Consolidation / Merger of Banking: Benefits & Risk

While the country needs big banks but timing may not be right as
banks need to focus on cleaning up of balance sheet first

The government has raked up the matter of merger among public sector
banks, after a long break. First, finance minister Arun Jaitley said in his
budget discourse that a roadmap for link will be implied out, which was
followed up by the declaration to set up an professional panel to look into the
issue of alliance.

Consolidation among public sector

banks was also in the agenda of the
earlier United Progressive Alliance
governments finance minister P
Chidambaram but the then
government desired the proposal to
originate from bank boards which not
ever came. Union between two banks
would have cost the profession of one
of the chief executive.

Gross non-performing assets (NPAs) of several banks have scaled to nearly

10% after the Reserve Bank of India split the whip, making them to set aside
large calculations to cover bad advances. Most have stated a sharp drop in
third-quarter profit or dispatched losses. RBI wants the clean-up to be
finished by March 2017. The government will finance Rs 25,000 crore in
capitalizing public division banks, which have had a hard time raising funds
from the marketplaces, partly due to a rule that prevents state holding from
dropping below 50%.

"Our public sector banks will have to be durable and modest," Jaitley said.
"The Bank Board Bureau will be operationalized during 2016-17 and a road
map for merging of public sector banks will be spelt out. The process of
transformation of IDBI Bank has already ongoing. Government will take it
onward and also consider the option of falling its stake to below 50%." India's
28 public sector banks, which controller about 70% of market share, have
collapsed on bad times, thanks to some humble credit decisions which has
broken up total stressed assets to around 11.3% of the total, creating a
generous of crisis.
There is also a lot of overlapping of processes, where within a hundred
meters one can find branches of nearly half-a-dozen state-run banks. More
often, public sector banks contest with each other.

"It is easier to opt for merging in crises because it is problematic to take the
judgement in normal times," said Arundhati Bhattacharya, chairman, State
Bank of India.

"India requirements four to five big banks to ensure that credit that is
desirable for growth is available." Though Jaitley said that capital distribution
may not be the final term on capitalization of banks, experts are
disappointed.

"The obligation is much larger, since the current stress level revealed by the
banks," said Kalpesh Mehta, senior director at Deloitte India. "The pressure
level is expected to rise when Basel-III necessities will be fully related by
2018."

Morgan Stanley projected that Indian banks would need Rs 2.5 lakh crore of
money by 2019; the government estimations it at Rs 1.8 lakh crore.

RBI has requested banks to make positive provisions to cover stressed loans
and to clean up their records by March 2017, but the rise in requirements
and fall in incomes have tense the banks' capital and upset their capacity to
advance.

Key for successful merger

Cost validation is seen as one of key to make merging a success. This would
outcome in critical down branches, mainly in urban areas where there are
too several branches of different banks in a same zone, bankers said.
So, there is a opinion that banks from different layouts should be selected for
merger. For example, a south created banks should be merged with a north
based bank. The current acquisition by Kotak Mahindra Bank of ING Vysya
Bank is a case in fact, which mainly determined by the geographical
collaborations. Before the merger, 15 per cent of the Kotak branches were in
south India, which better to 38 per cent post union

Employee unions

One of the hardest challenges that the administration will face while merging
banks is since the employee unions and the staffs who may fear identity loss.
The unions have now started opposing the planned privatization of IDBI
Bank, in which the management said it would study lowering stake below 50
per cent. The unions have called for a one-day strike on 28 March to request
reversal of the governments choice.

We have continuously opposed merging among public sector banks. We

have different it since 2004 when the then finance minister P Chibambaram
spoken about merger of Bank of India and Union Bank of India. At that time
both the banks are profit making, Mr Utagi said.

The Association said cleaning the bank balance sheet which the RBI has
assumed and the merging process that the government is planning, is a step
near privatizing the public sector banks.

Jayshil R. Hirpara - 147340592036

FOM-MBA Semester - IV