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Bank consolidation won’t lead to too-big-to-fail lenders: Sanjeev Sanyal

LiveMint logoLiveMint 20-08-2017 Sahib Sharma

New Delhi: The government is looking to reduce the number of public sector banks to 10-15, more than what was envisaged earlier, through a series of mergers and acquisitions so that none of the banks become too big to fail, said Sanjeev Sanyal, principal economic adviser at the finance ministry.

“Consolidation will not be taken too far to four or five as speculated since the whole system breaks down even if one fails. Eventually, possible number will come down between 10 and 15. It will be done purely on commercial basis,” Sanyal said in an interview.

The consolidation of struggling state-run banks, which have a market share of about 70% and account for over 80% of the bad loans in the Indian banking system, is aimed at building scale and bolstering their risk-taking ability. The government hopes that this, along with measures such as capital infusions in weak banks, will trigger a revival.

“In case of consolidation, one should not factor in balance sheet only but also process, integration of technology and people. For State Bank of India (SBI) it was easy because they were relatively under the same architecture,” said Kartik Srinivasan, senior vice-president at rating agency Icra Ltd.

SBI has merged operations of five of its associate banks and Bharatiya Mahila Bank with itself earlier this year, marking the first consolidation move in the sector following the bad loan crisis. The merger has reduced the number of state-controlled banks to 21 from 26.

It has, however, turned out to be much costlier for SBI than expected, with a drastic deterioration in its asset quality following the merger. One reason for the sharp increase in bad loans was that the non-corporate loan book of SBI’s associate banks followed an internal classification standard that was different from SBI’s, chairman Arundhati Bhattacharya said after announcing the bank’s June quarter earnings.

The government, Sanyal said, is willing to go the extra mile to support banks by infusing capital in ex­cess of the Rs20,000 crore promised as part of the Indradhanush plan over this fiscal and the next.

Under the Indradhanush scheme introduced in 2015, the government had agreed to infuse Rs70,000 crore in state-run lenders over four years. They were to receive Rs10,000 crore in 2017-18 and the same amount the following year. The government has so far proposed to infuse Rs8,586 crore in 10 lenders this year, subject to the banks meeting stringent requirements for improving their health.

“Once the (bad loan) resolution process moves somewhat, we will get a better fix on how much money banks need after accounting for provisioning and recovering,” Sanyal said. “There are a number of options before the government, ranging from recapitalization through bonds, general budget and reducing holding down to 52% without doing privatization. Some combination of these will be used.”

Reserve Bank of India (RBI) governor Urijit Patel last week said public sector banks will require higher recapitalization. “It is clear that PSBs will need to take haircut on current exposure and resolution plan agreed within or outside the Insolvency and Bankruptcy Code. Higher provisions requirement will affect the capital position of several banks. This will necessitate higher recapitalization of these banks,” Patel said.

Along with resolving stressed assets, banks also have to comply with Basel III norms, which require them to maintain a capital adequacy ratio of 10.875% by March 2018 and 11.50% by March 2019. In addition, new accounting standards for banks will kick in from 1 April 2018, requiring them to make higher provisions.

“Recovery is not much happening in the system and on the contrary, the NPA stock is rising. Going forward, new accounting standards will bring along its own share of volatility on mark to market value, thus increasing more pain for the banks,” said Srinivasan.

Services at public sector banks may take a hit on Tuesday as all unions under the United Forum of Bank Unions have threatened to go on strike against the government’s consolidation plan, besides raising a host of other demands.

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