risk, and has a diversified portfolio.
But why does the government want to cut its stake in IDBI Bank?
IDBI Bank is the worst performing state-owned lender in terms of Non-Performing Assets (NPAs). The government has been trying to privatise IDBI Bank over the past couple of years, but mounting losses and rising bad loans have made it difficult to attract buyers. For the year ended March 31, 2018, IDBI Bank’s Gross NPAs rose to 27.95% — which means that out of every Rs 100 loaned by the bank, Rs 28 turned into NPAs — from 21.25% as on March 31, 2017. In 2017-18, the bank reported a net loss of Rs 8,238 crore, up from Rs 5,158 crore in 2016-17. If the government sells nearly 40% of its stake in the bank, it will get Rs 10,000 crore that will not only help meet its disinvestment target, but will also reduce, to a similar extent, the need for future capital infusion.
Unlike in the other public sector banks, the government can pare its stake in IDBI Bank to below 50%, because this bank is not governed by the Bank Nationalisation Act, 1969. The central government owned 80.96% equity in IDBI Bank on March 31, 2018, but following a capital infusion of Rs 7,881 crore in May, its stake went up to 85.96%. LIC’s stake would have been diluted in proportion to the fresh equity issuance by the bank.
Besides issues of legal or regulatory compliance, is there any other problem with LIC buying a controlling stake in IDBI Bank?
Because LIC deals with policyholders’ money and provides them with protection, some experts argue that buying a controlling stake in a beleaguered state-owned bank may not be a prudent decision. It could put the Corporation at risk, since it would be required to pump in capital in the bank year after year. LIC is already a large investor in public sector banks and holds a more-than-9% stake in 16 out of India’s 21 public sector banks. Loading up a higher stake in IDBI Bank will expose the Corporation to the concentration risk of investing disproportionately in a single sector.
Is this proposed disinvestment similar to oil and gas explorer ONGC buying oil marketing company HPCL?
When ONGC bought HPCL, it paid money to the government for picking up its stake in the latter. While LIC’s proposed buying in IDBI Bank is somewhat similar, there is one key difference. While ONGC used its own cash reserves and borrowed to complete the deal, the funds at the disposal of LIC are valuation surpluses, reserves, and policyholders’ money. Using those funds to buy a badly performing bank entails a much greater risk than ONGC took while buying HPCL.
Source- Indian Express
Public Sector bank mergers in the works
The government has plans to merge some state-run banks to cut their losses and improve their capital adequacy ratios. During two meetings with interim finance minister Piyush Goyal, top bankers discussed such a possibility.
The State Bank of India, which has itself gone through a process of merging the associate banks with itself, is believed to have prepared a presentation on the benefits of such a move.Officials said Calcutta-based Allahabad Bank and Delhi-based Punjab National Bank are a candidate for merger.
The other plan being talked about in North Block is a mega consolidation of three state-run banks - Bank of Baroda with the Oriental Bank of Commerce and the Central Bank of India. Officials said instead of selling off IDBI as planned earlier, the sick bank could be tagged on to this mega merger.
"A selloff of IDBI is justified, but this being a pre-election year, the government may decide not to sell it. However, there is resistance from other PSU banks to take IDBI in any planned merger," said officials.
PNB has bad loans worth Rs 86,620 crore, while Allahabad Bank has bad loans of Rs 10, 326 crore. While the former is strong in north India, the latter is strong in the east. "Synergies could result from the merger," the officials said.
Similar benefits could be gained from the BoB-Oriental Bank-Central Bank merger. The merged entity would have assets worth Rs 11.68 lakh crore. However, except BoB, the other two are under the RBI's prompt corrective action (PCA), which imposes limits on their lending.
Once a bank is placed under PCA, it is barred from distributing dividends, remitting profits and disbursing fresh loans. Banks are also stopped from expanding their branch networks and need to maintain higher provisions. The mergers are expected to allow weak banks to sell assets, reduce overheads and shut loss-making branches.
In August last year, the Union cabinet gave in-principle approval for the merger of more state-run banks, but since then the plans have been drawn up and redrawn without actual action on the ground. Last year, the government merged the State Bank of India's five subsidiaries with the country's largest lender, creating a behemoth with assets of around $37 trillion.
"The objective is to create strong banks and the experience of mergers has so far been that they do help strengthen banks, cut down flabs and create positive synergies," said officials.
The finance ministry feels consolidation will prevent multiplicity of resources being spent in the same area and strengthen banks to deal with shocks. Studies are being conducted on which bank is to be merged with which other PSU lender. "There are studies on manpower, technology merger of various banks... we have to take them forward," said officials.
The government hopes the proposed mergers will help state-run banks to reduce their bad loans and achieve economies of scale and operational efficiency. However, experts differed on the possible benefits of the move. Former Punjab National Bank chairman K. C. Chakravorty has cautioned "merging inefficient banks would not necessarily help create efficiency".
The idea to merge state-run banks has been around for some time, but gained momentum after a 2014 report by the PJ Nayak Committee which said the government has to work towards reducing its liability to recapitalise banks. It recommended either privatisation or consolidation.
Source- Telegraph India
Bank mergers: An idea whose time should never come
Some ideas have long legs – they refuse to die, or fade out. The idea of merging Public Sector Banks (PSBs) is one such idea in realm of economic policymaking – it has been around for a long time, debated at the highest levels, often posited as a panacea for various policy objectives (from creation of “world class Indian banks” to resolution of the current NPA issue). It is generally an idea with very variable merits, which is why its never really taken off. But it resurrects like a phoenix every now and then, as it did recently with the news of the merger of four PSB – Bank of Baroda, Punjab National Bank, IDBI Bank and Oriental Bank of Commerce – creating India’s second largest bank, with assets of Rs 16.5 trillion. Consolidating four loss-making banks into one would make it easier to tackle the NPA and governance issues in these institutions.
It is useful to test out the hypothesis, ie, bigger banks would be better, against available data. In India, PSB consolidation was first mooted by the Narasimhan Committee in 1991, in the first flush of liberalisation. Since then, there has been one-and-a-half live cases of consolidation of PSB. The outcomes have not been encouraging.
The first such exercise was the takeover of the distressed New Bank of India (NBI) by Punjab National Bank (PNB) in 1993. It was an involuntary exercise, driven by RBI to rescue NBI. PNB was a solid bank then with a long trackrecord of profitability, and many times larger than NBI in terms of assets and employees. Post-merger, PNB recorded its first loss (of Rs 96 crore) in 1996, and remained embroiled in employee issues for a very long time. Despite the fact that NBI was a “digestible” target for PNB, and the latter took many years before attaining equilibrium.
The second was gradual merger of all Associate Banks (AB) of SBI with the parent institution, culminating in the last tranche of the remaining five ABs with SBI in March 2017. This is termed as “half ” a merger, because for many critical purposes (like treasury operations, banking systems etc) the AB were largely under the operating control of SBI for a long time. While the jury is still out on the outcome of this merger, what is illustrative is that the combined losses of all the five ABs wiped out the net profit of SBI for 2016-17.
At a balance sheet level, with gross NPA of 20 per cent, the ABs significantly worsened SBI’s asset quality. How SBI digests this acquisition will give us more data on how mergers of PSB could pan out. Admittedly, past evidence on the outcomes from PSB consolidation are from a very thin sample – not enough to draw definitive conclusions from. Hence, let us look at the rationale, and test them against global evidence.
First, capital adequacy. Merging stressed, weaker banks with larger, stronger banks will enable effective management of NPA and allow for greater credit availability. Unfortunately, this is a complete red herring – PSB as a category are short of equity capital by an estimated Rs 2.5-3.5 lakh crores. There isn’t a single bank, not even the giant SBI, that has the kind of spare balance sheet capital to make even a small dent in the capital requirement of the category as a whole.
Second, economies of scale. Larger banks derive efficiencies of scale, reduce risk and improve returns. Global experience militates against this hypothesis though. In 2011, Harry Huizinga of Tilburg University and Asli Demirguc-Kunt of the World Bank evaluated a sample of banks from 80 countries from 1991 to 2009 – they looked at the impact of size – absolute size (in terms of size of balance sheet) and systemic size (ratio of balance sheet to national GDP), and their impact on risk and return profiles of banks. The results were interesting — banks with larger absolute size achieved higher return on assets (RoA). However, this came at a cost of higher bank riskiness. Absolute size thus implied a trade-off between risk and return. Systemically larger banks on average have lower RoA, but no discernible impact on bank riskiness. Systemic size is thus a liability, lowering RoA without an offsetting reduction in risk. In a nutshell therefore, merging PSB wont have any obvious benefits on either risks or returns. Rather, in case we end up creating “4 or 5 world-sized banks” (as is often stated), we would end up creating 4 or 5 systemically large banks that would make the banking system more vulnerable, while making lesser returns.
From a technology perspective too, the assumption of larger being better stands on tenuous grounds. A study by Dean Amel et al in the ‘Journal of Banking and Finance’, in 2004, showed that the tipping point for banks in North America was $50 billion, beyond which there were negative impact of larger size on operating costs.
Third, larger sized banks are required to meet the requirements of larger projects in a growing economy. This is another misplaced hypothesis. At the core of risk management is diversification, risks of larger projects should be ideally spread across multiple institutions rather than being with one (or few). At a conceptual level, highest risk exposures (especially in large projects) should be diversified away to non-banking pools of capital – like PE funds, Mutual Funds, Overseas pension funds etc.
The biggest challenge confronted by regulators globally since the financial crisis in 2008 has been the issue of Too Big To Fail (TBTF) banks. Regulatory action since then has been focused towards ensuring that banks do not reach TBTF levels, and the ones that are already there are regulated tightly. In India, we have been incredibly fortunate in not having a very concentrated banking system. Any effort to shoehorn consolidation of PSB merely reverses this welcome feature, without any mitigating benefits – either in terms of conceptual objectives, or in terms of past experience (in India or abroad).
Source- Economic Times
Govt. plans to make 2nd largest bank after SBI
The government is considering merging at least four state-run banks, including Bank of Baroda, IDBI Bank Ltd, Oriental Bank of Commerce and Central Bank of India, two people aware of the matter said. If the plan goes through, the merged entity will become the second-largest bank in the country after State Bank of India, with combined assets of ₹16.58 trillion.
With the merger, the government hopes to help stem the rise in bad loans in their books at a time when poor asset quality has crippled the lending ability of some of them. The merger will also allow the weak banks to sell assets, reduce overheads and shut money-losing branches.
The four banks that are being proposed to be merged are under pressure with combined losses of ₹21,646.38 crore in the year ended 31 March.
The department of financial services, under the finance ministry, is also simultaneously considering a 51% stake sale in IDBI Bank to a strategic partner, for ₹9,000-10,000 crore, the people said on condition of anonymity.
“Dilution of (government) stake in IDBI Bank could also be achieved through stake sale to private equity investors,” said one of the two people cited above. Queries emailed to IDBI Bank, Bank of Baroda, Oriental Bank of Commerce and Central Bank of India did not elicit any response.
On 21 May, IDBI Bank told the exchanges in a regulatory filling that a special resolution will be placed for further issue of capital at its board meeting of 25 May.
On the following day, IDBI Bank informed the exchanges about a scrutinizer report for an increase in the bank’s authorized capital from the existing ₹4,500 crore to ₹8,000 crore.
The increase in authorized capital could facilitate the sale of a stake of 51% or more, in the form of a preferential issue to investors.
Government officials declined to comment, saying the matter is highly market sensitive. In his 2016 budget speech, finance minister Arun Jaitley said that the government was considering reducing its stake in IDBI Bank to less than 50%.
Source- Livemint
Source- Livemint
