THE MERGER MANIA
BY S.SRINIVASAN
PRESIDENT
NATIONAL UNION OF BANK EMPLOYEES
(NUBE )
It has been widely reported about the proposal to
merge some of the PSU banks (Nationalized banks). These merger has been
proposed by the government, specifically our Finance Minister P. Chidambaram.
In the annual banking summit, the finance minister reiterated this by saying
that banks should not fear consolidation and that for being a world economic
super-power or for at least being one of the three largest economies, India
would at least need a couple of global banks. The centre is nudging the capital
infusion demand by the state-run banks with demands for mergers as these
mergers would considerably bring down the liability on the centre for capital
infusion. Currently the centre has a commitment of Rs 15888 crores of capital
infusion towards state run banks to maintain the financial health of the state
run banks. Over the next five years it would have to take the burden of another
Rs 90000 crores for the same.
The justification
of the need for large global sized banks given by the centre was that these
banks could have a larger asset base as their exposure to various sectors would
be widened and their scope for financing bigger and larger projects would
undoubtedly increase. Certainly the centre is adopting the policy of looking
towards the west and drawing some inspiration out their ways. In the financial
debacle of 2008, the world has witnessed how the so called global banks of USA
and Europe are still gasping for breath. Ultimately many of these financial
institutions and banks had to be taken over by others or had to be bailed out
by the government through the respective central banks by providing grants and
soft loans. Even the biggest of banks in the world, Citibank, was not spared by
the recession. The state of these banks were as a result their own making and
not because of circumstances that they had to bear the brunt. Indian banks have
a large customer base and undoubtedly large amount of public money is involved.
A larger loan exposure would only put the public money in unsafe domains. The
more fragmented the banks are, the lesser will be the exposure wrt to size,
thus making public money secure. We have already seen how the banks are reeling
under pressure because of their exposure to the aviation, power generation,
infrastructure, mining and agriculture sector. The banking sector is the pulse
of the economy and decisions should be taken by keeping the long term
implications in view. Even the slightest of jerks in trying times could prove
fatal for the economy. Further more in this regard, these proposals are being
mulled upon to create 2 or 3 global sized banks. Without doubt, the sizes of
banks are being compared by keeping in view their loan books and their asset
base. But what the minister is forgetting is that we got to compare apples for
apples. If we are to compare the size of our banks with that of the US,
converting our financials in terms of dollars and making a pie to pie
comparison would be utter foolishness. With my limited knowledge of economics
and with due respect to our finance minister, it isn’t rocket science to
understand that what 1 dollar means to an American is not what 1 rupee means to
an Indian. We got to factor in the purchasing power of both the currencies in
their respective economies for the corresponding average citizen of that
country before making any comparison. Appropriate weightage should be given to
this aspect in any exercise of comparing size of banks in each of these economies.
Moreover it will be pertinent to note that the penetration of the Indian banks
by their sheer enormity of the reach their customer base is something
unparallel world over (SBI being the case in reference). One has to definitely
give due consideration and weightage to this fact and not merely be guided by
size of loan book and enormity of asset while considering the size of a bank.
Thus all these points all the more make it unreasonable and unfavorable for the
centre to even think about merger of banks. Apart from all this, the points
being raised by the respective unions of all these banks are also to be
considered before making any commitments. It would amount to nothing but
digging our own grave or to put it more bluntly we would be cutting the hands and
legs of the workers who built our very own taj mahals upon which our economy is
sustaining and I sincerely hope that our finance minister wouldn’t want to take
the wrath of being termed as shahjahan who made all this happen.
Another very important point of consideration is the
proposal of divestment of the PSUs including the nationalized banks. No doubt
it is impertinent that the government meets its fiscal demands and divestment
of holdings is one of the most easiest and non-cumbersome ways to meet this
end. But the unique, never-before tried out model which the centre plans to
adopt in the process of divestment is alarming. From what we understood of what
was reported in this end is that the centre plans to sell the stakes of these
Banking and other PSU stocks to selected Asset management companies (AMC) and
mutual funds, and these mutual funds AMCs
in turn would create a special category of securities where in these
securities would derive their value from the value of the basket of these PSU
stocks. These securities thus created would be issued to the public as units of
exchange traded funds (ETFs) listed in the stock market through these mutual
funds in the name tradable listed ETF units. The fact that the underlying value
of these securities would be derived from that of the PSU stocks which are
listed in the exchanges would garner a lot of interest in the common public,
who are generally unaware of the ways of the market. This would be so because
it is generally understood that PSU stocks are considered to be safe havens of
investment for the common man and has a huge upside as it linked to the
economy. India being projected as the next big economic super-power and a force
to reckon with would furthermore add to such an understanding of the public. Keeping
the present proposal in mind, the only earnings out of the securities that the
mutual funds and AMCs would issue would be out the dividends that the companies
(underlying stock/PSUs) declare and the capital appreciation of these stocks.
How often would these companies declare dividends is a question which only time
can answer and whether these stocks would ever see any capital appreciation is
a question which can, to a large extent be answered by us. Such a possibility
is certainly shady. Because the catch is that, the stocks of these public
sector undertakings most of which are already listed in the exchanges do not
reflect their true price. Their values on the exchanges are not reflective of
their true value which ideally should be ascertained by market forces. It was
already very well seen how the market reacted to the offer for sale of a few
PSUs which were divested. Even though those stocks were being offered at a
discount it did not garner much interest. There was hardly any buying for the
better part of the period of the trading window. Towards the fag end of the
trading window, it was LIC which took a lion’s share of the offer for sale,
thus being a saving grace for the government. Seasoned Market players probably
knew about the intricacies of these stocks. And that is why it did not garner
much interest even though it was being offered at a discount. Even in the case of the proposed divestment
of PSUs through AMCs it would is highly doubtful that it would see an upside
resulting in capital appreciation since the values are already fabricated. The
reasons for such artificial prices are the low public holding or free float of
many these shares. Probably the government does not want to face the same
situation and that is why they have devised this new structure where in a
mutual fund AMCs would act as an intermediary between the divesting government
company and the common public. Ultimately the fiscal needs of the government
would be satisfied, the mutual funds would have made their money but it would
be the common that would have lost their hard earned money. The average middle-class and those planning
for their retirement would without hesitation enter into such a fund. And after
a few quarters of capital stagnation when they decide to encash out of it they
are bound to face the road block of not even fetching the face value/ purchase
value of the units held by them thereby leading to a downward spiral in the
value of these units when these mutual funds face redemption pressure. This is
the same model which was the prequel leading to the November 2008 financial
debacle where the securities, which derived its value from underlying subprime
loans, were being issued as highly secure and AAA rated securities to the
average American. They innocently entered such funds as a lucrative substitute
for pension funds and got trapped.
Furthermore, the next initiative which the
government plans to take in the bid to open up the economy and make reforms is
the opening up of the pension sector. The dual combination of opening up of
pension funds and allowing pension funds larger freedom to invest in equity and
equity based securities and the so called seemingly innocent act of offering
these ETFs which has the wide acceptance and belief of being safe simultaneously
by the government is the most dangerous cocktail which has the potential of
leading to catastrophic results which is likely to affect scores of millions of
unassuming individuals, especially senior citizens and pensioners, the most
vulnerable of any society.
In order to
understand the ‘incentive’ driving the ministry of finance and the various
interests pushing it, it is useful to distinguish between the activities of
banks as seeding-cum-cultivating agents and as harvesters on the one hand, and
the activities of modern banks as over-time seekers of interest from customer
activities, and their activities as point-of-time earners of fees. Bank
mergers, like many other types of liberalization directed at increasing the
wealth of rich shareholders has been a tsunami originating in the activities of
US financial corporations. Their role has been that of a harvester of fruits of
other institutions’ seeding and nurturing activities, and of looking for
product lines involving fees for point-of-time services rather than of durable
customer servicing activities. They generally provide usual banking services
only to an elite band of up-market customers with whom they have sought to
build close relationships.
MERGER MANIA II
By
S.SRINIVASAN
PRESIDENT
NATIONAL UNION OF
BANK EMPLOYEES
HOLDING COMPANIES
CURTAIN RAISER TO CONSOLIDATION
PSU BANKS’S IDENTITY – MOST PRECIOUS ASSET – PRESERVE IT
Cabinet to Consider Holding Company for PSU Banks:
Capital
infusion with foreign funds planned:
On January 16, 2013 PTI reported that the finance ministry is contemplating a
holding company structure for public sector banks. This will help the banks raise capital
and government can hold on to a majority stake. The holding company is likely
to be a statutory entity, to be set up under the Parliament's new Act, and may
come up by the end of the current financial year 2012-13, the official told the
newspaper.
The holding
company may also be allowed to hold government shares in other financial
companies, the official said, adding that this way the firm “would have another
stream of income as dividend”.
Also, the
government is contemplating letting banks hold shares in one another via the
holding company, which may be permitted to be listed on the stock exchanges, he
said.
Under the process
of creating the holding company, the government will transfer its shares in all
state-run banks to the company, which will raise capital from domestic and
overseas markets, and infuse funds into the public sector banks (PSBs).
The government
will transfer its shares to the holding company in a cashless transaction. The
company would hold shares in all PSBs (public sector banks), raise debt from
the market and infuse it into its subsidiaries.
Moreover, being a
holding company, the fiscal burden on the government due to recapitalization of
banks will also reduce.
The government, in
the Union Budget 2012-13, proposed to provide Rs. 145.88 billion for
recapitalization of public sector banks in the current fiscal, excluding Rs 13
billion for recapitalization of regional rural banks.
Once the holding
company is set-up, such kind of provisioning may not be needed in the Budget
and the company will be similar to other public sector units, the official
said.
The holding
company will be permitted to tap funds at interest rates higher than the London
Interbank offered rate (LIBOR) -- the average interest rate charged by London
The official,
however, said, “The capacity of the holding company cannot be infinite. The
company's equity would increase when it infuses capital into banks.”
The company will
enable the government to retain its majority stake in the state-run banks,
despite the strain on budgetary resources being curtailed.
“If banks go to
the market to raise funds through the equity mode, our (government) equity
would come down, the official said.
The Indian
government is waiting for the report of the committee, headed by State Bank of India
Capital infusion
has become imperative for public sector banks to meet the capital requirements
under the Reserve Bank of India
Earlier this
month, the RBI said that Indian banks must maintain tier I capital at a minimum
7% of risk-weighted assets when the new Basel III norms on capital regulation
of banks are fully implemented by March 31, 2018, higher than the 6% suggested
as per the global norms.
The guidelines are
pursuant to the recent global financial crisis, which has underlined the
importance of sound liquidity risk management framework to the functioning of
financial institutions and markets.
The move comes
after public sector banks submitted their capital requirement plans for the
next eight-10 years, after taking into account the capital requirement under
the new Basel-III framework. The government, which is keen on holding a minimum
stake of 58 per cent in public sector banks, may find it difficult to infuse large
sums of money, as this would affect the country's fiscal position. Banking industry officials say by forming a holding
company, it would be possible to raise funds from the market, and the
government holding can be maintained at above 58 per cent. According to the
proposal, government share in the banks would be transferred to the holding
company, which would hold 100 per cent stake in the bank. Since the funds would
be raised by the holding company, which is an investor in the bank, the
government would continue to hold on to its control of the bank's management,
while inducting external capital into the holding companies. The bank would pay
dividend to the holding company, and this would be used for servicing the debt
for the funds raised.
Holding firm - Reserve
Bank of India
MoF
moots bank holding cos to help raise funds
An FHC is an
entity engaged in a broad range of banking-related activities, including
insurance underwriting, securities dealing and underwriting, financial and
investment advisory services, merchant banking, issuing or selling securitised
interests in bank-eligible assets, and generally engaging in any non-banking
activity authorised by the regulators. Any non-bank commercial company that is
predominantly engaged in financial activities, earning 85% or more of its gross
revenues from financial services, may choose to become a financial holding
company, according to the US law. These companies are required to sell any
non-financial (commercial) businesses within 10 years.
The Reserve Bank
of India (RBI) placed on its website discussion paper
on holding companies in banking groups for comments from the public on 27
Aug2007 See http://rbidocs.rbi.org.in/rdocs/content/PDFs/79486.pdf).
“All considered, while the intermediate holding company structure should be
supported with legal structure etc, for the present, there has to be a roadmap
for moving to the BHC/FHC structure by private and public sector banks before
the banking sector is opened up in April 2009. The latter is an international commitment.
Necessary consultations among the various stakeholders must commence as early
as possible," says a note circulated by the capital markets division of
the finance ministry.
RBI
suggests two options for Govt holding in public sector banks
The
Reserve Bank Of India (RBI) on put out a report on its web site on
23-5-2011(see http://www.rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=632) Report
of The Working Group on Introduction of Financial Holding Company Structure In India
dated May 4, 2011 recommending a financial holding company model for the
financial sector, which it says will protect banks from being destabilised by
the activities of other firms controlled by the same promoter.
RBI has
recommended two options to warehouse the government's holding in public sector
banks. This is in view of the constraint of minimum government shareholding of
51 per cent in these banks.
First
option
Under
the first option, the government holding in public sector banks (PSBs) gets
transferred to a holding company, which also holds shares in demerged bank
subsidiaries.
Because
of the need for the Government to hold minimum 51 per cent in a PSB, the first
option will require the financial holding company (FHC) to be listed while the
banking subsidiary can remain unlisted, the report states.
Further,
according to the report, the Government would have to continue to support
capital requirements of the bank as well as non-bank subsidiaries.
Second
option
Under
the second option, the Government continues to hold directly in the bank while
shareholding of all private shareholders gets transferred to a holding company.
The holding company will also hold shares in the demerged bank subsidiaries.
Going
by the second option, the Government would be required to support only the
capital requirements of the bank. The Government could also encash the value of
indirect shareholding in bank subsidiaries.
Post
FHC, the Government, under the second option, could continue to hold, in
addition to 51 per cent in the bank, shares in various subsidiaries directly
equivalent to its existing indirect shareholding. Since there is no requirement
of minimum holding in these entities there will not be any need for the
Government to provide capital.
The
holding company would, as per the second option, effectively, not be a holding
company in the sense that it would not be holding controlling stake in the
bank. The shareholder dynamics in such
cases needs to be examined since there will be two large shareholders — the
holding company and the Government.
The RBI report
says the structure may create challenges in governance. the RBI report states. Under the second option, although the public sector
character of PSBs would not get compromised and existing government powers can
continue to be exercised, the challenge would be governance of the bank with
two blocks of directors who could have differing interests.
The government is likely to
consider within a few weeks a proposal for setting up a
holding company for public sector banks to enable them to raise capital from the market instead of seeking funds from
the exchequer.
IBA’s response:
Indian
Banks’ Association (IBA), the umbrella organization of banks in India , has drafted a response to the Reserve
Bank of India
Although
there were some differences among member banks as reported in new papers on Sep
14 2007( see Economic Times ) ,who felt that the central bank is “policing” and
others who felt that the central bank must continue “a strict vigil” on banks,
the members arrived at a decision to support the creation of an intermediate
holding company.
In a document posted on its
website on Sep 145 2007(see www.iba.org.in/Discussion.doc )
,addressing the concerns of the central bank on the difficulty in regulating
the ‘multi-layered structure of the holding companies,’ the IBA suggested, it
would be worthwhile for RBI to facilitate growth of home-grown financial
conglomerates through intermediate holding company structure, as an interim
solution, pending the end-state of FHC or BHC model in the system. the intermediate holding company may be
“regulated as any other non-banking finance company
Centre mulls holding
company for PSU banks
Once again on November
2011 the central government mulled
the idea of setting up holding company. “We are moving to Cabinet for setting
up a holding company for the public sector banks,” said an official source in
the media. It will take 2-3 weeks. There will be one holding company for all
public sector banks, sources said. They said the Law Ministry’s opinion has
been sought for making legislative changes as various acts will have to be synchronized and amendments will be
required in the Banking Companies (Acquisition and Transfer of Undertakings)
Act, 1970 and 1980.
As per the structure proposed, 99 % of government holding in the bank will be shifted to the Holding Company and the government will retain 1 % with itself so that it remains a state-owned bank, sources said.
The Budget 2012-13 had proposed the setting up of a financial holding company that the finance ministry has sought the opinion of the law ministry on a proposal to set up a holding company for all 24 public sector banks. Such a move will need amendments to a number of existing acts, including the bank nationalization acts of 1969 and 1980 and the State Bank of India Act 1955. Following the law ministry’s opinion, the proposal will be forwarded to the cabinet.
As per the structure proposed, 99 % of government holding in the bank will be shifted to the Holding Company and the government will retain 1 % with itself so that it remains a state-owned bank, sources said.
The Budget 2012-13 had proposed the setting up of a financial holding company that the finance ministry has sought the opinion of the law ministry on a proposal to set up a holding company for all 24 public sector banks. Such a move will need amendments to a number of existing acts, including the bank nationalization acts of 1969 and 1980 and the State Bank of India Act 1955. Following the law ministry’s opinion, the proposal will be forwarded to the cabinet.
The setting up of a holding
company, with an aim to recapitalise public sector banks, was announced in last
year’s budget by then finance minister Pranab
Mukherjee. The aim was to devise a mechanism to handle the growing
capital requirements of public sector banks without straining the finances of
the government. But it took some time for the model to be finalised as
questions were raised about its financial viability as well as the possibility
of increased risk since public sector banks account for nearly 75% of the
market.
The government is likely to consider within a few
weeks a proposal for setting up a holding company for
public sector banks to enable them to raise capital
from the market instead of seeking funds from the exchequer.
If the cabinet approves, the holding company could be operational from June and manage the capital requirements of banks from the next fiscal, the official said. The holding company has the approval of Reserve Bank ofIndia
If the cabinet approves, the holding company could be operational from June and manage the capital requirements of banks from the next fiscal, the official said. The holding company has the approval of Reserve Bank of
The finance ministry has
estimated the state-owned banks’ capital requirement for the next fiscal at
Rs20,000 crore. But the final amount decided will be dependent on Planning
Commission approval. Of this, around Rs5,000 crore could be allocated to the
holding company.
The government has infused
more than Rs12,000 crore into state-owned banks this fiscal. According to an
estimate by consulting firm KPMG, Indian banking sector requires Rs1.1 trillion
to comply with Basel-III norms.
The government said it will
provide Rs15,888 crore to banks in fiscal 2012-13. This, compared with the
overall need, “is just a drop in the ocean
Capital infusion with
foreign funds planned
To make the model viable, the holding company may
borrow from overseas markets at comparatively cheaper rates so that repayment
problems do not arise. The revenue model for the company would involve
dividends paid by banks. HC would help raise resources to meet capital needs of state-owned
banks. Bank recapitalisation will no longer be budget business. The company
would only raise money for capital infusion and apportion it to various public
sector banks as per their requirements, so that the exchequer would no longer
have to bother about making provisions in the budget, in managing which the
government has been walking the tight rope in view of the difficult fiscal
situation.
Should the proposal go through, the government will
transfer most of its equity in public sector banks to the holding company,
which will, in turn, leverage its huge capital base to borrow overseas to meet
the capital infusion requirement of public sector banks. As result of this move
the PSU banks may be delisted from stock exchanges. The holding company will also receive dividends,
adding it will tap both debt and equity markets to raise capital. The resources
will be primarily raised through foreign borrowings, which would then be
infused as equity in various state-owned banks.
RBI pushes for consolidation...
“RBI has said that
consolidation in the banking sector would pave the way for stronger financial
institutions with the capacity to meet corporate and infrastructure funding
needs, and to rescue distressed lenders. However, it has prescribed a
`non-operative bank holding company' structure to avoid
creation
of complex institutions.
"Voluntary
mergers and transfers help consolidation in the financial sector and pave the
way for stronger financial institutions to rescue the weaker ones. Such
voluntary measures, while saving the constituents of weaker institutions,
provide business opportunity to the stronger ones to spread their presence in
different geographies," said Anand Sinha,
deputy governor, RBI. Sinha was speaking at the Financial Planning Congress
2011, organised by the Financial
Planning Standards Board of India here last week. He added that India
However,
the Competition Act, 2002 (as amended by the Competition (Amendment) Act, 2007)
could come in the way of consolidation. One of its provisions requires an
enterprise proposing to enter into a combination via a merger or an
amalgamation to notify the Competition Commission. The commission has been
allowed up to 210 days to decide on it before the default clause kicks in.
RBI's comments come at a time when many in the Indian
industry feel that Indian banking has not kept pace with India Inc's funding
requirements. In the two years preceding the outbreak of the 2008 global
financial crisis, most business houses acquired multinationals through
leveraged finance, with the support of international borrowers. "Given the
crisis in the West, it would be difficult for Indian corporates to acquire
international assets as none of the large lenders are in a position to extend
funds for acquisition," said the head of a large consultancy firm. At the
same time Indian banks do not have the balance sheet size to fund large
corporates.”
The RBI group recommended a separate regulatory framework for FHCs and
a new law for regulating FHCs. While the RBI should be designated as the
regulator for FHCs, a separate unit within the apex bank should undertake the
regulatory function with staff drawn both in-house and from other regulators.
The group also recommended a consolidated supervision mechanism through
memorandum of understanding between regulators.
On listing the holding company, the working group has recommended that requisite space needs to be provided to the holding company to raise capital for its subsidiaries.
On listing the holding company, the working group has recommended that requisite space needs to be provided to the holding company to raise capital for its subsidiaries.
“The
financial services sector in India has been witnessing growth in the emergence
of financial conglomerates,” the RBI has stated, adding, “With the enlargement
in the scope of the financial activities driven by the need for diversification
of business lines to control the enterprise-wide risk, some of the players are
also experimenting with structures hitherto unfamiliar in India.” Obviously,
the central bank was referring to the state-owned premier bank of the country,
the State Bank of India (SBI) and the largest private bank of the country,
ICICI Bank, which had recently taken steps to set up ‘intermediate holding
companies’ for their non-banking operations such as insurance and asset
management. In a discussion paper on the
subject in August 2007, the RBI has preferred a financial holding company model
over an intermediate holding company model, as the latter is seen as less
transparent and difficult to regulate. The central bank had then struck down
proposals from SBI and ICICI Bank to set up intermediate holding companies.
ON STRUCTURE OF HOLDING COMPANY
The
RBI unveiled a fresh paper. The RBI also reasons that multi-layering of the
corporate structure is not considered good from the investors’ point of view as
they will not know where their will be eventually used. “Thus, it becomes
difficult for them to assess the true risk involved in their investments. The
government may transfer a part of the Rs 15,888 crore allocated for bank
recapitalization to the proposed bank holding company. While enacting a
legislation for the holding company, the government is also expected to amend
the Bank Nationalization
Act and the State
Bank of India Act.
The company is expected to be modelled on the lines of the Government Investment Corporation (GIC) of Singapore, although it will confine its activities to providing equity to public sector banks. According to the plan, the holding company - which will be wholly-owned by the government initially - will be permitted to list and raise funds later. This is expected to help the government save some funds which it has been allocating to banks to ensure that they have sufficient capital to meet the regulatory and growth requirements.
The difficulty relating to PSBs has been
recognised in the RBI report itself. If
the government decides to list the holding companies of the PSBs, it is saddled
with supporting the capital requirements of non-bank subsidiaries. If, on the
other hand, the step-down bank subsidiary is also listed, it poses
administrative and implementation challenges.
Private sector banking groups are likely to be given a
more straight-jacketed alternative—existing banks get a timeframe to migrate to
a simple structure, wherein the resultant structure has one FHC that holds all
entities directly under it. The report concludes that the one step structure is
adequate for the existing size and requirement of Indian FCs and does not
favour intermediary holding companies. While that may be true, it is more
likely to be a self-fulfilling prophecy. Given that the entire process of
creation of the regulatory framework around FHCs and the attendant legislation
will take considerable time, there is a case for thinking ahead and creating a
framework that will serve the need of the economy beyond what it currently is.
Ability to raise capital with ease will be one of the key drivers of growth in
the financial sector. The creation of a listed holding company on top of the
financial services companies may have implications for investors, given the
valuation discounts normally applied to holding companies and the varying
valuations of stocks across asset classes such as insurance, banking and
broking, not to mention the different FDI thresholds for different sectors. The
option to list individual entities has its own operational challenges.
An RBI
official said listing the holding company of a bank would set the stage for
consolidation of accounts in systemically important financial institutions. But the differences between the government and the
central bank may further delay the guidelines for new bank licences, Unless
there is clarity on the rules for existing banks, the RBI cannot issue
guidelines for new licences, as it will create two sets of rules - one for
existing banks and another for new ones.
The RBI's draft guidelines on new banking licences
also said that the NOHC would need to reduce its shareholding in the bank to
15% within 10 years and retain at that level. The RBI has suggested that the holding company of the bank gets listed
while the bank itself remains unlisted
The fallout for new licensees is considered to be less
than that for the existing banking and financial groups. It does, however,
raise the existential question of how these developments are likely to affect
the timeline.
The question
which remain unanswered is ‘Achieving a simple one step holding structure and
bringing all existing businesses under it may be easier said than done given
that most promoter groups hold their interest through holding companies’. Also,
if banking groups are to remain ‘predominantly’ banks, what happens to the
existing businesses of these groups? Do
they get regulatory indulgence or is it goodbye to banking dreams?
The group, headed by deputy governor of RBI Shyamala
Gopinath has suggested that the FHC structure should be made mandatory for new
entrants to the banking space. An FHC will typically have a bank, an insurance
company, an asset management company and others of the sort operating under it.
The Gopinath group has also recommended a fully-capitalised model for the
holding company instead of an intermediate holding structure as that would make
the relations between the operating companies and the holding company, complex.
Recently,
the government of India
A
holding company can directly go to institutions like LIC, offer ownership of
itself and ask for money, freeing up the government from any criticism for
taking direct help of others to mend its house in order, say analysts.
A holding company that decides on capital allocation
will likely have discretionary power to capitalise certain large banks at the
cost of the smaller ones. This will allow the government to actively push top
five-six banks to build scale. The finance ministry is considering using the
Specified Undertaking of UTI, or SUUTI, as a holding company for all the
state-run banks in a bid to fast track its budget proposal to house all
government holding in state-run companies under one structure to help raise
capital easily.
The
union cabinet has already approved a proposal to wind up SUUTI and shift its
assets to a new asset management company.
The
big five banks, other than State Bank of India India
The
need for large global Indian banks is being felt by various stakeholders as India
A
credit growth of 20% would require banks to grow their business by 25% every
year, according to bankers and this would mean increasing capital needs.
The
government may subsequently pare its stake on smaller banks to below 51% and
retain control on only such handful large banks.
“There
is no need for the government to hold more than 51% in all public sector
banks,” said a banking analyst .
“The
shareholding in other banks can be allowed to fall to 26-30%, enough for
effective control, while the money raised can be used to recapitalise bigger
banks,” the analyst said.
The small number of banks that control
half of the market share will allow the government to push through any kind of
market reforms, say analysts, and this will also allow far greater access in
raising fund through the market than what can be achieved through merger of banks.
A holding company, when listed, allows
tapping the capital market in two ways -- the bank that needs money directly
can approach the market as well as the money raised through the holding company.
Also, if the government ever wants to
create large banks to be in the top-50 of the financial world, it can pool
capital from smaller banks and allocate them to the ones that need money to
become big.
A holding company, owned by investors,
also enables the government to implement a consistent policy across banks and
thus also allow better compensation for bank chiefs as well as make the banks
more profitable and competitive.
The holding company may also take shape
of an “investment arm of the government of India
Out
of the 24 banks that government owns, in 10 banks it has a stake of less than
60%. The government stake in Bank of Baroda is 57.03%, the lowest that it holds
in any bank. Its stake in State Bank of India
Earlier at the economic editors’ conference the
finance minister had spoken of passing supplementary grants, if required. He
had set up the committee on capital requirements with the finance secretary in
the chair. It is required to come up with recommendations by November 15, 2013. The total with
capital requirements of all the banks are estimated to be Rs 3,50,000 crore.
Last year the government provided capital support of Rs 20,157 crore to a host
of banks owned by it. Other options include issue of preferential allotment of
warrants, preferential shares etc. Once Parliament approves the supplementary
grants, the government will decide how much money the holding company needs to
raise abroad, according to an official privy to the decision.
The Business Standard on Thursday, Jan 31, 2013 reported
“On April 24, 2008 in a major push towards consolidation in the
banking space, the Reserve Bank of India
The idea is to first seek consolidation on a voluntary
basis — as has been the stated stance of the government and the RBI. While the government has been pushing
for board-driven consolidation, almost no proposal discussed so far has
materialised due to opposition from unions and political pressure. The sources said enabling legislation for
forced merger of the banks has been provided under section 45 of the Banking
Regulation Act. Using this provision, the
RBI, under government advice, can push the merger of two banks The RBI said If
such mergers do not fructify, the regulator has suggested that the government
could step in to push consolidation. Sources pointed out that even in
the case of merger of a small private bank with a larger player in the private
sector, it takes a long time for the proposal to be approved by courts and get
shareholder nod. On the other hand, the clock is ticking for the RBI and the
government to open the doors to foreign banks.
According to the central bank's roadmap, foreign banks are slated to get
a more liberal access from 2009”.
Large lenders asked to handhold small
banks
The
Business line published the following article on On December 17, 2012
“As competition intensifies, size would matter for
PSBs.
Public sector bank (PSB) consolidation was a hot topic
in 2008-09. Mooted by the then Finance Minister P Chidambaram, the issue did
not get the required thrust after he left the Ministry. With him back in the saddle again, there is a
growing expectation that the issue will come up on the government’s drawing
board.
At the recent Bancon meeting, while addressing
bankers, the Finance Minister again raised the issue of PSB consolidation. The emerging scenario is also turning
favourable to the process of consolidation. Mounting pressures to issue new
bank licences, which will induce enhanced competition from foreign banks getting
full bank licences, and entry of a new set of private sector banks, will also
precipitate the PSB consolidation. The
Reserve Bank (RBI) has already set the process of new licences in motion by
approving the Dutch banking major Rabo Bank’s application for a full banking
licence. Goldman Sachs was also given a licence to undertake primary dealership
business in debt a few months back.
Big
Fish
The biggest whale in the Indian banking waters, State
Bank of India India
Once all its subsidiaries are merged with it, it would
be among the top 10 banks in the world in terms of various parameters. Grapevine
has it that recently the Ministry of Finance called the chairmen of SBI and BoI
on the issue of merger and if this were to happen, SBI will become the fifth or
sixth largest bank in the world. (Why not
SBI and PNB? Emphasis ours)? With the advent of new century, Indian
corporates are spreading their tentacles by acquiring companies abroad. For
funding cross-country acquisitions Indian banks should acquire size and
sophistication. Thus, there is no substitute for consolidation in PSU banks.
Pros and Cons
Despite the fears raked up by the happenings to large
banks in the US and Europe , that proved the hypothesis that ‘big banks cannot
fail’ wrong, there are some clear advantages that large banks enjoy. Bigger
banks would be in a position to take advantage of efficiencies of scale, scarce
talent could be utilised more fruitfully than in a smaller bank, better
exploitation of brand equity and capital utilisation.
By experience, one can say that the larger the balance
sheet you working on, more is the ability to weather economic ups and downs.
Most of the
other ticklish issues coming in the way of mergers can be sorted out very easily
today than four years back. The big
issue in bank consolidation then was the interface for various information
technology (IT) platforms used by different banks. Now, that is a non-issue. Most of the banks
have integrated operations with Core Banking Solutions (CBS) in place, and most
of these platforms are capable of talking to each other. The same is the case
with ATMs.
The Department of Financial Services has worked to
make PSBs become clones in terms of technology, standardisation of manpower recruitment,
accounting practices, and most chairmen of PSBs are working in tandem with the
advice of the Banking Division on these issues. And therefore, it would be easy
for consolidation.
Human resources issues have also been smoothened with
the same salary and perks structure adopted across PSBs. PSBs, having added 1.8
lakh personnel to their ranks over the previous year, are in a position to
accommodate the surplus staff in the wake of mergers rather fruitfully in
different roles.
Some of
the overlapping branches can be converted into offices for specialised
services. Even cultural issues are passé, with many employees prepared
to work in areas far away from their native place.
Hierarchy
issues at the top management can be handled by following the pattern adopted by
State Bank of India
Permutations,
combinations
The
first question that arises after initiating the process of consolidation is who
would be the predator and who would be the prey. It should be based on a clear criterion. In
the process of preparing PSBs for Basel-III guidelines, which seeks to raise
the tier-I capital to 9 per cent from 8 per cent now, the government is
expected to recapitalise banks to the tune of Rs 15,000 crore.
If the
mergers can address this issue and give some relief to the government, it would
be an added advantage, besides ensuring other synergies in scale of business,
even geographical spread (branch concentration) and lower NPAs of the merged
entity.
In the
process, some weaker banks must be able to find some strong banks in alliance,
besides it should improve the return on investment (RoI).
The
following are some combination* for undertaking consolidation of PSBs, in the
light of these parameters:
SBI, BOI
and BOB — To be among the largest banks in the world
Canara
Bank, Indian Bank, BoM, IOB and United Bank of India
PNB,
Vijaya Bank, Andhra Bank and IDBI — To be the third largest
Allahabad
Bank, Central Bank, Corporation Bank and P&S Bank — To be the fourth
largest
OBC,
Syndicate Bank, UCO Bank and Dena Bank — To be the fifth largest
(The
author is Chief Advisor, ‘Banking Law’, PDS & Associates, and former CMD of
Corporation Bank)
These combinations
have been formed keeping the CBS (core banking solution) platform in view,
officials said.
Inference:
From the chronological
sequence of events mentioned above it is pellucid that the setting up holding
company and consolidations of PSU banks are
‘equally likely’ events ( not mutual excusive ) of the same side of the coins orchestrated and endorsed by RBI, Government and IBA.
NUBE
HOLDING FIRM OPINION THAT HOLDING COMPANY FOR PSU BANKS IS NOT BEING A
GOOD IDEA AFTER ALL
The NATION
UNION OF BANK EMPLOYESS the 4th largest union in the comity of union
aprioi holds firm stand that The
finance ministry’s proposal to transfer all government holdings in public
sector banks to a single financial holding company (FHC) needs careful
consideration before it heads for cabinet consideration shortly.
·
The ostensible
reason behind such a proposal is to use the combined equity strength to get a
higher leverage in overseas borrowings for scaling up capitalisation of public
sector banks in line with the stringent Basel III norms on capital adequacy
that are set to kick in phases from 2014, going up to 2019.
·
Under the FHC
model, the identity of the promoter of PSU banks will change from the President
of India to the proposed FHC. Notwithstanding the fact that FHC’s promoter
shareholder will still be the President of India, and therefore, the FHC will
be a government-owned company responsible to the government and taxpayers, it
may well be possible to divert public attention from huge amounts of capital
infusion into PSU banks under the new dispensation.
·
This, especially
when not all state-owned banks are known to pursue prudential norms, and
require regular bailouts from the exchequer.
·
A significantly
high amount of capital infusion amounting to Rs 1.4 lakh crore is required for
the Basel III compliance over the next few years. Under the proposed corporate
structure, PSU banks will become subsidiaries of the FHC, which will, in turn,
manage their aggregate capital requirements.
·
A quick analysis
by Financial Chronicle Research Bureau of 24 listed PSU banks revealed
a collective market capitalisation of about Rs 4,00,000 crore, with 62 per cent
of this, amounting to Rs 2,50,000 crore, being the value of government
holdings. A little over 40 per cent of the government’s holdings are accounted
for by just one bank, State Bank of India
·
In the country,
the holding company format has so far been used by India Inc. Recently a
Reserve Bank of India
·
While some other
countries too use the holding company format to selectively manage taxpayer
money, its potential for misuse has been debated upon. Loss of transparent
accounting and indulgence in financial chicanery are some of the severe
allegations against its use by governments. Private companies, particularly the
listed ones, have to not only disclose their standalone financials to
shareholders, but also consolidated numbers.
·
While it is true
that an FHC for PSU banks will be able to better access foreign loans,
servicing those loans and re-paying them will still be the government’s
responsibility. Taxpayers have a right to be informed about the effect of
foreign borrowings on the exchequer, but an FHC would only keep such
liabilities hidden from the budget documents. The taxpayer deserves a better
deal than that.
One of the lessons of the financial crisis was the downside of having 'too big to fail' entities.
·
The sub-prime crisis of 2007, the consequences of which
are still being felt by the world economy, highlighted glaring deficiencies in
the regulation of banks and in the financial sector in general. A number of
measures have been taken both at the international level (under the auspices of
the Bank for International Settlements (BIS)) and by national regulators by way
of tightening bank regulation. Perhaps the most comprehensive is the Dodd-Frank
Act (2010) passed in the United States (US). A fundamental problem that remains
unresolved is what is called the too-big-to-fail problem or the problem posed
by Systemically Important Financial
Institutions (SIFIs). Banks that are very big (in relation to the size of
their economies) cannot be allowed to fail because the failure of these would
cause significant disruption in the economy. Knowing this, managers at these
banks can take enormous risks. If these work out, they will collect big
rewards; if they do not, the government will rescue them
·
Under Basel US
·
Volcker said the problems surrounding banks that are too
systemically significant to be allowed to fail have ‘not yet been convincingly
settled’, despite being ‘the heart of the reform question’ (Huffington Post,
20 September 2011).
·
It is more plausible that the problem of SIFIs is posed,
not by scope, but by bigness. Beyond a certain size, banks become difficult to
manage; they also pose systemic risks because of the difficulty in resolving
them when they fail. There may be greater merit, therefore, in addressing size
and concentration in banking than scope. The size of a bank’s assets in
relation to GDP and the share of the top five or six banks in total banking
assets may be more appropriate parameters to monitor. Large banks may need to
be broken up, not by limiting the scope, but by selling off assets across the
entire spectrum. Given the sizes of some of the large banks and the state of
financial markets, whether this is feasible at all in today’s context is a
different matter.
·
We also need to address ownership structure in banking,
an idea that is almost totally missing in the present debate. The scandals that
have made headlines in recent months – the rigging of Libor, money-laundering,
non-compliance with sanctions, etc – have prompted calls for a sweeping change
in culture at banks.
·
There is more than an element of delusion to these calls.
No major cultural change is possible under the incentives that go with private
ownership. What we need in banking is an alternative model in the form of
public ownership. It is necessary to have at least a few large banks under
public ownership. Then, shareholders, customers and employees, all have a
choice. They can go with the go-getting culture of private banks or the
risk-averse culture of government-owned banks. The culture in the system as
a whole changes, with conservatism in the public sector offsetting a
greater appetite for risk in the private sector.
·
Can government-owned banks perform in the face of
competition from private banks? We have tentative answers from the Indian
experience. Size confers an advantage as does access to government business,
managerial costs are lower, there is greater depositor confidence, and listing
on stock exchanges makes for better focus on commercial performance. A track
record of stability in earnings in itself can help improve market ratings.
·
Government ownership must be supported by more intrusive
regulation and supervision than has happened in the recent past in the west.
This must include norms for the composition of boards, approval of independent
directors, and approval of top management at banks. Norms for risk management
must go well beyond those prescribed by the BIS – risk management cannot be
left entirely to banks or to market discipline.
·
Everybody understands that the problem of SIFIs cannot be
tackled by increasing capital requirements alone. Perhaps, the time has come to
recognise that limiting the scope of banks is not the answer either. We need a
multi-pronged approach that addresses size and concentration, the ownership
structure and entails far more intrusive regulation than we have seen in the
recent past.
·
A serious issue
that needs informed public debate. Recently, govt. made seven groupings where smaller banks were
assigned to bigger 7 banks. It looked
like an ‘arranged courtship’. These days we are
hearing from the west a new phenomenon called ‘too big to fail’
What will the impact of such a concern
if we also just for aping the west to consolidate our banks to make them bigger
with all the NPAs. The rationale for such mergers needs to be known. Also, see the
stagnation of the merger of just two airlines. Will the Dept. of Financial
Services play an active role or merely be a fifth wheel ordering about the banks. Also will the
political leaders use their position and
talk to labour leaders and ensure their active and ensure their active
suggestion and participation
·
As one from
another branch of financial services, let us dust out from the archives how the
Congress ministers in the fifties successfully merged the 243 private insurance companies varying in every aspect into a
single LIC in just about four years.
That continues to be a classic case of excellent coordination between the
political leaders-civil servants, regulators, industry officials and above all
the employees and their unions.
·
The report on
currency and finance for 2006-08, released on Sep 05 2008, said the
introduction of Basel II norms could prompt small banks to merge with bigger
players to maintain capital adequacy. But, consolidation among large banks, in
particular, would raise competition and moral hazard concerns, that is, “too
big to fail”. A new report from a research division of the Reserve Bank of India
·
The RBI has advocated FHC/BHC structure in as much as the
banks would be much better protected from the possible adverse effects from the
activities of their non-banking financial subsidiaries. Infact, it may also be
possible to consider allowing non banking subsidiaries under the FHC/BHC
structure to undertake riskier activities hitherto not allowed to bank
subsidiaries such as commodity broking.
It has therefore contended that it will be useful to explore the
possibility of adopting a BHC/FHC Model. However, a proper legal framework
needs to be created before such structures are floated and it is ensured that
no unregulated entities are present within the structure. It ahs further stated that , it will be useful to contain the complexity
in the BHC/FHC Model as also in the Bank Subsidiary Model of conglomeration to
the bare minimum. Towards this end, it will be desirable to avoid intermediate
holding company structures.
·
The major motivation for FHC/BHSC MODEL as outline by RBI is
given below
·
In terms of existing instructions, a bank’s aggregate
investment in the financial services companies including subsidiaries is
limited to 20% of the paid up capital and reserves of the bank. In a BHC/FHC
structure, this restriction will not apply as the investment in subsidiaries
and associates will be made directly by the BHC/FHC. Once the subsidiaries are
separated from the banks, their growth of the subsidiaries/associates would not
be constrained on account of capital.
·
In the context of
public sector banks, the Government holding through a BHC/FHC will not be
possible in the existing statutes. However, if statutes are amended to count
for effective holding then, the most
important advantage in shifting to BHC/FHC model would be that the capital
requirements of banks' subsidiaries would be de-linked from the banks’ capital.
Since the non-banking entities within
the banking group would be directly owned by the BHC, the contagion and
reputation risk on account of affiliates for the bank is perceived to be less
severe as compared with at present.
Figure-1: A typical bank-centric organization
structure - Bank Subsidiary
Model
Bank
|
Others
|
Insurance
|
Securities
|
Asset Management
|
Figure 2: A Financial
Conglomerate with holding company at the top
BHC / FHC
|
 Main Banking subsidiary |
Insurance
|
Securities
|
Asset
Management
|
Others
|
Other banking
subsidiaries
|
3. A Financial conglomerate with holding company at the
top as well as an intermediate holding company
 BHC / FHC |
 |
 Main Banking subsidiary |
Intermediate
holding company
|
Housing
Finance
|
Others
|
 |
Other banking
subsidiaries
|
General
Insurance
|
Life
Insurance
|
Asset
Management
|
·
Let us look into Recommendation 15, 16 of
the working group of RBI
Recommendation 15:
·
If
the holding company is to function as an anchor for capital support for all its
subsidiaries, requisite space needs to be provided to the holding company for
capital raising for its subsidiaries. In
this context it is possible to envisage to have ether a listed holding company
with all its subsidiaries unlisted or both the holding company with all or some
of the subsidiaries being listed depending on the objectives and strategy
of the financial group and the prevailing laws and regulations on investment
limits .Given the circumstances
prevailing in India listing can be
allowed at the FHC level as well as the subsidiary level subject
suitable safeguards and governance /ownership norms prescribed by regulators from time to time
Recommendation 16 for Public Sector Banks
·
There is a
constraint of minimum government shareholding of 51% in public sector banks.
·
Option I: Government holding in PSB’s gets
transferred to a holding company which also holds shares in demerged bank subsidiaries.
Because of the need for government to hold minimum 51% in the bank, this option
will require the FHC to be listed while
bank subsidiary can remain in unlisted. Government would continue to
support capital requirements of the bank as ell as no banking subsidiaries
·
Option II: Government continues to hold directly in
the bank while shareholding of all private shareholders gets transferred to
holding company. The holding company will also hold shares in the demerged
banks subsidiaries. The government has to provide support the capital
requirements of the bank. But it states further that “Although, the public
sector character of banks would not get compromised and existing government
powers can continue to be exercised, the challenge will be governance of the
bank with two blocks of directors who could have differing interests.
·
Hence there is every likely hood the first
option will be implemented by the
government. In which case with all the nationalized banks will become
subsidiaries of the single monolithic, oligopolistic, financial conglomerate
FHC. With the voting rights of the shareholders of public sector amended to 10%
by the parliament recently, there is every possibility shareholder
directors& other directors of FHC will wield considerable powers to dictate
terms on the subsidiaries. This makes the board of FHC omnipotent and that of
the subsidiaries rudderless and or of recommendatory nature of being
accountable to the apex board of FHC. In
otherwords the policies of the subsidiaries will be defacto decided by the FHC,. as is being done by the government
even now in public sector banks despite declaring autonomy to PSB’s on paper.
That nothing is decided without the approval of Government and RBI
directors despite majority directors supporting a proposal in the board
underscores this irrefutable fact that board of PSB’s ‘is not above board with
genuine powers of autonomy and all its policies are controlled by remote by the
government . The major fallout of this
option for this pyramid model of FHC discussed above will not only be on the management of subsidiaries but also on their recognized unions which will become ineffective as most of HR
policies arrived hitherto under bipartite culture with respective managements
will be dictated by board of FHC, which in the long run make it inactive weakening its identify and paving way for consequent deunionisation.
·
Another question which remains unanswered
is the constitution of board of FHC. There is every likelihood the government
will take umbrage, in as much object of the FHC is to manage only capital requirements there is no need for
workmen/officer nominees in its board.
·
In tune with
the policies of IMF, even in 1981, government of India
·
The same happened
to powers of workmen nominee on the Board of Nationalised Bank, since the
workmen directors had become “essential nuisance” for them (Government
introduced ESMA in 1981) as they
had freely, frankly, fearlessly,
forthrightly participated in all the machinations of banking growth, such as
analysis and sanction healthy loan proposals, and ensuring that a hard working
sincere official, without God-Father also comes up in the life and given his
due share of promotion. In other
words, from the trade union point of view we were not satisfied with mere
participation since it would mean our agreeing to the way bank is managed. We
therefore, made it our business to ensure that the management of the bank does
not leave much to be desired and resolved to have a say how the bank is to be
managed through our nominee to ensure ‘Board’ is above board.
·
It is because of
such sincere participation and involvement of workmen directors, notification
emanating from the distilled wisdom of Department of Bankers was issued
replacing the powers of board on promotions with DPC. Further frequent
interventions of workmen nominee, in sanctioning large proposals for industrial
houses and their constant vigilance on men and matters irked the powers that
be. Therefore slowly the powers of the
employee nominees were sought to be curbed.
Surreptitiously the Management Committee System was introduced where the
CMD, ED, Govt.nominee, RBI nominee and the Chartered Accountant Director are
the permanent members and one from the other Directors is given rotation for
six months only. The result is at the
most the employee nominee could be a member of the Management Committee only once
in six months during his tenure.
·
It should be
noted that all vital decisions regarding sanctioning of credit proposals,
writing offs; compromise proposals, etc. are decided by this all powerful and
omniscient Management Committee. In
short the Management Committee usurped the powers of the Directors and
ultimately made the Board a real showpiece before which matters are placed only
for information and confirmation.
·
It has further
been seen to it that the employee nominee does not find a place in the Audit
and Inspection Committee throughout his tenure thus preventing him from having
even a cursory reading of the RBI Inspection Report of the respective Banks
which contains the real picture of the Institution.
·
Despite all odds,
clipping of powers from time to time the “directives” of ministry, our nominees
have been discharging their functions in the best
traditions. Who have ensured that the
banks shall be run not only for our common good but also for
the country’s good and for that there should be equal power to the true
representative of bank, workmen nominee.
·
With the powers
of board getting curbed in this FHC
model as explained above, in future all the internal agreements, settlements, customs, practice
and culture of individual banks arrived at through bipartite culture between
the union and respective banks will sealed in airtight containers and will now
be replaced by Notifications,
Order, Directives(NOD’s)of the FHC , the consequeses of which will be
disastrous to recognized unions in the subsidiaries( Nationalized Banks ) under the monolithic FHC .
The very objective
of setting up the holding company is to raise money for capital infusion and
apportion it to various public sector banks as per their requirements, so that
the exchequer would no longer have to bother about making provisions in the
budget, in managing which the government has been walking the tight rope in
view of the difficult fiscal situation. The holding company will raise capital
to meet Capital Adequacy Ratio, as per Basel III standards which is a measure
of a bank’s capital, expressed as a percentage of the bank’s risk-weighted
credit exposure, is also expected to increase, as the RBI a credit growth
increase.
It is
pertinent to mention here the Countries that failed to enforce Basel
The scorecard issued on Financial Times on October 18, 2011 by the Basel Committee on Banking
Supervision, which writes the rules, raises serious questions about whether some of the world’s financial centers are paying
lip-service to global efforts to make banks safer and prevent a repeat of the
financial crisis.
Six of the 27 countries that set global banking
regulations still have not fully implemented the Basel II reforms agreed in
2004, and only 11 of the 27 have drafted rules to enact the tougher Basel III standards that are
supposed to replace them Both the US and China are among the countries that are
in the process of implementing Basel II.
The Basel II framework is widely seen as
having contributed to the 2008 banking crash by allowing banks to understate
risk and hold too little capital against unexpected losses. However, its risk-based
structure remains an essential part of the stricter Basel III framework, which
includes higher capital requirements and the first global liquidity rules.
The scorecard is part of a larger effort to shame big
countries into implementing the commitments they have made at annual meetings
of the G20, a group of the world’s richest economies, and to insure that
financial institutions will not avoid tougher rules by shifting to new
locations.
The Basel II report card found that one
member country,
EU member countries have for
months have been debating how to implement the minimum bank capital standards
agreed under Basel III. Their arguments have unfolded as the EU works to
complete its fourth Capital Requirements Directive and its Capital Requirement.
There are reports as of 27 May 2012
debates continued with UK, Sweden, and
Spain, with the support of the ECB ,taking
Osborne View – named after perhaps its most ardent proponent, George
Osborne (UK Chancellor of the Exchequer)and Germany and France, with the
support of the European Commission, opposing their views and taking Schäuble
View in honour of Germany’s Minister of Finance, Wolfgang Schäuble. With regard
to Capital Requirements Directive and
its Capital Requirements Regulations per Basel III.
Hence what is the
urgency to push for consolidations / FHC without a, credible, transparent,
accountable social dialogue in India
That
being the case, still with the view of reducing the risk weighted credit
exposure, i.e. reduce the NPA’s the
UNIONS time and again had demanded the following time and gain to strengthen
PBU banks in right earnestness.
·
Stringent
measures should be initiated to recover the increasing Bad Loans in the Banks.
·
Securitisation
Act was claimed to be used against the defaulting borrowers but nothing
worthwhile has been achieved by utilizing the powers under the Act. The Act has not been enlarged to cover
attachment of personal assets of the borrowers and their kith and kin. A large
number of the defaulters who created NPAs in the first place have got their property back at a much lower price,
and will not have to repay loans. If this becomes a part of the system, those
who take loans from banks in future will not be serious about following norms
and regulations
·
A vicious circle
that will eat into the vitals of the banking system will be created. Hence the
unions demands the establishment of an independent statutory audit system in
banks, along the lines of the Comptroller and Auditor General (CAG).
·
Stop
needless evergreening
/restructuring of NPA’s
·
Government should Publicize the list of defaulting
big Borrowers – declare willful defaults as a criminal offence – confiscate
Properties of individual directors in defaulting companies – make defaulting
companies/Directors ineligible for further Bank Loans and other facilities –
initiate strong legal reforms to expedite recovery of Bank Loans
Needless to underscore here despite the long rope that
the NPA group gets from its bankers, it
often accuses the lending institutions—in its court case—of not being as tough
on other borrowers who “stand on the same footing”.
The big question is this: if
the Group says it’s bankrupt, why does it fight institutions trying to take
over its assets? Obviously, the Group still has assets worth fighting.
Had these measures been
implemented the PSB‘s would have emerged much stronger and there is no need to
adapt westerns models which have proved
ineffective and junk in their own countries. The flip-side of banking sector reforms has been the overemphasis on
profits and virtual neglect of the distributive role of the banks. Now, only
strong and high net worth companies within the organized sector are capable of
raising funds, declaring it NPA, get ting it restructured at a considerable
lower rate of interest, while the credit disbursal to small borrowers has
sharply declined.
That is why we say that "Financial
Reforms" and NPA’s &Scams are like an Object and its Shadows! About
which we shall cover in e our next series titled Merger Mania III .
Suffice
to state, in this background, the current merger moves in any form, i.e. setting
up of holding companies and /or by consolidation of PSU banks is unwarranted. Hence the Government should
drop these move and focus on efficiency Success
of any economic reforms is to be judged on the touchstone of all positive
Benefits to vast masses of our country where mounting unemployment and price
rise of essential commodities constitute the worst curse of the nation. Any
reforms of the banking system should be built on the institutional structure
that has created it rather than seek to destroy it as is now being done. The
banking industry is in need of true reforms in pursuit of true nationalization,
but the strategy for it does not have to subvert the basic goals of development
nor does it have to be forced at a pace with adhoc, arbitrary moves of mergers,
FHC‘s etc tinkering of banking regulation acts, etc without any public debate
and study that will result in liquidation of the institutional structure built
up over decades of faith.
As
Indians we should take pride that Indian banks have at historically maintained
their core and overall capital well in excess of the regulatory minimum all
through its chequerd, purposeful history of social banking. Therefore the raison d’etre of the adoption of
the FHC model itself is questionable.
When
the financial crisis intervened, the talks of bank mergers receded into the
background in the wake of the 'too-big-to-fail' argument advanced
in favour of rescuing large imprudent banks which means it is difficult to
allow large banks go under, without such failure having far-reaching systemic
implications. But it has come up again at the annual banking
summit in Pune last week where the FM urged banks not to fear consolidation. He
is entirely right. PSBs have no need to fear consolidation but, equally, they should not consolidate out of fear.
NUBE SHALL NOT
ALLOW THIS “Clearance Sale” of Indian Banking Industry by the Government. We
therefore have to be in readiness to launch a CAMPAIGN and fight resolutely to
frustrate the evil and sinister designs of the Government. Let
us prepare ourselves to fight to preserve our IDENTITY by opposing the merger move. The one who is courageous
never has a doubt of being fortunate. Even if there are difficult situations
and challenges, the faith of being fortunate never fades away. This faith
enables such a person to recognize and use the available resources in a
worthwhile way. Even during difficult situations, there is never a need to stop
as faith gives courage to move on. Let
us prepare our heart and minds for this faith and struggle.
To be
continued …..
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