Random Reflections – 13                                                                           24.08.2017

                       

 Merger of Public Sector Banks. For whose Benefit?

It is quite alarming that Govt is very adamant in his attitude of privatizing / merging / consolidating the Public sector Banks at any cost despite the thunderous protest of 10 lakhs Bank Employees during the Nationwide Bank’s strike held on 22/08/2017.

It is a matter of concern that the Union Cabinet approved the alternative mechanism to implement the crisis. Under this strategy, the proposals received from banks for in-principle approval to formulate schemes of amalgamation shall be placed before the Alternative Mechanism(AM).The decision will be based on commercial consideration by the boards of the banks involved. We now understand the Government tactics of non appointing workmen/Officer directors in the Board for nearly 3 years.  They want to pass the merger resolution without any protest in the boards. 

In the case of SBI, the Chairman herself had stated in press that merger was not needed but within 6 months she was asked to seek approval of the Board. In few Associate Banks Independent Directors opposed but their voice was ignored.  Today the PSB Boards are puppets of the GOI.  The Finance Minister reviews Banks almost on a monthly basis and gives instructions.  So he is equally responsible for the NPA which is increasing every year. 

 All the reasons explained for the merger  are unjustified as detailed below: 

1.   “To create strong and competitive banks that can absorb shocks and have the capacity to raise resources without depending on the State-Exchequer”.

Ø  The Govt’s intention is very clear. The Govt. wants to privatise some PSBs. The Government received all the profits earned by the PSBs when the economy was good in all the periods. Due to economic slowdown, the banks faced crisis especially in handling Non Performing Advances. Further 86.5% of total defaults relates to Corporate clients only which are mostly favoured by the Government only.  In the name of hair-cuts, Government now wants to benefit the defaulting Corporates favourably. RBI Governor recently told “It is clear that state run banks will need to take haircuts on the current exposure under any resolution plan within or outside the IBC”.  In the case of 12 A/cs referred to NCLT, the RBI has already asked the Banks to create 50% provision this year and 50% provision next year.  This means that Govt. is really not for entire recovery of such defaults. This indicates the double standard policy of the Govt.

The Government wants all the social banking  done by Public Sector Banks at their own cost (ex: Jandhan accounts ) whereas PSBs are expected to compete with Private Banks/ Foreign Banks under profitability. The Govt has forgotten social goals, the preamble of the constitution and is moving towards private monopolies. People will stand up and question soon.

2.   “Mergers and consolidation will help in faster resolution of bad loans of public sector banks”

Ø   In the past two years, the total provisions made by all the PSBs as a percentage to hard earned gross profit increased to 113.21%(more than the gross profit) in March 2016(it was at 72.94% in March 2015) and still overlapping at 106.44% in 2016-17 first time in the history of Banking. It is a pathetic situation that almost 99% of the above provisions constitute NPA provisions only. In other words, around 25% of total NPAs are kept under provisions for NPAs during 2016-17 for entire PSBs as a whole. Further, the quantum of willful defaults in the case of all PSBs  increased to Rs.92,376 cr in March 2017 compared to Rs.76,685 cr in March 2016 with a share of 13.5% to total gross NPAs compared to 14.2% in the same corresponding period. The Government wants all the provisions held with PSBs to be enjoyed by the willful defaulters and other Corporate clients, and only on this motive, the Government favours mergers and consolidation of PSBs. On such mergers, the merged bank will have larger provisions so as to easily offset the willful defaults. (Example Recent merger of SBI Associates and Mahila Bank proved that provisions increased alarmingly at the time of merger. In fact, the provisions for NPAs increased to the huge   level of Rs.27565 Crores for the Associate Banks during the merger process whereas the actual provision for Associate Banks in 2015-16 was only at Rs. 8127 Crores. The increase at  239.18% is unbelievable and it is compulsorily made during the merger).

3.    “PSBs will benefit from operational and functional synergies, resulting in better efficiencies.” according to CRISIL ratings.

Ø  On recent SBI merger, the cost to  income ratio (efficiency ratio) increased to 58.31% in March 2017 compared to 49.27% in March 2016 for the SBI group as a whole. The growth in operating profit declined to 8.66% in March 2017 compared to 12.05% in March 2016 in the case of SBI associates alone during merger.

It is said that there is no plan to launch Voluntary Retirement Scheme (VRS) in SBI after merger and no employees have been laid off on account of merger. But, it is a matter of fact that 3569 staff of Associate Banks had opted for VRS before merger mainly due to fear of merger impact.  Because of this, reduction in productivity as well as efficiency has affected the sustained growth in business as well as profitability.  The Associate Banks alone showed a negative credit growth at 15.64% in 2016-17 compared to 3.17% in 2015-16.  Similarly the growth in deposits has come down to 8.68% in March 2017 compared to 10.14% in March 2016.  The rating agencies in general talk much about the government policies and agricultural development and economic growth. But they don’t have the mechanism to arrive at the weightage for awarding ratings under achievement of social banking and priority sector lendings in their rating format.  Many CRISIL rated companies are Non Performing Assets now.  

      4. “Merger of Associate Banks and Mahila Bank with SBI is a successful plan”.

Ø  A brief analysis on recent consolidation of SBI associate banks & Bharatia Mahila bank with prime SBI indicates that there are possible manipulations in the accounting procedure and it is believed that the performance of the associate banks are underestimated mainly by showing higher NPAs and thereby keeping higher provisions apart from abnormal increase in wage provisions.  

It is observed that the growth in gross NPAs during 2016-17 was greatly reduced by the entire Public Sector Banks, in general.  The growth in NPAs was at 29.26%  in 2016-17 for all the 11 Turn Around Banks compared to last year level of 93.83%.  Similarly the increase in Net NPAs was also minimal at 20.95% in 2016-17 compared to 92.22% in 2015-16.  This was also being the position for the entire PSBs average at 26.91%  compared to last year level of 93.91%.

 Excluding NPAs of Associates of SBI, the increase in gross NPA for the system was only at 19.97%.  This being the case,  how could the Associate Banks gross NPA alone increase at  164.72% when compared to last year level of 50.41%.  As per the annual report recently published by SBI for 2016-17 in page no.219, the following table illustrates the above.                                                                                                                       ( Rs. In crores)

Details	2015-16	2016-17	Growth %
Gross NPA for SBI Group	123416	179167	45.17
Gross NPA for SBI Standalone	98173	112343	14.43
Gross NPA for Associates	25243	66824	164.72
Gross NPA for PSBs	539950	685257	26.91

 It appears that abnormal adjustments would have been made in finalizing the NPA position of Associate Banks alone. Due to this, the overall gross NPA ratio of Associate Banks as a whole was given a lethal blow of showing gross NPA Ratio at 20.19% compared to last year level of 6.55%.As such, the provisions for NPAs increased to a huge   level of Rs.27565 Crores for the Associate Banks alone whereas the comparable provision for Associate Banks in 2015-16 was only at Rs. 8127 Crores. The increase at  239.18% is unbelievable.

In general, when there is an increase in gross NPAs, there would be a fall in Net Interest Income (NII) growth.  During the year 2016-17, the entire PSBs registered an average growth in NII was lower at 4.19% due to higher NPAs observed in the system. As a matter of fact, 10 PSBs have showed negative growth and almost all other banks showed a growth of less than 10%. But in the case of Associate Banks as a whole, the NII growth was observed significant at 27.42% and ranked first among all the PSBs in the particular parameter.

Further, the staff cost for associate banks have been vouched more at Rs.9202 Cr  in 2016-17 compared to Rs.5901 Cr in 2015-16 with an abnormal increase of 55.92% i.e,over by Rs.3301 Cr against a system average of 8% only. 

As such we can conclude that the Associate Banks are merged on a compulsory and committed  basis despite their reasonably  good performance.  A false and unhealthy show of their performance is seen. Since larger provisions are made unreasonably, this could be easily reversed in the subsequent quarters of current year or in the next year and  the post merged SBI can exhibit higher profit in the coming period as against a poor show of Rs. 391Cr loss during 2016-17.

  It appears the provisional adjustments and NPA classification is done on a committed/pressure basis which needs reclassification and re-audit especially by a Government Audit. All this has been done  so as to justify the Government that the merger plan is a successful process so as to continue for other banks also.  Further,  without projecting a P&L plan for the proposed merger, the process has been made.  The actual merger cost would be alarming and it is yet to be derived.    We have to wait for 2 years to see the real impact.

    5.  “Let some Public Sector Banks die, Consolidation should be done keeping  in     

    mind the interest of minority share holders: Former RBI Governor Mr.Subbarao”.

Ø  The entire Balance Sheet Capital of all PSBs forms only a very low of 0.25 % of total PSB deposits for all the last 3 years. The total reserves and Surplus also constitutes less than 7% of total deposits for all the last 3 years. But in contrast, the capital investors in PSBs (with the very low share capital% to that of public deposits enjoy more benefits /more importance/more accommodation with the share price index and more dominance  with the common law of governing rules than the deprived and ordinary public deposit holders.

Ø  The public sector banks are doing more social banking than that of commercial ones especially more in the recent periods. The timely and significant work done by the employees of PSBs towards implementation of Demonetization and the exemplary achievement   made towards opening of Jandhan accounts may be quoted.

Ø  This may be correlated with the recent advice given by a Parliamentary panel on the Indian Railways on 09.08.2017, suggesting that the Govt. should not run the Railways as a business centre. The Steering committee also recommends for Govt. funding to many “socially desirable projects”.

Ø  As long as the PSBs are earning profits they are bound to pass the profits earned every year to the Govt. Hence, it is the duty of the Govt. to support and help the PSBs whenever they are in crisis. Here, the concept of weak banks and strong banks should not be devised on the basis of capital structure and net profit earned over a limited period of time.

   6.  “Consolidation among PSBs assumes significance as most of them are grappling 

          with huge levels of non-performing assets, slow credit off take and resultant 

          pressures on capital adequacy.”

Ø  The Govt. has to agree with the reasonable performance of all PSBs in 2016-17 which has far improved than in 2015-16 despite the constraints faced with demonetization impact and the Capital inadequacy added with stringent provisioning norms on the accumulated NPAs. It is a matter of fact that for the entire PSBs as a whole, the operating efficiency improved significantly expressed in terms of operating profit growth at 18.67% in 2016-17(11 turnaround banks at 15.71%,9 Other PSBs at 24.73% and SBI group at 15.81%) compared to a negative growth of 1.82% in 2015-16. Even the deterioration of Return on assets is minimized by 8 to 9 basis points during the period 2016-17 though ended negative at 0.11% for the PSBs as a whole. The global banking trends also observed a weak credit growth reflected in low return on assets  due to the huge burden of stressed assets, banks in Russia and India witnessed significant declines in RoAs. The RoA of Chinese banks too declined sharply. Various factors are responsible for worsening asset quality in these countries, e.g., sector specific problems in case of India, economic weakness in case of Brazil and Russia and excessive corporate leverage in case of China. Deteriorating asset quality of banks adversely affects the lending capacity of banks, reduces their profitability, erodes their bank capital and can pose challenge to these economies. It is a matter of concern that why the Govt.is more reluctant in issuing needy capital to the banks in time despite the many economists view, recommendations of certain committee reports, suggestions by some reputed rating agencies and system followed in many global economies. As such, raising equity from non-banking companies and mobilizing capital from market should not be insisted on the Public Sector Banks for the sake of diluting Government capital. It is obvious that the credit growth is sluggish mainly due to stringent norms imposed on credit front as well as the capital norms by the Regulators apart from the Govt’s. attitude of reluctance towards capital infusion.

The All India Bank Officers Confederation has submitted Turnaround Plans to 11 Banks and shown how it is possible to turn them around.  The Govt insisted on a tripartite agreement which has been agreed and signed.  As per the agreement a High Power Committee of Management and Association / Unions will review the progress every month.  Not a single bank has done it so far.  So the Govt is cheating the staff as well as the masses.  Concession continue for favourite Corporates.  The move towards merger is nothing but a step towards handing over some of this Banks, if not all to the Corporates.  People of the country will understand for whose benefit these mergers are proposed and they will  join together to save the Banks and save the economy.

D.T. Franco

ngcfranco@gmail.com