E(merging) Banks?

Despite benefits of scale and capital infusion, the ‘big’ new banks will take time to regain good health and power the economy in a slowdown 

By Author  |  Published: 8th Sep 2019  1:10 am

Amid a slowing economy – GDP growth hitting its lowest in the last six years at 5% in the April-June quarter — and concerns of growing bad debt and rising frauds, Finance Minister Nirmala Sitharaman recently announced the big bang merger of 10 public sector banks into four banks. This reduces the number of state-run banks to 12 from 27 in 2017.

The country will now have six large public sector banks with Rs 10 lakh crore-plus balance sheets, two national banks and four regional banks, the Finance Minister said, making the announcement. “So, 12 solidly present, well-consolidated, energised, adequately capital-endowed banks will now operate to target $5-trillion economy and give the necessary support for banking facilities required by our customers,” said Sitharaman.

Thus, Punjab National Bank, Oriental Bank of Commerce and United Bank of India will be merged to form the second largest state-run bank in the county. Canara Bank and Syndicate Bank will merge to be the fourth largest lender. Merger of Union Bank of India, Andhra Bank and Corporation Bank will create India’s fifth-largest lender, while the coming together of Indian Bank and Allahabad Bank would make it the seventh-largest PSU bank.

Capital Infusion

Along with the mergers, the Finance Minister also announced capital infusion of Rs 55,250 crore in the PSU banks for credit growth and regulatory compliance. “This is not just for consolidation, but growth,” she stressed.

Finance secretary Rajiv Kumar added that, “the merged banks have global reach, and they will look forward to global markets.” More powers will be given to the bank boards and specialised risk officers from markets will be appointed.

“Risk management committee will have the mandate to fix accountability for compliance of risk appetite framework,” Sitharaman said. The banks will also decide on a system of individual development plan for all senior executive positions. There will be no political interference in the selection of the Banks Board Bureau.

Bouts of Mergers

Though the framework for the merger of banks was laid during the UPA era, the real action is happening under the NDA. In its first term, the Modi government merged the associate banks of State Bank of India with the SBI.  Thereafter, Dena Bank and Vijaya Bank were merged with Bank of Baroda. The present mergers constitute the third big round of bank amalgamation.

In 2017, State Bank of India merged its associates – State Bank of Patiala, State Bank of Bikaner and Jaipur, State Bank of Mysore, State Bank of Travancore and State Bank of Hyderabad – and the Bharatiya Mahila Bank with itself. Bharatiya Mahila Bank was announced as a woman-exclusive bank by Finance Minister P Chidambaram during the UPA regime.  In April last year, Dena Bank and Vijaya Bank Bank were merged with Bank of Baroda making it the country’s third-largest lender. The new entity came into being on April 1 this year.

The background of these mergers is a consistent view for the need for big banks. It is felt that a larger bank may be less risky than a smaller one as the larger bank will have a more diversified portfolio resulting in less volatility in its earnings. Consequently, a large bank may command higher credit rating than a smaller bank.

Viral Acharya, when he was a Deputy Governor of RBI, had emphasised, “as many have pointed out, it is not clear we need so many public sector banks. The system will be better off if they are consolidated into fewer but healthier banks. After all, we do have cooperative banks and micro-finance institutions to provide community-level banking. So some banks can be merged, as a quid pro quo for timely government capital injection into the combined entity. It would offer the opportunity to rejig management responsibility away from those who have under-performed or dragged their feet the most…”

Till recently India did not figure in the list of top 50 banks in the world. It was only after the merger of SBI with its associate banks that the SBI breached the top 50 barrier.

Back in Time

The call for consolidation of PSU banks is not new. In 1991, the Narasimham Committee recommended a three-tier banking structure through establishment of three large banks with international presence, eight to ten national banks and a large number of regional and local banks. The Narasimham Committee Report of 1998 again reiterated the recommendations of 1991.

The Indian banking sector had seen two types of mergers – voluntary and forced. Post reforms, there have been over 32 mergers. Though prior to 1999, most of the mergers were driven by resolution of weak banks, there has been an increasing trend of voluntary mergers amongst private sector banks.  These include the merger of ING Vysya Bank with Kotak Mahindra Bank, acquisition of Bank of Madura in 2001 and Sangli Bank in 2007 by ICICI Bank, and acquisition of Centurion Bank of Punjab by HDFC Bank in 2008.  The only example of merger of two public sector banks during this period was the merger of New Bank of India with Punjab National Bank in 1993, which was not a voluntary merger. (Speech of R Gandhi, Former DG RBI)

There were also instances when a weak private sector bank was merged with other private sector banks or public sector banks. For example, merger of Global Trust Bank with Oriental Bank of Commerce in 2004. In fact, after the Palai Central Bank’s failure way back in 1960s, there were several such mergers guided by the Reserve Bank of India.  (R Gandhi)

Not All are Happy

Dr D Subbarao, former RBI Governor, writing in The Indian Express, called the fresh merger announcement a ‘needless distraction’. “In the short term, the mergers will contribute nothing towards engineering a turnaround of the economy. Worse still, the administrative and logistic challenges of mergers will divert the mind space of bank managements away from their most pressing task at the moment — of managing the NPAs and aggressively looking for lending opportunities. Down the line, bank staff will be worrying, notwithstanding the Finance Minister’s assurance, about their jobs and career prospects even as their morale will be sapped by the complexity of coping with a new banking culture and new practices at a time when they should be giving their undivided attention to scouting for borrowers and improving service delivery.”

There is an uproar among other sections as well. The opposition has termed it as a diversionary tactic of the government to take attention away from its mismanagement of the economy.

The All-India Bank Employees Association in a statement said that “the proposals which the government has moved are unmindful since it has no logic or rationale. Neither, it is the case that a weak bank is merged with a strong one nor geographically compatible banks are being merged. At this point in time, when stability is the need of the hour, the government itself is attempting to destabilise the finance and economy.” It also pointed out that SBI had closed over 1,000 branches and BoB is shutting down over 500 branches owing to mergers.

So, amid an economic slowdown and saddled with bad loans, will these mergers help the new big public sector banks regain health or power the $5 trillion dream by 2024? Can elephants dance?

Big Bet

  1. Punjab National Bank (Anchor Bank)
  2. Amalgamated Banks — OBC and United Bank of India
  3. 2nd largest bank with Rs 17.94 lakh crore business

PNB

Total Business – 11,34,279 crore

Branches: 7,036

Employees:  Over 70,000

Net Loss: 9975 crore

OBC

Employees 20,000

Branches — 2,390 and 2,625 ATMs

Total Business  – Rs 4,04,195 crore

Net Profit – 55 crore

United Bank of India

Employees – 15,191

Branches: 1,999 

Total business – Rs 2 lakh crore

Net loss: 2,316 crore

Canara Bank (Anchor Bank)

Amalgamated bank Syndicate Bank

To be 4th largest public sector bank with Rs 15.2 lakh crore business

Canara Bank Rs 10.4 lakh crore;  Syndicate Bank has Rs 4.7 lakh crore

Canara Bank net profit:  Rs 547.14 crore

Syndicate Bank: net profit – Rs 128 crore

To have third largest branch network with 10,342 branches

Employee strength together – 89,885

Canara Bank (58,350) and Syndicate Bank (31,535)


Union Bank of India, Andhra Bank, Corporation Bank (FY19)

Union Bank of India (Anchor) – Amalgmated  with Andhra Bank and Corporation Bank

To be 5th largest public sector bank with Rs 14.6 lakh crore business

Union Bank of India

Branches –4,288, overseas 4

Employees 37,262

Business – Rs 7,41,306 crore

Net loss of Rs 2,922.35 crore against Rs 5,212.47 crore loss in 2017-18.

Andhra Bank

Branches – 2,885 , 3798 ATMs/BNAs/CRs.

2,900 branches

21,000 employees

Total Business  – Rs  3,98,511 crore

Net Loss – Rs 2,786.12 crore for the year.

Corporation Bank

Total Business Rs 3,05,819.05 crore,

Branches  – 2,432 , ATMs – 3,015

Employees – 19,000-plus

Indian Bank, Allahabad Bank

Indian Bank (Anchor Bank) – Amalgamated Bank Allahabad Bank

To be 7th largest public sector bank with Rs 8.08 lakh crore business

Employees – 43,011 

Indian Bank

Business – 4,29,972 crore

Net Profit  – Rs 321.95 crore

Branch  – 2,875,

Employees 19,801

Allahabad Bank

Branch – 3,229, 1 overseas branch, and 836 ATMs.

Global Business  – Rs 3,77,887 crore (Rs  3.77 lakh crore)

Net loss – Rs 8,457.38 crore

Employees: 23,210 

Previous Mergers

Vijaya Bank and Dena Bank with Bank of Baroda (BoB) became effective from April 1, 2019.  – Rs 16.13 lakh crore

In 2017, State Bank of India absorbed five of its associates and the Bharatiya Mahila Bank –  Rs 52.05 lakh crore

Other PSBs

Bank of India – Rs 9.03 lakh crore

Central Bank of India – 4.68 lakh crore

IOB – 3.75 lakh crore

UCO Bank – Rs 3.17 lakh crore

BoM – 2.34 lakh crore

Punjab and Sindh Bank – 1.71 lakh crore

(Annual Report of Banks)

Capital infusion

Punjab National Bank –  Rs 16,000 crore

Union Bank of India – Rs 11,700 crore

Bank of Baroda – Rs 7,000 crore

Indian Bank – Rs 2,500 crore

Indian Overseas Bank – Rs 3,800 crore

Central Bank – Rs 3,300 crore

UCO Bank – Rs 2,100 crore

United Bank – Rs 1,600 crore

Punjab and Sind Bank – Rs 750 crore


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