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Thursday, December 12, 2019

Big bank reform: 10 merged into four for scale and growth

Fund infusion in the merged entity will provide growth capital enabling the bank to enhance lending, Mehta said. Punjab National Bank will get a fresh capital infusion of around Rs 16,000 crore, the FM said.

Written by Sunny Verma | New Delhi | Updated: September 1, 2019 5:20:42 pm
FM announces Public Sector Banks merger: PNB, OBC, United Bank Finance Minister Nirmala Sitharaman during the press conference to announce merger of banks. (Express Photo by Amit Mehra)

The Centre Friday unveiled a mega amalgamation plan, the third in a row, that merged 10 public sector banks into four larger entities with board-level governance reforms aimed at improving banks’ financial health and enhancing their lending capacity to support growth.

The merger announcement was followed by a move to infuse equity of Rs 55,250 crore in these banks to enable them grow their loan book.

Finance Minister Nirmala Sitharaman announced four new sets of mergers — Punjab National Bank, Oriental Bank of Commerce and United Bank of India to merge to form the country’s second-largest lender; Canara Bank and Syndicate Bank to amalgamate; Union Bank of India to acquire Andhra Bank and Corporation Bank; Indian Bank to merge with Allahabad Bank. Banks have been merged on the basis of likely operating efficiencies, better usage of equity and their technological platform, officials said.

Instead of privatising some of these banks or bringing in strategic investors, the government decided that amalgamation is the “best route” to achieve banking sector scale and to support the target of achieving a $5-trillion economic size for India in five years, Sitharaman said. Analysts note that the amalgamations will help banks scale up but doubt if it will lead to an immediate improvement in their credit metrics.

Explained: Here is how to read the mergers of public sector banks

The biggest merger of the four was Oriental Bank of Commerce and United Bank of India merging into Punjab National Bank to create the second largest state-owned bank with Rs 17.95 lakh crore-business and 11,437 branches. These three banks are technologically compatible as they use Finacle Core Banking Solution (CBS) platform. Punjab National Bank MD and CEO Sunil Mehta said the bank and the government “were in consultation for quite some time and we were on board.”

Big bank reform: 10 merged into four for scale and growth During the press conference in New Delhi, Friday. (Express Photo: Amit Mehra)

Fund infusion in the merged entity will provide growth capital enabling the bank to enhance lending, Mehta said. Punjab National Bank will get a fresh capital infusion of around Rs 16,000 crore, the FM said.

Read | Good move but bad timing: experts on bank merger

“In 2017, when there were 27 public sector banks, after today’s announcement there will be 12. So 12 solidly present, well-consolidated, energised, adequately capital-endowed banks will now operate to achieve the target of $5-trillion economy,” Sitharaman said, adding that “we’re trying to build the NextGen banks.”

The merger of Syndicate Bank with Canara Bank — both of which use the iFlex CBS platform — will create the fourth largest public sector bank with Rs 15.20 lakh crore-business and a branch network of 10,324.

Canara Bank will get a capital infusion of Rs 6500 crore. Andhra Bank and Corporation Bank’s merger with Union Bank of India will create India’s fifth largest public sector bank with Rs 14.59 lakh crore-business and 9,609 branches. The government announced a capital infusion of Rs 11,700 crore for the Union Bank of India. These three banks work on Finacle CBS platform.

“We have synergies since we are operating on same technology platform. Our Board will meet within a week to take a call on the proposal,” Union Bank of India MD and CEO Rajkiran Rai G. said. He said the capital infusion announced by the government will help the amalgamated bank grow its balance sheet by over 10 per cent.

Also read | GDP growth contracts to 5 per cent, slowest in six years; Govt says more boosters coming

The merger of Allahabad Bank with Indian Bank — both use the BaNCS technology platform — will create the seventh largest public sector bank with Rs 8.08 lakh crore-business with strong branch networks in the south, north and east of the country. Indian Bank will get an equity infusion of Rs 2,500 crore.

Last year, the government had merged Dena Bank and Vijaya Bank with Bank of Baroda, creating the third-largest bank by loans in the country. The government said this merger has been “a good learning experience” as profitability and business of the merged entity has improved.

Big bank reform: 10 merged into four for scale and growth Finance Minister Nirmala Sitharaman said “we’re trying to build the NextGen banks.” (Express Photo: Amit Mehra)

Earlier, the State Bank of India acquired its associate banks. Indian Overseas Bank, Uco Bank, Bank of Maharashtra and Punjab and Sind Bank, which have strong regional focus, will continue as separate entities. Bank of India and Central Bank of India will work on strengthening their national footprint.

The government also unveiled governance reforms in public sector banks, providing their boards greater autonomy, flexibility to fix sitting fee of independent directors, longer term to directors in the management committee of boards. Post consolidation, banks will also recruit chief risk officers at market-linked compensation while non-official directors will perform a role analogous to that of independent directors.

In a presentation on the proposals, the government said profitability of public sector banks has improved and total gross non-performing assets have come down to Rs 7.9 lakh crore at end-March 2019 from Rs 8.65 lakh crore at end-December 2018.

Read | ‘Emerging to merging economy’: Sitharaman’s bank merger announcement triggers mixed reactions

“The consolidation of PSU banks is a credit positive as it enables the consolidated entities to meaningfully improve scale of operations and help their competitive position in segments such as corporate where their share of customer wallet tends to be low and retail loans where their operations are sub-scale. The scale factor should also help them invest in technology where they fare very poorly compared to their private sector peers,” said Srikanth Vadlamani, Vice President, Financial Institutions Group, Moody’s Investors Service.

While stocks of most anchor banks that will be acquiring smaller banks fell on stock exchanges, shares prices of banks being amalgamated into larger banks rose sharply as as much as 10 per cent Friday. Among the five anchor banks, stocks of Canara Bank and Punjab National Bank ended nearly flat, Union Bank of India fell 1.59 per cent while Indian Bank rose 5.10 per cent at the National Stock Exchange Friday.

Among the smaller banks that will be amalgamated Corporation Bank rose the most by 10.07 per cent, followed by United Bank of India — the bank currently under the Reserve Bank of India’s Prompt Corrective Action framework — which rose 10.05 per cent.

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