Consolidation Of Banks – A Noval Suggestion
by Tilak Gulati
Banks Board Bureau started functioning from April 1, 2016, for the purpose, inter-alia, consolidation of public sector banks (PSBs), but it has not moved a step forward. Before we criticize Mr Vinod Rai, Chairman, BBB, let us first analysis the problems Mr Rai might be facing and the possible solutions.
Banks were nationalized in 1969 & 1980; with the motto to give government more control on credit delivery, a step towards social banking. Earlier the banks were extending credits mainly to their promoter corporates and the group companies. Lower strata of society and the government welfare schemes were denied the bank finance. To give equal opportunity to all, Reserve Bank of India directed PSB’s to extend 40% of their net bank credit to the priority sector comprising mainly lower class and the lower middle class population.
These PSBs, working as commercial banks, were extending mainly retail advances and working capital loans. Infrastructure and project finance was granted by way of long term loans by development institutions like IDBI, IFCI, ICICI, IDFC etc. There was clear cut unwritten demarcation about the roles of these institutions and that of the banks.
Commercial banks had the advantage of accepting all kinds of public deposits- savings, current & fixed deposits; - whereas development institutions could accept only fixed deposits. Having resource advantage, commercial banks encroached upon the areas of development institutions, consequently latter ceased to exist. Those commercial banks (PSBs) are now called Universal Banks- performing the functioning of both commercial banks and investment banks.
During 1990s, RBI issued licenses to New Generation Tech-savvy banks - Axis Bank, ICICI Bank, HDFC Bank. Within short span, these banks surpassed age old PSBs in all banking parameters. Axis Bank’s net profit of Rs 579.57 crore for three quarters ending December 31, 2016 is more than the combined profit of Rs 492.53 crore of all public sector banks. There are talks that Kotak Mahindra Bank is planning to take over Axis Bank.
Shortly, Payment Banks and Small Banks will show their hi-tech presence without requiring brick and mortar branches.
Over a period of time, PSBs have started competing among themselves, each snatching the business of other PSB. Whether business remains with one PSB or the other, it is not going to benefit the owner- the government. Instead, time, energy and money is wasted on unwarranted competition. With the exception of State Bank of India, none of the PSBs is able to compete with these private banks on any parameter. Let us analyze the reasons for such state of affairs:-
1. PSBs, being public sector undertakings, are covered under the purview of CVC and CBI. Consequently, their executives refrain from taking decisions. But this statement cannot stand the test of truth, considering the number of officers punished by CBI is negligible as compared to the loans given by these banks. The fact is that credit facilities beyond five crore rupees to a customer come under the purview of CBI. Has any PSB ever thought of not extending single ticket loans beyond five crore rupees to avoid unpleasant CBI.
Then it will be argued that PSBs cannot remain viable without extending big-ticket loans. HDFC Bank is the leading player across retail loan categories and its focus remain on working capital finance and trade services. As per Bloomberg data of January 15, 2016, the market capitalization of HDFC Bank (Rs 2.60 lac crore) was approximately equal to the combined market capitalization of SBI and all PSBs (Rs 2.70 lac crore). The same data revealed that market cap of Kotak Mahindra Bank was more than the combined market cap of all PSBs. If HDFC Bank and Kotak Mahindra Bank can sustain tough competition relying solely on their retail advances, why PSBs cannot think in this direction.
2. The other argument is Priority Sector lending is eating away the profitability of PSBs. Again private banks are also obliged to finance priority sector. As per study, 72% of stressed assets of banks are from small, medium and large industries; whereas 28% stressed assets are from micro industries, agriculture and other sectors.
3. The CEOs of private banks remain in office till they perform well; hence they can cultivate long term vision for the banks. Example Aditya Puri of HDFC Bank (since 1994), Chanda Kochhar of ICICI Bank (since 2009) (earlier K.V.Kamath- 13 years), Romesh Sobti of IndusInd Bank (since 2007) and Shikha Sharma of Axis Bank (since 2009). Whereas tenure of CEOs of nationalized banks is three to five year or even shorter. Their decisions are based on short term approach and are often reversed with the change of guard.
During the two day 'Gyan Sangam – A Retreat for Banks’ in March, 2016. Finance Minister Mr Arun Jaitley has hinted for consolidation of public sector banks, as the country needs stronger banks rather than large number of banks. It is being talked about that all PSBs will be merged to make seven strong banks. The reason- survival of public sector banks (PSB) depends on increasing income and reducing cost. In the present economic scenario, avenues for income enhancement are limited. The best way to reduce cost is through the merger of PSBs. One thing must be kept in mind that whenever an institution starts moving in the direction of cost cutting, instead of income enhancement, it is slowly dying. And then where is the guarantee that these seven banks will not start competing among themselves. Having 21, or in its place, seven nationalized banks will not serve the purpose if they do the same type of business, selling similar products and competing among themselves. What is required is not mere consolidation, but it should be coupled with change in mind-set.
Government is seriously considering merging all non-life state insurance companies to make it one and also merging all state-owned oil companies into one entity. This is to compete with private players in a befitting manner. Then why can’t government be only one of the players in the banking industry.
1. Consolidation should be based on the core strength of banks, existing and proposed, and their jurisdiction be clearly demarcated. There should be only three Public Sector Banks with different areas of specialized operations:-
i. Large Bank for projects and infrastructure financing and having overseas presence;
ii. Small and Medium Enterprise (SME) Bank to meet the needs of the SME sector, thus aiding Make in India;
iii. Retail Bank that will concentrate on the retail and priority sectors, tax collection and miscellaneous functions such as financial inclusion and subsidy distribution.
2. The capital requirement of these banks should be judiciously stipulated. As the Large Bank would be competing with those around the world, its capital requirement should be according to Basel norms. SME Bank would mainly work within India, so its capital requirement could be less than that of the Large Bank. Retail Bank’s capital requirement would be the least, as its operations would be local, and also guaranteed by the government.
3. Government infuses fresh capital into PSBs every year. Instead of giving this capital proportionately, let it be bifurcated into developmental capital and survival capital. The bigger chunk should be allotted as developmental capital and given to Large Bank and SME Bank. Retail Bank should be given only survival capital. This way the government would not have to shell out a large amount of funds and yet the social responsibility of public sector banks would be met.
I would be failing in my duties, if I do not appreciate the contribution of public sector banks in nation building. Whatever India has progressed over the last thirty years, it is due to PSBs’ contribution in infrastructure and project financing. Private banks prefer giving consumption and retail loans. No nation can ever progress by importing everything to satisfy its consumers’ needs.