Public Sector Banks: How Mergers and Strategic Sale Appear to Be a Distinct Possibility

Public Sector Banks: How Mergers and Strategic Sale Appear to Be a Distinct Possibility

Public Sector Banks: How mergers and strategic sale appear to be a distinct possibility


JUN 07, 2017

Last week, the Reserve Bank of India said an 89-year-old lender, founded by the Devkaran Nanjee family of Mumbai, is unfit to conduct normal banking business, thanks to its financial position which is so precarious that it may collapse if allowed to continue.

The entity, Dena Bank, was the fourth public sector lender to attract RBI’s attention. Some months back, another 90-year-old lender which thrived even during the British period, Indian Overseas Bank, was diagnosed with a similar disease. IDBI Bank, which traces its history to a special act of Parliament, is gasping for breath, and so is Kolkata based UCO Bank
Investors wonder whether a single shareholder—the government—can nurse all these entities back to health or throw in the towel. Is there a justification for one shareholder running so many loss-making lenders? Out of the 21 listed state-run banks, not more than four large ones have a future as rising bad loans and provisions have eroded the profitability of the rest, financial metrics provided by the regulator show.

At the end of the fourth quarter of the fiscal year ended March 2017, the collective losses for these lenders stood at Rs 10,000 crore, according to a Credit Suisse report dated May 23.

Just four banks—State Bank of India, Bank of Baroda, Punjab National Bank and Canara Bank—are financially stable. These four lenders have either increased their profit or swung back from a loss reported in the fiscal year ended March 2016.

“Public sector banks will have to consolidate. There’s no need for 20 large public sector banks in this country. They should be merged together to form 5-6 large ones. The typical names could include State Bank of India, Punjab National Bank, Bank of Baroda among others which can continue to do business,” said Suresh Ganapathy, head of financial research at Macquarie Securities.

If a weak bank is merged with a strong one, the government need not shell out capital separately. Also, many of these banks have branches in the same locality and a closure of some of these would reduce costs and help redeploy personnel in a better way.

Strong banks like State Bank of India and Bank of Baroda would be in a better position to raise capital from investors because of their strength, reducing dependence on government, unlike Dena Bank or UCO Bank.
India’s state-dominated banking that came into life with the nationalisation of banks in 1969 to help the poor is in tatters with a poor capital position.

Total stressed loans of the Indian banking sector amounted to Rs. 12 lakh crore, a large part of it coming from public sector banks. These banks under the guidance of the state lent recklessly which has led to a situation where tax payers have to bail them out.

With government disinterested in rescuing them, the call for their consolidation is gaining ground. Even if the state wants to drive some social agenda, it could be done with a few instead of a score of lenders. Reserve Bank of India’s deputy governor Viral Acharya at a FICCI event recently in Mumbai mentioned how banks need to be something citizens can ‘bank upon’.

Highlighting the need for consolidation in the sector, he said the system could be better off if banks are consolidated into fewer but healthier ones.
“Synergies in lending activity and branch locations could be identified to economise on intermediation costs, allowing sales of real estate where branches are redundant. Voluntary retirement schemes (VRS) can be offered to manage headcount and usher in a younger, digital-savvy talent pool into these banks,” he said.


For banks, the raw material is capital that comes from shareholders. The government, which has to own at least 51% in lenders by statute, is not in a position to provide capital. And private capital can’t flow either because of law.

Under the government’s Indradhanush road map announced in August 2015, the government had earmarked a total of Rs 70,000-crore investment in public sector banks between fiscals 2015-16 and 2018-19.

Government had estimated that these lenders will have to raise as much as Rs 1.1 lakh crore from the markets to meet their capital requirement under Basel-III norms. That’s a drop in the ocean for these banks which, according to ratings agency Fitch, will need 80% of the $90 billion (about Rs 5.8 lakh crore) required by Indian banks in the next two years. Because of their huge bad loans, they can’t focus on expanding business even as private lenders such as HDFC Bank and Kotak Mahindra Bank are acquiring new customers.

As a result, public sector banks are losing out on vital low-cost deposits, which are fast dwindling.

These banks are not in tune with developments in technology where youngsters call for fancy products that old state-run banks are struggling to provide. As a result, retail customers are moving away from them even as they lose out on new digital-savvy customers. This is reflecting in their declining market share as well.

“How many technology innovations have been reported from the smaller public sector banks and I doubt how much of automation are they prepared for,” said Kuntal Sur, partner, financial services, PwC India.
According to a report released by Credit Suisse, all new loan growth last fiscal came from private sector banks, their market share has risen to 27% from 20% in the second quarter of 2014 and deposits’ share is at 23%, up from 18%.


Though state-run banks’ financials are crippled, their franchise and customer trust are not broken. With India growing at more than 7%, there are enough opportunities to do business.

There is ample opportunity in the Indian banking scene, still enough scope for growth of PSBs. The argument around size and performance also does not hold true because there are a lot of small-sized private banks which are doing a very good job like IndusInd Bank, Kotak Mahindra Bank, among others,” said TT RamMohan, faculty for finance at IIM Ahmedabad.

The branch network and the human talent still make them attractive for private buyers too. So, the government could also consider letting private banks merge with these lenders.

“I believe private banks should also be allowed to throw their hat into the ring for buying these PSBs,” says PWC’s Sur. “The aim should be to bring down their share of business in the economy.”

The government may be in no mood to loosen its purse strings and provide capital to small lenders which do not perform. It may not have shown its hand on what it intends to do with them. But the day of reckoning is closer than ever as Kotak Mahindra Bank vice-chairman Uday Kotak said.

“The time has now come to bite the bullet. The state, sooner or later, may have to make the difficult choice of putting in more good (tax payers’) money after bad or being open to ‘strategic’ choices. I wonder whether that can happen now or sometime after 2019,” Kotak said in his annual letter to shareholders.

Govt may merge 21 PSBs to create 5-6 global banks


In a fresh wave of consolidation in the banking sector, the government now plans to merge the remaining 21 public sector banks (PSB) to create 5-6 banks of global size and scale.

The government believes they are capable of increasing credit flow in the market following prudential lending norms.

It has asked policy think tank Niti Aayog to work out details of further consolidation in PSU banks and submit its report in a month’s time so that follow up action could be taken quickly.

The government is looking at further consolidation in PSU banks following the successful merger of five associates with the State Bank of India last month. The merger of Bharatiya Mahila Bank with the SBI also followed this.

“The recent crackdown on non-performing assets (NPAs) has created room where further consolidation in PSU banks has become a lot easier. There are several low hanging fruits in the form of stronger banks like Bank of Baroda, Punjab National Bank and Canara Bank that could absorb relatively weaker banks without affecting their own operations,” said an official source privy to the development.

Sources said that Niti Aayog has been given the mandate to work out the merger plan giving due importance to factors like regional balance, NPAs, geographical reach, financial burden and smooth human resource transition.

The government does not want the process to become hostage to unnecessary controversies and wants to carefully vet all aspects before giving its approval.

While the Niti Aayog is still working out its recommendations, it is understood it has been asked to compress the 21 PSU banks into a set of 5-6 banks with stronger entities taking over the operations of weaker ones.

Under this model, while banks like PNB could consider merging operations of Punjab and Sind Bank with itself, the other strong bank — Bank of Baroda (BoB) — can take over some turnaround banks in the southern region like Indian Overseas Bank and United Bank.

Other options include merging the Corporation Bank, Oriental Bank of Commerce, Allahabad Bank and Indian Bank with the PNB.

Similarly, the Union Bank, with asset strength of over Rs 12 lakh crore could consider merging IDBI Bank, Central Bank of India and Dena Bank with itself.

While Bank of India is also a potential target for merger, sources said with an asset base of over Rs 10 lakh crore, the bank could itself be considered for taking over other relatively weaker banks such as Andhra Bank, Bank of Maharashtra and Vijaya Bank. Another good performer, the Canara Bank could anchor merger with the Syndicate Bank, UCO Bank and others.

“There was various combinations, but nothing concrete has been worked out yet and discussions are premature. Niti Aayog’s study and recommendations would thus be very handy,” said an official source.

“Under the scheme of things, it looks like the PSU banks would be reduced to larger entities lead by SBI, followed by PNB, BoB, Union Bank, Bank of India and Canara Bank. But the role of the government would only be like a matchmaker and RBI would take the process forward. We will also need to take clearance from the Competition Commission of India (CCI) as was dome in the case of merger of BMB with SBI,” the source added.

The proposal for fresh consolidation in PSU banks comes close on the heels of the government promulgating an ordinance last month amending the Banking Regulation Act (BRA) to empower RBI to deal effectively with rising incidence of stressed assets in the banking segment.

In April, RBI also issued stricter norms under the revised prompt corrective action framework that has also pushed banks to consolidate in case they do not meet regulatory requirements.

The banking sector is sitting on high levels of non-performing assets that have seen a spike last year with a rise of over Rs 1 lakh crore in the nine-month period of FY17 to Rs 6.07 lakh crore.

This has weakened banks’ balance sheet and reduced their ability to lend more to industry affecting growth. Consolidation is considered a panacea that could also help improve overall capital of the banks and assist in their ability to lend. Moreover, banks have also lined up market issues to raise fresh capital.

PSBs’ merger: Niti Aayog drawing road map, may unveil it in amonth

The NITI Aayog is chalking out a road map on the proposed consolidation of public sector banks (PSBs) at the behest of the finance ministry, exploring various possibilities and models to create only a few banking behemoth of global size, a senior government official said on Tuesday.

By:Banikinkar Pattanayak| New Delhi |June 7, 2017


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Finance minister Arun Jaitley has already said that India needs five-six large PSBs of global size and that a large consolidation in the banking sector would be done at an appropriate time. (PTI)

The NITI Aayog is chalking out a road map on the proposed consolidation of public sector banks (PSBs) at the behest of the finance ministry, exploring various possibilities and models to create only a few banking behemoth of global size, a senior government official said on Tuesday. “A detailed report from NITI Aayog on consolidation is expected in about a month or so,” he said. The finance ministry is also roping in global consultancy firms to examine the issue. Finally, the ministry will take a call on the issue, as it deems fit, in consultation with the Reserve Bank of India, he added. Finance ministerArun Jaitleyhas already said that India needs five-six large PSBs of global size and that a large consolidation in the banking sector would be done at an appropriate time. Recently, the NITI Aayog had submitted a report on the possible disinvestment of Air India. The factors that would be looked into while the government undertakes consolidation exercise include financial burden (including stressed assets), human resource transition, regional balance and geographical reach, the official said. For instance, a lender like Bank of Baroda can take over some banks in the southern region that have turned around or are in the process of turning the corner such as Indian Overseas Bank. Similarly, Dena Bank could be merged with some large South Indian bank, according to sources. The merger process will pick up pace with the possible improvement in the stressed asset situation in the next two quarters, the official said.

Toxic loans of public sector banks rose by over Rs 1 lakh crore to Rs 6.06 lakh crore during April-December of 2016-17, the bulk of which came from power, steel, road infrastructure and textile sectors. Earlier this year, five associates and the Bharatiya Mahila Bank became part of State Bank of India from April 1. State Bank of Bikaner and Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala and State Bank of Travancore were merged with SBI.

RBI will take 'lot of time' to count old note deposits: Jaitley

Indicating that it may take long for the people to know the actual deposits received in old notes post-demonetisation, Finance Minister Arun Jaitley on Monday said there can be no timeline as the RBI has to count deposits in the range of Rs 14-15 lakh crore.

"Let us be very clear, the Reserve Bank of India (RBI) has to count every currency note and you are now thinking in terms of lakhs of crore of rupees. You are in the range of Rs 14-15 lakh crore which the RBI has to count. Each counterfeit note will have to be removed and the RBI has to come out with an exact figure," Jaitley told CNBC TV18.

"They have hired more machines, and the moment the RBI completes that exercise, it will come out with that number. How can you give a timeline to RBI? You must trust the institution.

"They have a huge apparatus in place counting each currency note. So, if you are counting Rs 14-15 lakh crore of currency, it is obviously going to take a lot of time," he added.

Declaring demonetisation as one of the greatest steps taken in the country, Jaitley said that to weed out black money and corruption was the prime issue for the government.

"You see a lot of surrounding activity taking place, people are losing properties, properties are getting attached, shell companies are under attack and politicians are being made more accountable. We are getting into a system of all-white money into politics and I think these are all the ecosystem demonetisation has created," he said.

"Demonetisation started bringing digitisation of the economy, lesser use of cash on the centre-stage of the economic thinking. It is changing the spending habits of people. The number of assessees has radically gone up and there is a huge fear in society now and a realisation that it is no longer safe to deal in cash," he added.

When asked about the slowdown in India's GDP to 7.1 per cent in 2016-17 as compared to 8 per cent in the previous fiscal, Jaitley said the economy's curve was going downwards even prior to demonetisation, which was announced in the third quarter of last year.