Merger Of Banks And Privatisation Of Banks

PRIVATISATION OF BANKS – A NATION’s PROBLEM-By Sri  G V MANIMARAN

Dear friends,

An atmosphere is created in the financial sector that the Merger of the Banks and the Privatisation in the Banking Industry is imminent and all the stake holders are only waiting for the date of formal announcement.

It has to be accepted by all the stake holders and particularly the work force that, though it is highly organised and structured, failed to register its protest loudly.

The primary stake holder and the major beneficiary of public sector – the Indian Public- maintain cool, as if it is an issue to be fought by the employees of the Industry.

In this background, the Government has accelerated its pace towards the process of privatisation which was initiated exactly 25 years back.

Yes friends,

The privatisation move was launched in ’90 and the well oiled Government machinery through the other Institutions like RBI and IBA, strategically has been executing relentlessly with all amount of patience throughout which has reached the climax now.

Many committee reports in the name of experts were released during this long drawn process, which has been slowly injected as an anesthetiser to cause an insensitivity among the stake holders.

Let us list out the various steps employed over a period of 25 years to transfer the huge public sector assets in the hands of private sector.

A big publicity and propaganda was unleashed during 90s on the Government’s inclination towards privatisation and attempts were made to influence the public towards privatisation.

Government holding was reduced in the Banking sector and the Nationalised Banks had to shift their status from “ WHOLLY OWNED BY GOI to GOI UNDERTAKING” which resulted in an inclusion of a set of directors in the Board under the category “ SHARE HOLDER’S DIRECTORS”.

Shares were allotted to employees too under preferential quota and financial assistance also was extended to them in order to silence them.

Term lending and mutual fund institutions like ICICI, IDBI and UTI became commercial Banks through reverse merger process.

Private Banks were introduced so as to create a competition with the PSBs but also to create a scene to compare the products of the private banks with the PSB products.

Experienced employees who were the committed & involved members of the organised trade unions were encouraged to go out in the name of SVRS.

Embargo was employed in recruitment in the banking sector from 2000 onwards despite the PSBs were increasing their business and presence exponentially.

Banking functions were linked to the capital in the guise of implementing Basel norms.
New accounting standards were introduced which brought a new nomenclature NPA and provisioning norms were introduced.

Using the two strings NPA and PROVISIONING NORMS, the declaration of the net profit by PSBs were controlled.

After blocking the rich capital possessed by the PSBs towards manufactured NPA, business of the PSBs were restricted in the name of inadequacy in capital.

Illogical and illegal decision of “non infusion of capital” to the under performing Banks was announced.

Governance structure of the PSBs were changed by nominating the non executive Chairman and by appointing MD & CEO from the private sector.

PSBs were instructed to consolidate the bad debts in the name of STRATEGIC DEBT RESTRUCTURING and in the process banks were discouraged to initiate even the normal recovery process. Besides, the banks were encouraged to extend additional funds to such corporates whose liability was restructured to show performing assets.

Suddenly initiated the process of Asset Quality Review by the RBI which is totally against the functional autonomy being now enjoyed by the PSBs, and arm twisted the performing banks to declare loss by making huge provisions towards such accumulated bad debts.

Openly declared through Gyan sangam the division of banks as Acquirer and target banks based on their assets.

Share prices of the PSBs were reduced to rock bottom and announced to dilute the Govt. holding to 52% - an orchestrated drama to hand over the public sector to the private hands at cheap price.

It is a well drafted drama enacted by the Government over a period of 25 years excellently stage managed by the controllers of the Banking Industry and also with the special appearance of committees in the name of Industry experts..

I was wondering where and who wrote the script till I came across a research study by the scholars of of Malaysian university whose report is reproduced below.

They have listed the various steps initiated by the Britain during their successful execution of privatisation by Madam Margaret Thatcher.

You will be able to understand the similarity, when compare the highlighted portion of both the parts

LESSONS LEARNED FROM THE EXPERIENCES OF PRIVATISATION
IN SOME COUNTRIES WITH DIFFERENT ECONOMIES (SPECIAL
REFERENCE TO THE EXPERIENCE OF PRIVATIZATION IN EGYPT)

Ali Abusalah Elmabrok Mohammed 1,*, Ng Kim Soon2, Abdalla Ab Sinusi Saiah3 & Abdul Talib Bin Bon4
Faculty of Technology Management, Business and Entrepreneurship
University Tun Hussein Onn Malaysia, 86400 Parit Raja, Batu Pahat, Johor, Malaysia
Tel: 60-127682709 E-mail: alialisabha@yahoo.com

ABSTRACT

From all the accumulated experience of privatization, new results have been added to the outcome of international experiences in this area, as these experiences are worthy of study so as to avoid the negative aspects and follow the positive aspects in the implementation of future privatization projects , but the majority of findings suggest the
importance of taking the circumstances and the local variables of economic, social, political and legal into account when preparing the strategies of privatization and their implementations, as there are inferred global indications which show that the experiences of privatization cannot transfer its entirety from one country to another, and this paper focused on a number of international experiences in the privatization program for the countries that differ in its economic, and vary in the variables of political and social REO , in the periods of the privatization program, with particular reference to the Egyptian experience.

1. INTRODUCTION 

There have been many terms in recent times to express the process of converting some production units (at the national level), the scope of the public sector to the scope of the private sector, notably the privatization and privatisation, expropriation and other public. But it is more common in these terms of use is privatization, a term used in this study, and has appeared numerous definitions of privatization, some say that it's as a transfer of ownership of the project from the public sector to the private sector. In another definition refers to privatization "convert public property to the private sector, the management or rent, or share or buying and selling in what follows the State , in the various sectors of economic activity or area of public services." In the last definition is seen "as a process of transfer of ownership and operational management of the state-owned enterprises to the private sector, either in part or in full, and the private sector can be either institutions or businessmen or foreign companies.

In another definition refers to privatization "transfer of ownership of public facilities to other parties that you manage, in accordance with the principles of the private business sector, indicates that the definition of three to privatisation is to increase the efficiency of the management and operation of public projects by relying on market mechanisms and arrangements to get rid of bureaucracy.

Experience of privatisation in Britain: 

Characterised by the British experience in successful privatisation, since it began with the Conservative government led by Margaret Thatcher, that the reasons for success had gathered, namely, at the first beginnings in this area, so are actually the pilot experiences in terms of the configuration of legislative, political and economic relations with the reforms in the market securities and tax structure, then the inclusion of privatisation of all sectors of national economy of goods and services, which focus on the promotional efforts:

• Use of media campaigns and advertising-intensive sectors, each addressed to the target market (people - investors - employees - managers - official bodies - political leaders and society); in order to convince them and encourage them to the feasibility of privatisation.

• Take-out in the method of privatisation, in order to give opportunity to the efforts of public relations, publishing, media and personal selling, advertising and publicity Impact to occur.  

• Focus on the quality of the product in the issues of privatization, since the focus is on winning institutions in each sector, to be converted typically, to be an example to the rest of similar institutions.  

• Focus on the attraction and strategic partnership for investors and citizens, managers and employees, and founders of companies, to expand the ownership base, as follows: 

1. Encourage the State of the founders in the first place to buy a share of the state of the stock or part of it.  

2. Encourage managers and employees by giving them priority in buying shares, or give them shares compared to their share in the profits or reducing their eighth stock, or give them an incentive to buy, or give talented employees free shares for being with primary responsibility for the continuation of their giving to the company, develop and duplicate (giving clear advantages for employees).  

3. Encourage investors to buy shares by giving them full information and truthful shows in the trend of the real opportunities for profitability in the companies offered for sale.  

4. Reduce the value of the shares or instalment price or to give priority to requests from small contribution. 

5. Restrictions on foreign investors in the privatisation process, by demanding enrolment in the register of foreign shareholders in the State, and not to increase the share of foreign investors for 15% of the total shares of the company, with no foreign participation in the Board of Directors. 

• Keep the government paced specially called golden share in the privatised company, which is entitled to attend the General Assembly, voting, and the appointment of a representative of business in the Governing Council, and also have the right to object in cases of emergency on some decisions, and this gives a reliable picture of the citizen because the companies privatised operating state in order to monitor the public interest, without prejudice to the rights of deliberate investors and shareholders.  

• Change managers in the public institutions in the state, opponents of the privatisation or either transfer them to alternative employment in the privatised institutions or to resolve these institutions, they lose their jobs.

• Supervised by the Minister of Finance on all privatisation processes in collaboration with relevant ministries, devise and approve guidelines for privatization, and the details of the technical operations, leaving the work of specialists from banks and financial intermediaries, lawyers and accounting firms, which widens the circle of strategic partnership in the privatization. 

• Political support for the ruling party and the government and ministries of privatisation reflect the strength of the supportive influence of the direction of privatisation.
So, our Government has executed the long drawn agenda of Privatisation through Mergers and Acquisitions which would demoralise the work force and who would ultimately succumb to be placed in the hands Private.

Let us wake up,

An awareness campaign must be launched to awake the public too, as primarily, the privatisation will have negative impact on the fellow country men and Country’s economy.
Let us effectively communicate to the Indian public that the privatisation of Banking sector is an anti – national move which would drive the rural economy back to the primitive.
Every individual officer must take it as a mission not only as a bank officer, but also an individual interested in our Mother India’s wealth and welfare.

Thanking you,
MANIMARAN G V
GENERAL SECRETARY

 RBI Governor Raghuram Rajan has said the issue of bad loans gets “loaded with a lot of morality” and it is necessary to keep criminal liability separate to put stressed assets back on track.

It is not a point whether defaulters are good people or bad people , whether the company is big or small, whether is popular or unpopular etc.

Questions are asked whether non-performing assets (NPAs or bad loans) were a concern for him given that some “big names and big companies” are linked to the problem.
The Reserve Bank Governor made it crytal clear that  the NPA clean-up is simply about whether the loan is “performing or not performing.

There may be good reasons or bad reasons behind a Non -performing asset.It may have become non-performing simply because someone had terrible luck or somebody else’s fault. Sometimes licences are cancelled , sometimes approvals are given to company by statutory bodies in time, sometime one of partners or directors do not perform or commits blunder , commit fraud or sometime divert the fund of the firm for self use or for different use and so on. There may be all sorts of reasons why companies get into trouble.

MR. Rajan said clearly , "if companies get into trouble, the loan becomes a non-performing asset and “we very much want these assets to be back on track,”

It is a completely separate issue of who to blame and whether there is criminal liability involved in a NPA account or with some defaulting firm. In a fraction of the cases there may be criminal liability involved. That should be separated from the whole issue of putting the assets back on track.

Asset is not a criminal.  Asset can produce value and can function. Asset should be allowed to produce value even while there is a separate case going on if there was criminal activity involved.

Rajan emphasised that the government has said very clearly it will not interfere in the process of granting loans and “I think that is a very important development. The next stage has been on trying to improve the administrative structure in the banks.”

Rajan said the last part of the stabilisation agenda has been to clean up the stressed assets in the banking sector in order to ensure banks have the room to lend again.

Rajan has said it clearly and without any ambiguity that we want to have our banks get their money back. For that we need a proper bankruptcy system, a court system that functions in finite time and we didn’t have that in the past.

He expressed hope that “there is a reasonable chance” that the bankruptcy code bill will be passed soon and that it will ensure a fully functioning system.

Under bankruptcy code banks and borrowers  can renegotiate outside of bankruptcy. Newly framed bankruptcy code keeps you from getting away with too much either on the banking side or the promoter side.

Number of frauds in banks has been rising quarter after after, year after year. Many cases of frauds are not even reported to RBI or reported with inordinate delay. RBI has said clearl that banks have to make provision for the entire amount of a loan in transactions where fraud has been detected in a period not exceeding four quarters.

Sometimes banks feel that  if huge provisions are done in a quarter it may adversel affect the finacial report of the bank and are afraid of erosion in image of the bank and its stock value.  To smoothen the effect of such provisioning on quarterly profit and loss, banks have the option to make the provisions over a period, not exceeding four quarters, commencing from the quarter in which the fraud has been detected.

RBI said that the banks have to make suitable disclosures with regard to the number of frauds reported, the amount involved in such frauds and the quantum of provision made during the year. This tight and hard instruction will in the long run change the dirty culture of bank officials who in order to save their employees from criminal actions conceal cases of fraud. It is important to say here that the culture of hiding evil acts of an employee who commit fruad like crime lead to escalation in volume and value of such frauds.

Banks must scrupulously adhere to the extant guidelines on classification and reporting of frauds. It is in overall interest of the bank and the country as a whole.

Corporate debt worth $178 billion at default risk: BNP Paribas
A whopping 16.1 per cent or USD 178 billion worth of corporate credit in India is at risk of default, making the domestic banking system the worst in Asia in terms of bad loans.

According to the report by French financial services major BNP Paribas, of the total bank credit of USD 1,109 billion in the country, corporate debt worth USD 178 billion, 16.1 per cent of the total bank credit, stands the risk of default.

India is followed by Indonesia and China with 7.2 per cent and 6.6 per cent of respective total bank credit at the risk of default.

While in Indonesia, USD 22 billion of its total bank credit of USD 305 billion is at potential risk of default, China stares at USD 1,050 billion of potential bad loans. The Chinese banking system is worth USD 15,884 billion.

The brokerage did not specify the time-frame of the report which is based on an analysis of 738 listed companies in Asia which have a combined gross debt of USD 1.7 trillion.

"Mounting corporate debt is one of the biggest problems for Asian economies," the report said.

"Our country-wise analysis highlights the following percentages of bank loans at risk:

6.6 per cent in China,

16.1 per cent in India,

5.8 per cent in Korea,

2.4 per cent in Thailand and

7.2 per cent in Indonesia,"

As per BNP Paribas, policymakers in every country are trying to tackle the debt problem in different ways. "Chinas solution seems to be a debt-to-equity swap. This was tried in China in the late 1990s," .

"The present instance, however, could be different...the government may not assume a significant part of the debt, as it did in the last instance," .

Indias approach is more direct as the "Reserve Banks asset quality review is forcing banks to acknowledge and write off stressed assets leading to severe short-term pain, particularly for PSU banks, but also potential long-term gain once bad loans are fully recognised,"