Friday, April 15, 2016

Merger Or Privatisation Of PSU Banks

The Banks Board Bureau has been constituted by Government of India and the same same started working from Ist of April this year. BBB will recommend appointment of directors in public sector banks (PSBs) and advice on ways of raising funds and dealing with issues of stressed assets.

It will ensure that the political interference in the functioning of banks must cease.

The BBB would replace the existing appointments board for PSBs.

BBB will also be a link between the government and banks and will be engaged with banks to evolve strategies for them.

The bureau will be a six-member board comprising three from the private sector and three government nominees, while the chairman "will be a distinguished banker or regulator.

Banks have a requirement for Rs.180,000 crore over the next four years to meet their capital requirements.

Of this, the government will provide Rs.70,000 crore.
They have to raise Rs.1.1 lakh crore from the market.

The BBB will advise the banks on ways of raising fund.

Also the government plans to provide Rs.25,000 crore capital each in the current and next fiscal year, while Rs.20,000 crore would be provided during 2017-18 and 2018-19.
Facts about Bank Board Bureau
1. Bank Board Bureau (BBB) will start the functioning from next financial year i.e. from 1st April 2016 and the selection of its member will start in the next six months.
2. It will replace existing system Appointments Board in which appointments for top level jobs at PSBs are made by an appointments committee led by the Reserve Bank of India (RBI) Governor.


3. Composition: The BBB will be a body of ’eminent’ professionals and shall consist of only one government official. It will be six members body with at least 3 former bankers, 2 professionals and secretary, department of financial services representing government.
4. Functions: Give recommendations for appointment of full-time Directors as well as non-Executive Chairman of PSBs.


5. Give advice to PSBs in developing differentiated strategies for raising funds through innovative financial methods and instruments and to deal with issues of stressed assets.
6.Guide banks on mergers and consolidations.


UPA had set up a committee under P J Nayak to suggest reforms in PSU banks. The report was not put in action by UPA Government keeping in view forthcoming election in the year 2014.
NDA government also accepted the suggestion given by Nayak Committee and with to view to execute recommendations, it constituted BBB and has  proposed that during course of time BBB would be converted into Banking Investment company.
Purpose is to dilute share of government is these banks and to reduce it to 40% and transfer these shares to Banking Investment company.

BIC will have the sole power to regulate and control banks.
Other recommendations of Nayak Committee is reported to be
also reducing Priority sector lending to make banks profitable.

Nayak committee also suggested cutting down of unprofitable banking activities such as investing in infrastructure projects or lending to small and medium entrepreneurs.

This would defeat the idea of inclusive banking.

Banks were nationalized in the year 1969 with the sole purpose of helping poor to start banking for unbanked people , to lend under welfare scheme , to make it available in rural areas so that poor farmers and traders in rural area are not exploited by local money lenders.

Why there is so much opposition to privatization of banks?

We must not forget that before 1969 except SBI all banks were in private sector
Between 1947 and 1969 , 559 banks failed.
A huge number of people lost their jobs and life’s earnings
The common men had no access to banks, rural areas were not having bank’s presence.
Banks nationalization took place to change from class banking to mass banking.

In 1969, over 40 percent of our GDP was coming from Agriculture, but total loans to the agriculture sector was only 0.2%
Capital was under the control of small percentage of population
Even after nationalization, private sector banks continued to fail.

Global Trust bank was awarded banker of the year and the vest next year it posted a loss of Rs.1100 crore. GTB was eventually merged with PSU bank Oriental bank only.

Between 1969 and 2014, 23 private banks which were not performing well and which were about to collapse were merged with PSU banks.

On the other hand PSU bank have not only survived the major global economic crisis ,but also shared social agenda like loan waiver, Jan Dhan Yojna, priority sector lending and what not.

It is PSU banks which wholeheartedly took part in government plan for lending to small and medium sector entrepreneurs.

Due to these PSU banks have faced little erosion in profits whereas private banks have earned huge profit because they do not take part in social responsibility work.

In case of recruitment too, private banks do not follow reservation policy.

Private banks do not give loan for education and do not take part in Government sponsored poverty alleviation schemes.

Privatisation is therefore not the solution for problems facing PSBs.

Further Banks Board Bureau would draw a road map for mergers.
There are 19 nationalized banks and several other public sector lenders, which include State Bank of India and its associates, IDBI Bank and Bharatiya Mahila Bank.
There is speculation among bankers that the government is looking at shrinking the number of banks to seven to 10.


The government wants to consolidate banks for two reasons.
One, it wants several bigger banks that can keep pace with demands of the economy.
Second, it wants to discontinue pouring more money into inefficient banks but does not have a choice.

Government thinks that Consolidation is one way of ensuring that capital goes to the efficient banks and the weaker banks merge.

Govt spends huge amount of tax payers money as capital infusion.

The bureau is ultimately expected to be replaced by a holding company for all the public sector banks.

Until the legislation is in place, the bureau will perform the job of the holding company, deciding on policy matters and appointments.


Unions, employees however oppose merger of 27 public sector banks into six. The consolidation exercise among public sector banks may not be an easy one with unions and employees voicing their concerns.

Unions have threatened to resort to strikes if the process is kicked off.

Here I would like to question Government of India that if merger and consolidation of PSU banks is the solution to make banks healthy and profitable , why did it issue licences to companies to set up payments and small finance banks?

Why GOI has decided to convert 154000 Post Offices into Post Bank ?

Here the question is when GOI is unable to control working of PSU banks and unable to stop political exploitation of PSU banks , how will it stop misuse of Post Bank by village level musclemen, Mukhiya, Panchayat Pramukh, Panchayat Karamchari and local political leaders?

Government should keep in mind that due to political exploitation , most of cooperative banks in the country are also sick or on the verge of collapse.

The consolidation exercise could bring down the number of public sector banks to about six from the current 27, but it cannot change the attitude, culture and mindset of politicians and bankers who have jointly and severally looted banks for serving their self interest and mutual interest.

Issues such as mergers of weak banks, chalking out a career path for the chairmen of the merged banks, cultural fitment of lenders will also have to be dealt with. Career of various employees of banks will be adversely affected. Promotion scope for employes will be reduced. Many branches will have to closed or merged .Government will face a tough task in closing of many branches of merged entity which will appear superfluous. Government will fail to unify different culture of different weak banks which will merge together to make a bigger entity.

It is therefore true as many of analysts feel, even though the government seemed confident of the merger exercise, it will not only prove be a hard nut to crack, it will also prove to be suicidal attempt. Government failed to do it during last three decades, and it will fail this time too.

If government is really interested to save banks from further damage, it should merge all PSU banks and convert it into a unified Financial Corporation or a Unified Public Sector Bank .

In this way , government of india can decide priority of the country , define rate of interest payable on deposits and rate of Interest for various sector of lending depending upon priorities decided by it.

This will not only help in elimination of competition among 29 PSU banks ( which are all part of same government and same owner ) and force the unified bank to compete with private sector bank but also help Government in execution of it social welfare plan in true spirit.

As of now one PSU bank is trying to takeover business of a customer from other bank by offering various concessions in interest rate and service charges.

In this way one PSU bank suffer and one gains. Ultimately loss goes to same government and when weakness grows in any bank , government is constrained to infuse capital.

Weakness of a bank caused by greed politicians and greedy bankers cause loss to taxpayer and bank customers who are not paid even adequate interest on money they keep in these banks.

Government and banks both are borrower friendly and appears to be enemy of savers. It is remarkable to point out here that discouraging savings will adversely affect lending capacity of PSU banks . PSU banks will face greater liquidity crisis in coming days if their deposit base does not grow as per expectation of the government and they will not be able to grow lending activity adequately.

The panel will closely work with the Banks Board Bureau (BBB) to identify the right matches for consolidation. The BBB has already started working in the line of merger and consolidation.from April 1, 2016.

I would like to say here that the main problem that public sector banks is facing today is that of rising non-performing assets (loans that do not yield returns) and this problem will not get resolved only by merging some of weak banks with some of so called stronger banks. The focus of the government should be on recovery and on ensuring quality lending through PSU banks while ensuring that no further slippage is allowed.

Government has to make it clear how will this get resolved by merging banks?



Around 800,000 people are currently employed with different public sector banks. There is no need to merge banks and even if this (issue) had to be discussed, all stakeholders need to be taken into confidence and no unilateral decision will be supported.

NPAs for scheduled commercial lenders have crossed `8 lakh crore, and almost all banks have seen their profits drop sharply during the last quarter, especially with the Reserve Bank of India asking them to clean up their balance sheets by March 2017.


Government says that the number of public sector banks will come down, perhaps to 6 or 7, after the proposed consolidation of banks and this will end the unhealthy and intense competition going on even among public sector banks as of now. While professional competition in the marketplace is welcome, unhealthy competition leads to many unethical practices and regulatory violations as noticed at present.

Going ahead with the same logic , I suggest government to merge all PSU banks and make a strong entity to compete with private sector banks.

Mergers will result in immediate job losses on account of large number of people taking VRS on one side and slow down or stoppage of further recruitment on the other. This will worsen the unemployment situation further and may create law and order problems and social disturbances.

The plight of people taking premature retirement (through VRS route or otherwise) will turn more pitiable than being envisaged.


Even now, public sector banks in India hold 77% market share. Therefore, the new unified entity , after merger of all banks into one unified bank, will give the private sector banks a good run for their money. Financial inclusion plans may be put into effect more speedily and powerfully. It will help stopping of fraud caused by multiplicity of accounts opened under Prime Minister Jan Dhan Yojna. It will also help in stopping loss caused to banks due to multiple financing to same borrower by many banks. It will help in smooth transfer of . ‘Direct Benefit Transfer’ (DBT) of government aid, subsidies..Government will find it easier to comply  norms under BASEL III, especially capital adequacy ratio.

The weaknesses of the small banks with a stronger bank may help in just postponing of sickness of weak bank for some time  and concealment of malicious activity of one bank under the shadow of another stronger bank.  . The amalgamation of Global Trust Bank with Oriental Bank of Commerce in 2004 is a case in point.


Similarly by merging existing weak banks to comparatively stronger banks will though reduce number of PSU banks from 29 to 6 or 7 or 10, but it will not help in curing the current sickness.

I therefore reiterate that GOI will have to improve quality of recruitment, quality of promotion, quality of knowledge of bank staff, quality of lending and doing business and incentivise staff who work sincerely and devotedly and punish those who have been elevated to higher post only by bribery and flattery to higher bosses.

GOI will have to make legal machinery stronger, speedier  and effective to deal with bad borrowers and defaulters . They will have to punish Chartered Accountants who are engaged in preparation of false and fabricated balance sheets to cheat bankers and to help borrowers . It is CAs who help and suggest business houses and individuals how to save taxes of various nature and  thus help in creation of black money.

It is CAs who certify good health of a company even if its health is critical.It is CAs who prepare fabricated balance sheet for a loan seeking company which suits need of bankers and loans are sanctioned by banks. It is CAs who certify even Non Performing assets of the bank as performing asset.It is they who help banks and other companies to project falsely inflated financials and shining image to cheat customers and common men who commits the mistake of trusting audited Balance sheet and who consider BS of a company or that of a bank as its mirror image.

GOI will have to punish government staff and advocates who help in making of fake deed of landed property and punish professionals who wilfully inflate value of Mortgagable property to cheat bank officials. GOI will have to officials attached with Debt Recoveryy Tribual, administrative officialss and judiciary staff  who stab banks and support defaulters and go on postponing court cases only to earn bribe from bank loan defaulters.









I submit below example of a private banks how they manage to pay higher rate of interest on savings deposits and how they value savers .


Kotak Mahindra Bank will forgo its margins and stick to its current savings rate of 6% to garner more savings deposits.

“We are dropping our lending rates in line with the banking industry, but on the deposit side, we are sticking our neck out and sticking to 6% for amounts at above Rs.1 lakh and 5% for up to Rs.1 lakh. It is a significant impact on margins,” managing director Uday Kotak said at a press meeting on Thursday.

The bank’s net interest margin was 4.3% as of 30 December and Kotak said it is unlikely to fall below 4% in spite of the higher interest rate offered on savings accounts.

Apart from Yes Bank, which gives a 7% rate on its savings account deposits, most commercial banks pay 4% on them. Kotak added that the bank will aim to increase its current account and savings account (CASA) ratio to 40% over the next 12-18 months from the current 35%.
Offering interest rates 200 basis points higher than its peers has helped Kotak Mahindra Bank to grow its savings account deposits by a compounded 40% over the last five years, he said.

A basis point is one-hundredth of a percentage point.

As bank deposit rates drop further after the latest deep cut by the government in the rates of small savings schemes, Kotak is hoping that customers will find a 6% interest rate on savings accounts appealing.

The government slashed interest rates on small savings schemes by as much as 130 basis points on 19 March, making bank deposits look more competitive. After the rates were pared, the one-year rate stands at 7.1%, while most banks’ one-year deposits offer a marginally higher 7.5%.

Kotak Mahindra Bank’s one-year term deposit rate is 7.75%. Kotak said that although the bank’s savings rate remains at 6%, the lender will not necessarily hold its term deposit rates.

The private lender will cushion its margins by pricing risks “better”, Kotak said, hinting that credit risk spreads for borrowers could be wider. “We also have to be competitive, because if you misprice risk, you will lose business,” he added.

Under the current marginal cost of funds based lending rate (MCLR) method, banks have to add a credit risk premium to the MCLR, which would be the final loan rate to the borrower.

The lender’s MCLR is among the highest in the one-year maturity at 9.60%. Most banks’ one-year MCLR is around 9.3%. Kotak said that lending rates will be competitive and not necessarily kept unchanged to protect margins.

The Reserve Bank of India introduced the MCLR as a way to prod banks to pass on the reduction in its policy rate


5 comments:

  1. Govt sorry politicians only looking there benifit in banking reform and try to provide undue benefits to corporat borrowers.

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  2. It's an good over view of PSB'S Govt loosing it's revenue as he created competitive conditions among the NUMEROUS PSB'S and giving license to pvt sector lender.

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  3. This BJP Govt must dop the idea of privatization of IDBI and other bank. People who voted for you made a huge mistake if this is privatized. will never ever vote for BJP if this happens

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  4. Privatisation of any public sector bank is not the solution.At the same time merger is also not the proper way to fight with huge NPA of PSB.However,merger of some PSB may reduce the Govt.concerns.There are many branches of PSB which are left idle and that can reduce the operating cost of govt.since in PSB govt is higher shareholding so merger may increase the profitability of PSB with higher network of branches and reduce competition with other PSB branches in same area.

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  5. Like 4 subsidiaries of GIC, one bank with 4 subsidiaries headquartered at North (New Delhi), West (Mumbai), East (Kolkata) and South (Chennai) may be established.

    ReplyDelete