Is there much to gain from bank
- A recent McKinsey report sees banks in Asia Pacific ‘grappling with
thinning margins, declining asset quality, and rising capital costs’.
- Pre-tax profits that grew 12 per cent a year during 2010-14, slipped to
3 per cent in 2014-18, four percentage points lower than the global average.
- Returns on equity are sliding whereas operational costs are rising.
Search for scale once again returned to centre-stage to seize ‘benefits in
distribution, productivity, and capabilities’.
- To that extent the intent to merge is consistent with current concerns
and in the context of Indian banking, which is grappling with a huge wave of
- The government might have done its own math for the merger, but from the
point of a heavily banked intermediated country, with a credit-to-GDP ratio
of 75 per cent, that still gives industry a lot of space for growth.
A few issues arise:
- The scope for organic growth, as most of the merged banks had performed
well in the past and still hold potential to rebound;
- The procedure of picking targets in accordance with the severity of
problems; and the opportunity costs of foreign investments.
- If the merger is a market-driven process, some of these factors could
have been discounted.
- But since it is one from a mandate, uncertainties arise about efficacy
of this exercise falling short of expectations in the long run.
The motives for bank mergers fall into four major groups:
- The cost benefits (economies of scale, efficiency, cost of funding, risk
- The revenue benefits (economies and scope for large deals);
- The economic conditions (up and downswings in business cycles); and
- Other motives (valuation, managerial benefits, pre-empting possible
Metrics for mergers
- Add to these the need to speed up growth, which is the biggest concern
now for India. Bank mergers are a common fare.
- More than 700 banks were merged in Asia, Latin America and Eastern
Europe in 1997-99, following the Asian financial crisis, and an equal number
after the global financial crisis.
- Then there is the issue of the metrics chosen for the merger. If it is
about bad debts, then Gross NPAs for the system as a whole fell from an
average 43 per cent in 2013 to 24.1 per cent in 2018 with similar decline
seen in nationalised banks (42 to 24 per cent) and in private banks (26 to
18 per cent) that reveals the issue is more systemic in nature than
- About choice of targets, Andhra and Corporation reduced NPAs by ₹9,972
crore in FY18 on a combined NPA portfolio of ₹34,714 crore, whereas Union
Bank with whom these two were merged could reduce ₹3,476 crore on a total
bad loan portfolio of ₹33,712 crore.
- The merged banks had Basel III capital ratios of 9-11 per cent that does
not cause an immediate threat. Vijaya Bank’s Basel III CRAR of about 14 per
cent is higher than that of many other banks with no record of loss since
2005, yet became a target of merger.
- Whereas Indian Bank, considered a basket case a decade back, has become
suitable enough to absorb another PSB. The metrics for merger should have
gone beyond mere size.
Losses made by various banks
- The losses of Dena and Vijaya at ₹3,721 crore during 2016-18 were less
than those of Bank of Baroda at ₹7,828 crore; that of OBC and United, at
₹8,701 crore, lesser than the ₹16,256 crore of PNB; and Syndicate’s, at
₹4,683 crore, lesser than Canara’s ₹7,034 crore.
- Andhra and Corporation are an exception with losses of ₹7,971 crore,
higher than Union’s ₹5,247 cr. But that’s not such a big difference. In
contrast, UCO with combined losses of ₹9,086 crore, IOB with ₹12,614 crore
and Bank of Maharashtra with ₹2,517 crore during 2016-18 are still awaiting
action, raising speculation on their being left out.
- About 85 per cent of new recapitalisation is given to four banks that
will absorb six banks, leaving questions about its efficacy.
There is opportunity cost too
- Foreign investment in nationalised banks averages a mere 4.8 per cent,
compared with 43 per cent in new private banks and 27 per cent in old
- If the idea behind consolidation is to attract foreign investment, that
seems misconceived. There will no longer be a number of banks for investors
to choose from.
- Banks like Vijaya, Syndicate, Corporation and Andhra are located in
regions that are witnessing rising income levels and an expanding middle
class amidst booming technology and modern manufacturing, which could surely
have helped them recover their prowess with a little more focus and thrust.
- India thinks 12 PSBs is enough along with 20-odd private banks and 35
foreign banks that have little share in business.
- China has 136 in the World’s Top 1000 and if that is not comparable,
then a small economy like the Philippines has 45 big universal banks, 54
mid-sized thrift banks and hundreds of rural banks, with Moody’s rating them
as stable in the medium term.
The metrics of bad debts and profit, most of the mergers weren’t required.
In this context how many banks does a big and growing economy needs?