A status check on the consolidation of four sets of state-run banks offers clues to the hard decisions that are needed, write Abhijit Lele and Raghu Mohan
When Finance Minister Nirmala Sitharaman presents her second budget today, all eyes will be on the package she unveils for state-run banks. Will a Bank Investment Company (BIC) come into being? Or are we to settle for recapitalisation — a limited one, at that? And will these make for a substantial difference? A quick look at the mergers of four sets of state-run banks (effective April 1, 2020), reveals that much more may need to be done.
It was in August 2019 that New Delhi decided to merge Punjab National Bank (PNB), Oriental Bank of Commerce (OBC) and United Bank of India (United Bank); Canara Bank and Syndicate Bank; Union Bank of India, Andhra Bank, and Corporation Bank; and Indian Bank with Allahabad Bank. It was the biggest such move anywhere in the world, rearranging 25 per cent of systemic banking assets in a single shot.
Eleven months after the effective date of the mergers, the combined market-cap (m-cap) of the merged entities was Rs 84,424 crore (on January 25), or up 30 per cent. The recent rally on the bourses helped, but what should be of greater import is that while just about every other financial parameter of these banks has improved, these can change quickly when the central bank’s post-pandemic regulatory forbearance and monetary accommodation measures are unwound.
It is surmised that the reason why there is no detailed study as yet on the efficacy of the mergers was to avoid undue pressure on the banks. And a post-merger study, sources say, could be in the offing, even as the Centre signals the path ahead for streamlining the functioning of non-merged weaker banks.
The coast is not clear
The top brass at these banks is uniformly of the view that they had to work hard on both integration and the Covid-19 pandemic. But it’s some of the next steps at these banks that can prove to be tricky.
“The focus will now be on rationalisation of the identified 400-500 branches that are in close proximity. We expect to get benefits (more business) from the next financial year,” says Rajkiran Rai G, managing director and chief executive officer of the Union Bank of India. His counterpart at Indian Bank, Padmaja Chunduru, says, “We have to rationalise 300 branches in 15 months, instead of the earlier three years. Work on 160 branches has already been done.” She adds: “As part of the turnaround plan, we have identified 100 branches which have not been profitable. They will chalk out a viability plan within six months and take a call based on their performance.”
And look at the larger setting.
“The modest gross non-performing assets (GNPA) ratio of 7.5 per cent at end-September 2020 veils the strong undercurrent of slippage. The accretion to NPAs would have been higher in the absence of the asset quality standstill provided as a Covid-19 relief measure. Given the uncertainty induced by Covid-19 and its real economic impact, the asset quality of the banking system may deteriorate sharply, going forward,” said the Reserve Bank of India in its Report on Trend and Progress of Banking in India (2019-20). And the Financial Stability Report (FSR) of December 2020 has warned that GNPAs may rise sharply to 13.5 per cent by September 2021, and escalate to 14.8 per cent under the severe-stress scenario.
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There is also the issue of subsidiaries. Take, for instance, Canara HSBC, in which Canara Bank holds 51 per cent, Oriental Bank of Commerce (OBC) 23 per cent and HSBC Insurance (Asia Pacific) Holdings (26 per cent). The merger of PNB and United Bank has to take into account the status of Canara HSBC, since as Canara Bank and Syndicate Bank have merged.
When the mergers were announced, Sitharaman had declared: “No employee will be removed post-merger of banks.” In 2019-20, state-run banks had a total wage bill of Rs 191,925 crore, up 9.6 per cent over the previous year. Provisions and contingences were Rs 200,045 crore, lower by 7.3 per cent. And the total loss posted by them was Rs 26,015 crore.
Is it going to be the case that these banks will not shed any flab even as they hunt for efficiencies from the mergers? There has been no update on manpower issues after the A K Khandelwal Committee Report on state-run banks in 2012. Perhaps, it is even time for the Centre to examine the feasibility of another voluntary retirement scheme (the last was in 2001) — more so, given that technology has vastly altered the financial services turf.
A BIC and recapitalisation will help, but capital issues of all kinds have to be addressed.