 "Banks Board Bureau chief Vinod Rai delivers Twenty-second Lalit Doshi Memorial lecture on \"Effect of Audit - Good Governance or Policy Paralysis\" in Mumbai (Pic: Kamlesh Pednekar)")
Banks Board Bureau chairman Vinod Rai said that the government is keen on bank consolidation, but not before building strong balance sheet by addressing the bad debt problem, and in that case merger may happen first between two large banks.
Vinod Rai was speaking at the Credit Suisse annual investors conference, of which the foreign brokerage made a note to clients. Business Standard has a copy of the report.
“The government is waiting for the resolution of the NPL (non-performing loans) issue and wants improvement in balance sheet strength before going ahead with the consolidation process. The strength of balance sheet is a hurdle as there are not too many large strong PSUs that can be merged. Therefore, initially the government may look to merge two large banks,” the report said.
It would be preferable to create “strong regional entities”, but the biggest challenge in any merger would continue to be how to reduce the redundancies in terms of branches and employees.
“To address this, various options are being considered such as branch swapping, early VRS (voluntary retirement schemes) and going slow on fresh hiring,” Credit Suisse wrote, attributing to Rai.
The government has already started the bank consolidation process by merging five associate banks with parent State Bank of India, effective April 1. The associate banks have also rolled out VRS schemes for their employees.
Rai’s comments at the summit is contrary to the general expectations in the market that smaller banks would be merged with larger banks. The plan, eventually, is to create a few global banks through consolidation.
However, big bank consolidation talks are not new. In early 2000s, there were some indications that Union Bank could be merged with Bank of India, both Mumbai based, but no concrete steps were taken by the government in this regard.
According to Credit Suisse, government is looking at industry-wide restructuring package, instead of company-wise.
“The government is also focusing on an industry-wide restructuring package instead of company-wise, given that stress is concentrated in a few sectors like infra and steel,” the report said.
The aim of the new restructuring move would be to improve decision making process, Rai said.
“For the resolution of problem loans, the government is looking at various structures including an increase in the number of oversights committees and allowing larger flexibility in the existing mechanisms, as decision-making continues to be the biggest obstacle to resolution,” the report said.
Vinod Rai said the government would be looking for rights issue in fiscal 2017-18 as the budgeted capital allocation is low and can be supplemented by minority shareholders. The budget provisioned for Rs 10,000 crore in the next fiscal, against Rs 25,000 crore in fiscal 2017. The government’s Indradhanush plan envisages infusion of up to Rs 70,000 crore in public sector banks in phases till fiscal 2019. The government, however, had indicated there would be more capital if there was a need.
“Our interaction with Mr Rai highlights that the resolution of stressed accounts will involve deep haircuts and with NPL coverage for banks low at 40%, this means higher provisioning and capital requirement for banks. Remain cautious on corporate lenders,” Credit Suisse said.
