More than a decade after, this month, Prime Minister Narendra Modi’s Cabinet has given a go ahead to banks to come up with plans by themselves to consolidate the 21 entities based on the needs of individual banks. As matters stand, government has said it wouldn’t force the hands of banks.
Which bank would set the ball rolling? The first casualty of any merger is the top management of one of the banks. In this context, it is difficult to see any lender taking the first step and see his crown go missing.
“Over five years back it was suggested that bank boards should come together and plan what should be done, but not a single bank has come so far. So a nudge from the ministry is needed,” said Kuntal Sur, head of financial services at PwC, a consultant.
About seven banks, including IDBI Bank, Central Bank of India, Indian Overseas Bank, UCO Bank, have lost loans market share over the year. Six government-owned banks, including Dena Bank, Central Bank of India, are under the RBI prompt corrective action watch after their financials deteriorated. Sixteen of 21 PSU banks have their capital ratio close to regulatory minimum with the peril of breaching it. Some of the state-run banks see the writing on the wall.
“There is an opportunity because potentially there are some reasonable banks,” said Ravi Venkatesan, chairman, Bank of Baroda. “They may not be in the strongest shape but they all have capabilities, they have customers, they have geographical presence. May be in two years’ time they may not be available. Somebody else may pick it up and then you lose the opportunity to grow inorganically.”
There’s no hard and fast rule on these mergers. But there are broad parameters that banks may take up. With not much product differentiation between state-run banks, the need to bridge geographical gaps, inability to raise capital and the ballooning bad loans are the factors that could be pivot of their plans.
Government’s reluctance or inability to throw capital forever without banks showing any improvement in their finances probably may be the key reason for the latest drive.
“After a decade of banks’ public listing, there is a prevailing sense that the purpose of being listed got defeated as most of the banks do not have the ability to raise resources of their own,” said former Union Bank of India chairman Debabrata Sarkar. “How long would they bank on government capital? It’s difficult for the government to keep on pumping in funds.”
In the Indian context, mergers historically were a bail-out tool. The outcomes have been bitter. The forced merger of the failed Global Trust Bank with Oriental Bank of Commerce in 2004 had been a drag in the latter’s balance sheet for four years. It was designed to protect depositors after mismanagement in GTB led to Rs 272-crore loss in 2003-04 and one-fifth of the loans turning bad. The merger ended up being bad for shareholders.
“Consolidation should be done keeping in mind the interest of minority shareholders and bring in greater autonomy for banks,” said former RBI governor Duvvuri Subbarao.
But this time around it is aimed at bailing out public sector banks themselves. There is an increasing feeling that so many banks are not serving any purpose and the job of inclusion and credit disbursal could be done by a few stronger banks.
Furthermore, weak state-run banks saddled with bad loans are unable to invest in technology which is driving banking now. That is leading to tremendous market share losses from which they might find it difficult to recover. “The weaker banks are losing market share (and) that is a good thing,” RBI governor Urjit Patel had said in a speech.
“The stronger banks are gaining market share, which is a good thing, particularly the private sector banks. In a way, it is working; those who need to shrink are shrinking.”
Agglomeration of public sector banks also would help from a scale perspective. Public sector banks are the dominant segment of India’s banking system, holding around 74% of all deposits. However, with the exception of State Bank of India, none of the other public sector banks is large enough to have a competitive advantage.
While no one from either the government or the regulator has said how to go about it, investors, analysts, credit rating companies have all thrown their ideas on how to proceed. The prominent among them is that how a certain category of state-run banks cannot survive without government capital even for a year should be the first to be merged. These are IDBI Bank, Central Bank, Indian Overseas Bank, UCO Bank, Bank of Maharashtra, Dena Bank and United Bank of India, which some investors call the “seven lemons”.
The ones that have the financial strength, like Canara Bank and Bank of Baroda, should go ahead and buy based on their geographical needs since there is nothing much that differentiates between many of these banks in terms of uniqueness. SBI is kept out since it is yet to digest the five associates and the Bharatiya Mahila Bank it recently swallowed.
There are about a dozen of them which are also in a bad shape, but, analysts feel, would be able to survive with some amount of capital and a recovery in the economy. “You should let certain banks die, you should have the boldness to cut the flab, reduce staff and branches,” said former governor Subbarao.