BANKING ON CONSOLIDATION

                                                        - MILAN K SINHA

The talk of some consolidation in Indian Banking space, particularly among government-run banks has been taking rounds for the last couple of years. The then Union Finance Minister and our present President in his first meeting with the chief executives of Public Sector Banks (PSB) after taking charge (just after the 26/11 Mumbai attacks) as the finance minister had said, "consolidation of Banks might be needed to improve the global competitiveness of Indian banks and to reduce the risk to financial stability. Any consolidation initiative in the banking sector would be viewed positively and government, as a majority shareholder, would continue to play a supportive role in the process”. 

The next incumbent and the preceding finance minister also put forth his opinion on the subject very candidly by saying, "we should not fear consolidation. Yes, it would be a good idea if the initiatives for consolidation among a few PSU banks emanate from the management of such banks themselves (after discussing the issue in-house thoroughly) with Government playing a supportive role as the common stakeholder.'' 

In fact, even proposals were reported to be submitted to the ministry for examining the feasibility and final approval of the government by a few bigger banks for merger of smaller banks having geographical and technological compatibility in a bid to have ten large sized banks in the country instead of twenty six at present. Two associate banks – State Bank of Saurashtra and State Bank of Indore, in State Bank group did merge with SBI in the intervening period. 

Industry watchers were hoping that the new government at the Centre would take the matter forward which actually came true when the present FM said in Lok Sabha during his maiden budget speech that the government agreed in principle on the need for consolidation of state owned banks. This was followed by the statement of Financial Services Secretary G. S. Sandhu wherein he said that several public sector banks had approached the finance ministry with proposals for consolidation.

Keeping in view the BASEL III requirements of capital Adequacy, the fast pace of soaring NPA, the unnecessary competition among the banks involving avoidable expenditure, the urgent need for greater and better financial inclusion, the expected growth in credit needs of corporate and infrastructure sector to sustain average 7-8% growth in GDP and such other reasons, the consolidation in Indian banking space looks imminent. 

However, two major factors namely requirement of substantial capital by almost all PSBs and ever increasing level of stressed assets commonly known as Bad Loans or Non- Performing Assets (NPA) necessitated early consolidation of banks which naturally demand certain elaboration. 

As spelt out in 2014-15 budget, the public sector banks which account for 70% of the assets that Indian Banks show in their books, will need huge capital infusion of Rs.2.4 trillion (two lakh forty thousand crore) by 2018 to comply with  BASEL III international regulatory norms. But the government doesn’t have this large sum to salvage the situation in view of the weak fiscal position. Hence, by embarking on a different approach to tackle this problem, the finance minister proposed that the government would reduce its stake in PSBs to 51% and allow PSBs to raise capital through sale of shares to retail investors by approaching the capital market. In nutshell, the government will continue to hold majority stake in PSBs without arranging capital through budgetary mechanism. 

NPA of country’s forty odd listed banks touched the alarming level at Rs.2.42 trillion in the quarter ended March, 2014 - about 36% higher than what it was a year ago. If the mammoth figure of Rs.6 trillion of restructured assets in the system is added for fair assessment of the bad loan position, the total amount of stressed asset would touch an astounding figure of Rs.8.42 trillion or to say, 14% of total bank loans. This has great impact on earnings, NIM and provisions besides bad image and reputation in international financial market.

Now, in order to mobilise and meet its own capital requirement from the open market, these PSBs will be forced to keep them sound and healthy by improving their overall functioning which includes far better management of the quality of their huge assets.

The Trade and Industry Associations have been in favour of such initiatives for consolidation to have at least few banks far bigger than SBI to qualify to be globally competitive. Understandably, the trade unions of the banks would be making hue and cry against such proposals, but they also know the basic ground reality and hence would be finally ready to accept the writing on the wall.

It is hoped that the actual process is started at the earliest by asking SBI, the big brother in the banking sector of the country, to effect merger of remaining five associate banks. Similarly, to start with one or two big and healthy PSB can be asked to take the lead in this direction so as to have at least two-three far bigger and healthier state run banks including SBI by the end of this fiscal.

As always, I am keen to know what you think on this subject. Hence, request you to post Comments to share your views and experiences.  

             Will meet again with Open Mind. All The Best.

# Published in Patna Daily