God knows how the same government will be able to control , monitor and safeguard big entities created by merger of banks. GOI failed to control railways and telecom sector , how will they stop loot in these big entities is a big question.In absence of proper and adequate control big entities like Lehman Brothers, AIG in USA failed.As such the theory of "Too big to fail" propagated by learned FM Mr. Chidambram does not hold good in India where none of department functions honestly and effectively and where all offices and all departments are victim of political exploitation.
P Chidambaram May 25, 2013 Last Updated at 21:44 IST
'Bank mergers lead to too-big-to-fail entities'
There are massive gains, both private and societal, from mergers and integration in industries: economies of scale, ease of information transmission, reduction of uncertainties, and synchronisation of demand and supply are just some of the benefits of integration. At the same time, we have to ensure that mergers do not substantially reduce competition and consumer choice.
A good example is the telecom sector. Given the high costs and rapid pace of technological development, telecom is a market where there are obvious gains from integration. However, as has been shown by developments in the US and Europe, consumer experience is extremely sensitive to the prevailing market structures. What is important is not just to ensure current competition between existing players, but also potential competition between existing players and new entrants, and between current technologies and emerging technologies. At the same time, regulators need to keep in mind the feature this sector has of a natural monopoly, with large up-front fixed costs and low variable costs. Such industries can succumb to ruinous competition, where no player makes enough money to be financially healthy...
The Indian telecom market has thrived with competition. Indian call rates are among the cheapest in the world, as Indian firms have evolved a uniquely Indian business model. Large volumes have, of course, helped, but those large volumes and the broad reach of communications - a cell phone in almost every hand - would not have been possible if it were not for the low price emerging from the business model. However, there are downsides. Quality has suffered. The sector is laden with debt. New players are loathe to enter and some existing ones are threatening to quit. Auction of spectrum has found no bidders in several circles. Going forward, though, one can foresee the continuing need for regulation to ensure competition, innovation, and low rates and better service for the consumers...
There are other sectors that may well need restructuring, and each sector has its own issues. For example, some banks, including some public sector banks (PSBs), among the 26 PSBs that we have, may be better off merging.
A good example is the telecom sector. Given the high costs and rapid pace of technological development, telecom is a market where there are obvious gains from integration. However, as has been shown by developments in the US and Europe, consumer experience is extremely sensitive to the prevailing market structures. What is important is not just to ensure current competition between existing players, but also potential competition between existing players and new entrants, and between current technologies and emerging technologies. At the same time, regulators need to keep in mind the feature this sector has of a natural monopoly, with large up-front fixed costs and low variable costs. Such industries can succumb to ruinous competition, where no player makes enough money to be financially healthy...
The Indian telecom market has thrived with competition. Indian call rates are among the cheapest in the world, as Indian firms have evolved a uniquely Indian business model. Large volumes have, of course, helped, but those large volumes and the broad reach of communications - a cell phone in almost every hand - would not have been possible if it were not for the low price emerging from the business model. However, there are downsides. Quality has suffered. The sector is laden with debt. New players are loathe to enter and some existing ones are threatening to quit. Auction of spectrum has found no bidders in several circles. Going forward, though, one can foresee the continuing need for regulation to ensure competition, innovation, and low rates and better service for the consumers...
There are other sectors that may well need restructuring, and each sector has its own issues. For example, some banks, including some public sector banks (PSBs), among the 26 PSBs that we have, may be better off merging.
The need for two or three world-size banks in an economy that is poised to become one among the five largest in the world is rather obvious. At the same time, mergers may reduce competition in certain segments or geographies substantially, and may alter competition between banks and non-banks.
Are our regulators well positioned to evaluate the consequences to competition in different sub-markets and across regulatory jurisdictions?
Is there a role for the Competition Commission of India (CCI) here?
Finally, we have seen bank mergers lead to too-big-to-fail entities.
What constitutes a merger too far?
How do the relative merits of prudential regulation and competition regulation weigh?
Monopolies
Let me turn now to pure natural monopolies. They arise when there are gains from concentration of ownership, for instance, because of large upfront investments. Fortunately, there are fewer and fewer situations where pure natural monopolies exist. For instance, power distribution used to be thought of as a natural monopoly, but given the advances in technology, we can allow multiple producers to distribute via the same grid - indeed, much of India is moving this way. Nevertheless, there are still a number of areas, many of them involving services to the public such as water distribution, which are natural monopolies. Given that we are increasingly turning to private firms in these areas, we do need regulation. We need separate regulators for such sectors, whose role will be to keep the private producer working for the public interest while ensuring the producer makes reasonable profits and that the public sector does not transfer undue risk on to the private sector...
Public sector enterprises
Monopolies
Let me turn now to pure natural monopolies. They arise when there are gains from concentration of ownership, for instance, because of large upfront investments. Fortunately, there are fewer and fewer situations where pure natural monopolies exist. For instance, power distribution used to be thought of as a natural monopoly, but given the advances in technology, we can allow multiple producers to distribute via the same grid - indeed, much of India is moving this way. Nevertheless, there are still a number of areas, many of them involving services to the public such as water distribution, which are natural monopolies. Given that we are increasingly turning to private firms in these areas, we do need regulation. We need separate regulators for such sectors, whose role will be to keep the private producer working for the public interest while ensuring the producer makes reasonable profits and that the public sector does not transfer undue risk on to the private sector...
Public sector enterprises
In theory, public sector undertakings (PSUs) are not influenced by pure profits, and are an arm of the government. As such, concerns about excessive prices and anti-competitive practices may seem unwarranted. Yet, this assumes an idealistic view of PSUs that is not borne out by reality. As an institution, a PSU may well care about its profits and market share as much as any private sector entity. Moreover, the deadening effect of lack of competition or the lack of incentives to innovate or produce quality goods and services is as likely to affect PSUs, where survival is assured, as it does private sector enterprises. But perhaps the most important reason to bring PSUs under scrutiny for anti-competitive practices is that we increasingly have an open economy, where the private sector has to compete with the public sector. A level playing field is in the best interests of the public - the consumers whose interests the CCI is mandated to protect.
PSUs often are handicapped by government regulations on recruitment, pay, procurement and pricing that limit their business independence and flexibility. They are also open to government directives. While these directives are rare and usually in the larger public interest, they can detract from firm efficiency and profitability. Sometimes, to presumably compensate for these handicaps, PSUs are given special privileges - they are favoured in government contracts, for instance.
Favouring PSUs by the government can be anti-competitive, and create an un-level playing field. In the medium term, we have to remove the constraints on PSUs that limit their ability to compete, even as we take away special privileges and make the playing field as level as possible. There are difficulties in doing that. For instance, the public may believe, or even expect, that PSBs have the implicit protection of the government, and are thus safer. An important role of the CCI in the years to come will be to guide us on how the interaction between the government and PSUs should play out to create the most competitive environment that we can.
http://www.business-standard.com/article/opinion/bank-mergers-lead-to-too-big-to-fail-entities-113052500702_1.html
Q4 Scorecard: PSBs continue downslide, pvt banks shine again
The number of restructured loans and defaulters have also hit record highs, but mostly for the public sector banks
Private banks continued to outshine their public sector peers on both profitability and asset quality, highlighting yet again poor risk management and recovery of the government-owned lenders, analysts said.
Private lenders also fared much better during the January-March quarter when it came to growth in loans and deposits, as also asset recoveries despite weak economy and choking credit demand.
The number of restructured loans and defaulters have also hit record highs, but mostly for the public sector banks.
Balance-sheets of the banks throw up starkly contrasting results. Analysts and some senior public sector bankers blame the poor risk management skills, coupled with unnecessary political interferences in the functioning of state-run banks for the mess they are in.
Industry leader State Bank of India reported 19% fall in profit for the fourth quarter, 2012-13, at Rs 3,299 crore- its first quarterly fall in two years. Others like BoB, PNB and BoI too have reported sharp fall in quarterly profits.
However, private sector rivals ICICI Bank and HDFC Bank continued to post higher profit growth on stable asset quality.
SBI's gross NPA rose to 4.75% during the quarter from 4.44%. Its net interest income declined 4.42% to Rs 11,591 crore, while the net interest margin fell to 3.34%, a decline of 13.2%.
Other PSBs that reported sharp dips in profit include Allahabad Bank, United Bank, IOB, IDBI Bank.
When asked at an event here for his response to the drop in net profit of many public sector banks, Financial Services secretary Rajiv Takru said: "I am not in love with these poor numbers. It is akin to asking someone who got bashed up on the road how he feels about it."
An ex-state-run banker told PTI on condition of anonymity: "Public sector banks should be given more freedom in their day-to-day affairs. While incentivisation, which is absent at public sector banks has its negatives, it also helps bankers perform better and more responsibly. All we need is less political interference and more professional freedom."
A banking sector analyst concurred saying that while there are many levels of risk management mechanisms at private sector banks, this is in effect absent at most of the public sector ones as there is too much petty politics at the local as well as the national level.
"It is not that private banks are not into rural lending but they have better skills at recovery. And more than a third of the business comes from non-urban centres for most of private banks today," said a banking analyst at a brokerage.
Another analyst said: "Private banks have specific set of people looking after specific work. For instance, there are separate set of people for sales, disbursals, recovery and risk monitoring. But this is something that public sector banks don't have. So investing with specific tasks could be a big beginning for better bottomlines."
BoB net fell 32% to Rs 1,029 crore as provisions doubled to Rs 1,598.40 crore. Its gross NPAs rose to 2.40% from 1.53%, and net NPAs more than doubled to 1.28 from 0.54%.
Allahabad Bank's Q4 net profit plummeted to Rs 126.15 crore, as against Rs 400.22 crore in the year-ago period; United Bank (Rs 31.18 crore, as against Rs 149.29 crore), Indian Overseas Bank (Rs 58.86 crore versus Rs 528.81 crore), Bank of India (Rs 756.57 crore versus Rs 952.73 crore) and Bank of Baroda (Rs 1,028.85 crore as against Rs 1,518 crore), while Dena Bank's net halved to Rs 125.67 crore due to higher provisioning and contingencies, which rose to Rs 342 crore.
In contrast, private lenders fared better on all the asset quality fronts and especially in profits and lending, while keeping a tight leash on bad assets.
HDFC Bank reported over 30% spike in net profit to Rs 1,889 crore, for the 38th quarter in a row on the back of a 206% rise in net interest income at Rs 4,295.3 crore. Its gross NPAs improved to 0.97% in FY'13 against 1.02% reported in FY'12; net NPA remained at 0.2%.
Similarly, ICICI Bank Q4 net profit jumped over 21% to Rs 2,304 crore on core income growth and an expansion in margins. Its net interest income grew 22% to Rs 3,803 crore, net interest margin rose to 3.3 from 3.01% even though it added Rs 779 crore in gross NPAs.
Axis Bank net rose 22% to Rs 1,555 crore on a 24.2% spike in core income growth to Rs 2,664 crore. This is despite the fact that it saw a three-fold spike in provisions at Rs 595.35 crore from Rs 139.28 crore due to additional Rs 240 crore put into a special contingency fund.
Also, for the three top private banks, their NPAs remained stable with ICICI's net NPA sequentially rising just 1 basis point to 0.77%, Axis Bank and HDFC Bank's net NPAs were flat sequentially at 0.32% and 0.2%, respectively.
However, there were some exceptions amongst the PSBs. The most notable one of the Central Bank of India which had net profit of Rs 169.15 crore, against a net loss of Rs 105.23 crore in Q4 of FY'12. Its provisions came down 48% to Rs 445 crore, while gross NPAs declined to 4.80% from 4.83% and net NPA to 2.90% from 3.09%.
Syndicate Bank nearly doubled its Q4 profit to Rs 592 crore on account of lower provisioning and contingencies. Its net NPAs came down to just 0.76% from 0.96%, while gross NPAs too fell to 1.99% from 2.53%.
Andhra Bank too saw a marginal rise in net to Rs 345 crore, but net NPAs soared to Rs 2,409 crore, while OBC net rose over 16% to Rs 308 crore but mainly driven by increase in non-interest income and recoveries of over Rs 550 crore from technically written-off accounts. Its the NPAs rose to 2.27% from 2.21%.
Vijaya Bank too reported a strong 24% rise in net profit for Q4 at Rs 224 crore, despite a rise in gross and net NPAs at 2.17% and 1.30%, from 2.93% and 1.72%, respectively.
Private lender ING Vysya too reported 34% rise in net to Rs 170 crore on improved asset quality. Kotak Mahindra Bank fared better with a 47% rise in net income to Rs 436 crore on the back of sound rise in core income though its NPAs rose a tad to 0.64 from 0.61%.
The only major private lender to report a drop in profit was Federal Bank which saw its net dipping 6.6% to Rs 221.94 crore in the March quarter. Its gross NAPs rose to 3.44% from the 3.35% while slippages rose to Rs 357 crore in the March quarter.
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