To order to bring in efficiency in the functioning of loss-making public-sector banks (PSBs), the government is considering merging at least four such banks because of rising bad loans. The four banks are Oriental Bank of Commerce, Bank of Baroda, Central Bank and IDBI Bank with a combined loss of Rs 21,646 crore in FY18. In fact, barring Bank of Baroda, all the three banks are under Reserve Bank of India’s Prompt Corrective Action, a mechanism to maintain sound financial health of the banks. If any bank comes under the RBI’s Prompt Corrective Action, it cannot distribute dividends, remit profits and disburse fresh loans.

Between the four banks, their gross bad loans or non-performing assets add up to nearly Rs 1,75,000 crore. Even Bank of Baroda, which is not under RBI’s Prompt Corrective Action, made a loss of Rs 3,342 crore in March 2018. Also, IDBI Bank has a gross NPA of over Rs. 55,000 crores at last count, which constitute 28 per cent of its total advances. This means more than one rupee in four lent has gone sour. Now there are talks that Life Insurance Corporation of India (LIC) will take 30 per cent stake in IDBI Bank. At present, LIC has 16 per cent stake in IDBI Bank. The Insurance Regulatory and Development Authority allows insurers with assets exceeding Rs 2.5 lakh crore to buy up to 15 per cent equity in a company. Under special provisions, LIC can hold up to 30% stake in a company with approvals from the government, the investment committee and the regulator.

The proposed merger will allow the weak banks to sell assets, reduce overheads and rationalise branches. Last year, the Union Cabinet gave in-principal approval for public sector banks to amalgamate through an alternative mechanism. With the merger, the government hopes to stem the rise in bad loans in their books which has crippled the lending ability of the state-owned banks. In the long-run, the government is considering reducing the number of public sector banks from the existing 21 to 12 with a view to create 3-4 global sized banks.  The government is drawing inspiration from the success of merger of SBI’s five associate banks and Bhartiya Mahila Bank with State Bank of India. The merger has helped the bank take its customer count to 37 crores and added a vast network of branches and ATMs.

The finance ministry and RBI are in favour of merger of public sector banks, which account for 70 per cent of the industry but are fast losing their market share. If the merger plan goes through and gets approval from the government and RBI, then it must be placed in Parliament, which reserves the right to modify or reject the scheme. Section 44A of Banking Regulation Act 1949 lays down the norms for voluntary mergers and forced mergers are done under Section 45 of the Act.

Problem with Non-Performing Assets (NPAs)

The gross NPAs of state-owned banks had crossed Rs 9 lakh crore at the end of March 2018. The NPAs are rising because of lack of governance and weakness in credit administration. State-owned banks control over 70 per cent of the banking industry by assets but carries over 90 per cent of the total bad loans in the banking system on their balance sheets. The share of PSU banks in cases related to willful defaults is far higher than private banks. Most of the NPAs have taken place because of wilful default by the borrowers or frauds. In the last 31 years, the government had infused over Rs 1.5 lakh crore in state-owned banks. It has also committed to infuse Rs 2.11 lakh crore in phases for the next three years.

According to RBI’s June Financial Stability Report, public sector banks’ gross bad loan ratio or NPA may increase from 15.6 per cent in March 2018 to 17.3 per cent by March 2019 under the severe stress scenario. Bad loans of 11 state-owned banks that are under prompt corrective action may worsen from 21 per cent in March 2018 to 22.3 per cent. Also, six state-run banks facing PCA may not be able to meet the required minimum capital requirement as per the Basel norms of 9 per cent. Most state-owned banks are far from meeting minimum capital requirements as their balance sheets are weighed down by NPAs, continuous losses, rise in provisions and stagnant credit growth. Consolidation will provide optimum balance sheet for competitive advantage and could maintain a capital base to meet regulatory and growth needs. To address the bad loan problem, the board of banks will have to instill better risk management tools, bring in expert agencies for strong audit.

Consolidation of banks

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