New Delhi, August 24, 2017

Boards to kick off move; to be based on commercial considerations; inter-ministerial panel to be set up to oversee process

Any proposal to amalgamate banks must be initiated by boards of state-owned lenders and a merger must be based on commercial considerations, finance minister Arun Jaitley said on Wednesday. Jaitley was addressing the media after the Cabinet approved an “alternative mechanism” by which an inter-ministerial panel will be set up to oversee the merger of public sector banks (PSBs). While the government may have formally kicked off the process of consolidation, analysts believe there is virtually no room for a merger on “commercial terms” given most banks have just the required amount of capital. Moreover, if a relatively strong bank acquires a weak bank, it will find it harder to raise capital from the market. Although there will be no outflow of cash — shares will be swapped — given the government is unlikely to allow any retrenchment, the acquirer might be saddled with high-cost employees. Under the circumstances, analysts feel the government, as the largest shareholder in PSBs, might need to nudge some of the stronger lenders to acquire weaker ones. To many, the fact that capital is being allocated only to select banks that fulfil certain criteria is a form of stealth consolidation.

Closing down unprofitable branches will not be an issue since the government has already asked lenders to shut unviable branches as part of its capital allocation policy. While ideally banks should ensure that the lender being acquired is a strategic fit for it, analysts say capital adequacy would dominate the mergers as such relatively strong lenders such as Canara Bank or Bank of Baroda might end up bringing into their folds a Vijaya Bank or a Union Bank, weakening the performance of the better PSBs. For instance, assuming BOB merges with two relatively small banks (Dena and Bank of Maharashtra), its impaired levels would reach approximately19% and un-provided impaired loans could end up at around150% of the net worth. Nevertheless, the government appears to be keen to have fewer entities, less than half the current number. Of the 20 PSBs (ex-State Bank of India), nine have impaired loans in excess of 20% and 12 have a common equity tier or CET-1 of below 8%.

SBI chairman Arundhati Bhattacharya said on a television channel on Wednesday that the merger process should be initiated despite the clean-up taking place in the banking system currently. “This is the best time to do the consolidation since the pain will be over by the time the downturn is over and banks will be ready for the new cycle,” Bhattacharya said. Analysts have pointed out mergers that may otherwise make sense might need to be aborted if political considerations need to be taken care of. “Some local government may not want a bank headquartered in its state to be merged into another bank,” a sector expert observed.

One objective of the mergers would be to reduce costs over the medium term, experts said. They pointed out that the gap between retirement assets and liabilities had touched its lowest point in the past decade, in FY17. Retirement costs contribute approximately 20% to overall staff costs. “The decline in the share of active employees who are part of defined benefits does suggest the issue of retirement costs for public banks is fading away rapidly,” an analyst said. Prime Minister Narendra Modi will choose the members of the inter-ministerial panel that will likely be headed by Jaitley. The presence of the panel is expected to help speed up the process and give lenders some support. No law is required to be amended for the consolidation exercise although Parliament’s approval might be needed. Sector experts estimate banks need close to Rs 1 lakh crore of capital over the next two years to meet capital adequacy norms; this is way above the Rs 20,000 crore that the government plans to give them by March 2019. However, the government has made it clear that it could provide more funds than announced under the Indradhanush plan (Rs 10,000 crore in FY18 and another Rs 10,000 crore in FY19) should there be any pressing need for it.

[The Financial Express]