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Banking News dated 5th October 2018

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Banking News: October 5, 2018


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Chanda Kochhar quits ICICI Bank,  Sandeep Bakshi is the new chief


Chanda Kochhar quits ICICI Bank,
Sandeep Bakshi is the new chief

The Moneylife Online
Published on October 4, 2018


Mumbai, October 4: Chanda Kochhar has quit ICICI Bank with immediate effect, says a regulatory filing from the bank. The board of ICICI Bank has decided to appoint Sandeep Bakshi as managing director and chief executive for next five years.


"The board of directors of ICICI Bank, accepted the request of Ms Kochhar to seek early retirement from the bank at the earliest. The board accepted this request with immediate effect. The enquiry instituted by the board will remain unaffected by this and certain benefits will be subject to the outcome of the enquiry. Ms Kochhar will also relinquish office from the board of directors of the Bank's subsidiaries," the Bank said in the regulatory filing.

Separately, the Bank says, owing to health reasons MD Mallya its independent director had also resigned from the board. Ms Kochhar is facing allegations of conflict of interest over a loan to Videocon Group that had in turn lent to a company part-owned by her husband. The decision of the 56-year-old brings to an end her nine-year reign as the top executive of the bank. In 2009, Ms Kochhar was appointed as MD and CEO of the bank and has been responsible for the bank's diverse operations in India and overseas.

Her alleged conflict of interest came out in the open in March this year after media reports referred to a Rs3,250-crore loan granted by ICICI Bank to Videocon Group, whose chairman Venugopal Dhoot had business links with her husband Deepak Kochhar. It was alleged that Mr Dhoot transferred a considerable portion of the loan to a company he jointly owned with Mr Kochhar.

The media expose was based on a complaint filed by a whistle-blower, who flagged Ms Kochhar's alleged impropriety and conflict of interest in a letter to the Prime Minister and the Finance Minister. The bank initially termed the charges against Ms Kochhar as "malicious and unfounded rumours" but after relentless public gaze, and regulatory pressure, the lender ordered a probe into the whole issue.

In 2012, a consortium of 20 banks and financial institutions sanctioned credit facilities to the Videocon Group for a debt consolidation programme and for its oil and gas capital expenditure programme aggregating to about Rs40,000 crore. Currently, Supreme Court's former judge BN Srikrishna is heading an independent inquiry into the allegations.

On 30th May, the bank had announced that its board decided to institute a 'comprehensive enquiry' to look into an anonymous whistleblower's complaint alleging that Ms Kochhar had not adhered to provisions relating to the bank's "code of conduct". In June, Ms Kochhar decided to proceed on leave. Thereafter, Mr Bakshi was appointed as the wholetime director and chief operating officer (COO) of ICICI Bank.

IL&FS: The Untold Tale Behind Modi's
Shock Takeover of a Risky Lender

Saloni Shukla, Vrishti Beniwal & P R Sanjai
The Bloomberg News
Published on October 4, 2018


New Delhi, October 4 (Bloomberg): With the future stability of the Indian financial system on the line, executives running a giant infrastructure lender gathered at the company’s glassy, modernist headquarters in Mumbai and hammered out an ambitious restructuring plan last Saturday to manage a $12.6 billion debt burden after a string of defaults.

Except that they weren’t really calling the shots any more. The very next day, the government in New Delhi authorized a plan to sweep in and seize control of Infrastructure Leasing & Financial Services Ltd., a vast conglomerate that’s raised billions of dollars in the corporate bond market and powered the nation’s public project building boom.

The stunning move, more typical of China’s command-and-control economy than a free-wheeling democracy like India, caught investors by surprise. Prime Minister Narendra Modi’s government also unveiled an investigation into IL&FS’s management by the Serious Fraud Investigation Office.

The decision to oust the company’s board was taken by Finance Minister Arun Jaitley after the government had quietly reached out, at least two days earlier, to former bureaucrats and current bankers to orchestrate a board coup, according to people familiar with the matter. The government had been monitoring the lender for two weeks, one of the people said.

Following a series of meetings last week, and months after the first defaults by the systemically important lender, the ministry was worried about the multiple shocks to the financial markets that would follow from IL&FS’s collapse.

“The restoration of confidence of the money, debt and capital markets, the banks and financial institutions in the credibility and financial solvency of the IL&FS Group is of utmost importance for the financial stability of capital and financial markets,” the government said in a statement Monday.

Systemic Risk

In addition to handpicking a new board of directors, the government is expected to overhaul the management and monitor any future restructuring plan, a process that seems likely to extend well into 2019. The newly constituted board led by Asia’s richest banker, Uday Kotak is likely to meet Thursday. It must devise a plan for the group and file a response to the National Company Law Tribunal, which endorsed the government’s move, by Oct. 15. The tribunal will next hear the matter on Oct. 31.

Modi’s government concluded it had few options. The economy was already grappling with surging fuel prices and a plunging currency. The last thing the government needed was more turmoil in the debt market, with plans underway to raise a net 2.47 trillion rupees ($34.7 billion) through March to bridge India’s fiscal gap.

Since IL&FS is an “internal factor to India, it should be contained so no adverse impact is felt,” Jaitley said at a briefing on Thursday.

Another consideration, and a big one, is that Modi’s Bharatiya Janata Party faces a general election in early 2019. During his four years in power, Modi has tried to cultivate an image of being a champion of the downtrodden. That will be tested as the opposition questions IL&FS’s loan-fueled expansion.

“The government was left with no choice but had to act quickly and decisively,” said Mathew Antony, managing partner of Aditya Consulting, an advisory firm based in Mumbai. “The risk from IL&FS’s default was spreading to all corners of the market and any indecisiveness would have eroded the political capital of the government further.”

The troubles at IL&FS had been intensifying since July, when company founder Ravi Parthasarathy stepped down, citing health reasons. Defaults from August within the group rattled India’s money markets, added to pressure on corporate bond yields and sparked a sell-off in the stock market.

The Reserve Bank of India has initiated a special audit, given the potential systemic risk to other non-bank lenders. There were also worries about upcoming group debt payments.

Secret Memo

Over the past week, Jaitley had come under pressure to act after receiving formal letters, including one from opposition lawmaker K.V Thomas, raising concerns about operations at IL&FS, according to people familiar with the matter. Jaitley’s team on Sunday sent a confidential note to the Ministry of Corporate Affairs recommending that the company court be approached for the “reconstitution” of the IL&FS board.

In the secret memo, the finance ministry said it was concerned that just 28 billion rupees of IL&FS securities owned by mutual funds could set off a chain reaction of redemptions by investors. That, in turn, may send sovereign bond yields soaring to 8.5 percent, a level not seen since 2014, and possibly derail the government’s borrowing plan, according to the note seen by Bloomberg. Finance ministry spokesman D.S. Malik declined to comment.

On Monday, government lawyers sought the National Company Law Tribunal’s approval to oust the board calling the directors a “parasite on public fund,” because of their “hefty” salary packages. Former Managing Director and Vice Chairman Hari Sankaran was paid 77.6 million rupees in the year ended March 31, while founder Chief Executive Officer Parthasarathy took home 205 million rupees, according to the company’s annual report.

The IL&FS Group is a bewilderingly complex conglomerate, with 169 direct and indirect subsidiaries. To defuse the long-running crisis at the company, the financier had considered selling short-term bonds, recapitalizing the company, and selling or stalling existing infrastructure projects, according to an ousted director, who asked not to be identified because the person isn’t authorized to talk to the media.

Another option was a bailout orchestrated by its biggest investors, which include Life Insurance Corp., India’s largest life insurer; State Bank of India, its largest bank; and Housing Development Finance Corp, its largest mortgage lender. Japan’s Orix Corp. is the company’s second-largest shareholder.

A plan to raise funds by selling stake to Piramal Enterprises Ltd., controlled by billionaire Ajay Piramal, in 2015 was rejected by the shareholders. That prompted the firm, which lent for projects that take years to complete, to seek short-term funds, according to the director.

Default Run

Enter the Reserve Bank of India. The nation’s central bank in an attempt to clean-up a burgeoning pile of stressed debt issued stringent new rules barring fresh loans to borrowers with dud debt. That made it difficult for struggling companies to get new loans from banks.

Five special purpose vehicles of IL&FS Transportation Networks Ltd. failed to service obligations in June, followed by defaults by parent IL&FS and its units on commitments including bonds and commercial papers starting August. A state lender Small Industries Development Bank of India filed an insolvency petition against IL&FS and its unit last month over missed payments.

The government in its court filing said IL&FS was “indiscriminately” borrowing money. IL&FS “has been presenting a rosy picture and camouflaging its financial statements by hiding severe mismatch between its cash flows and payment obligations, total lack of liquidity and glaring adverse financial ratios,” according to the 44-page filing.

The events that led to the firing of the board started with a complaint against an unit written to the Ministry of Corporate Affairs office in Mumbai a few weeks ago. That was followed by lawmaker Thomas’s letter to Jaitley on Sept. 20 in which he asked the minister to help IL&FS to avoid the world’s fastest growing major economy from plunging “into a recession.”

Following is the time line of developments in the run up to India’s shock decision to oust IL&FS’s board.

Sept. 25:
Jaitley meets LIC’s Chairman V.K. Sharma, central bank Deputy Governor Viral Acharya, State Bank of India Chairman Rajnish Kumar and Central Bank of India Managing Director Pallav Mohapatra

Sept. 27:
Jaitley meets RBI officials including Governor Urjit Patel at his residence

Sept. 28:
Economic Affairs Secretary Subhash Garg meets shareholders of IL&FS, including LIC and SBI.

Separately, the RBI meets LIC and Orix representatives in Mumbai

Finance ministry officials start reaching out to potential board-member candidates

Sept. 29:
IL&FS hosts its annual general meeting and decides to raise 150 billion rupees from a non-convertible debt issue

Sept. 30:
Ministry of Finance writes to Ministry of Corporate Affairs recommending IL&FS’s board be ousted

Ministry asks India’s Serious Fraud Investigation Office to begin probe into IL&FS’s finances

Oct. 1
A court in Mumbai approves the government’s petition to fire IL&FS’s board

Oct. 3
Government inducts a seventh board member: Former bureaucrat C.S. Rajan

Shares of the group’s listed units have been rallying since the ousting of the board. IL&FS Investment Managers Ltd. surged 28 percent, while IL&FS Transportation Networks has advanced about 50 percent.

“Investors didn’t want to put more money without a strong leadership and we can’t imagine a better team than the newly constituted board,” said Gaurang Shah, chief investment strategist at Geojit Financial Services Ltd. in Mumbai. “Assurance by the government and the necessary action taken against the erstwhile board has brought the much needed confidence.
©2018 Bloomberg L.P.


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Government cuts fuel prices by Rs 2.50per litre

The Indo Asian News Service
Published on October 4, 2018


New Delhi, October 4 (INAS): With unrelenting increase in fuel prices, the government on Thursday decided to affect a cut in the prices of petrol and diesel by Rs2.50 per litre.

Finance Minister Arun Jaitley announced at a press conference that the cut will be affected through slashing of excise duty to the tune of Rs1.50 per litre, while the oil marketing companies will absorb the impact to the tune of Re1 per litre.


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IL&FS crisis: How the end of an
easy money era is causing strain in India

Anirban Nag
The Bloomberg News
Published on October 4, 2018


New Delhi, October 4: Rising borrowing costs are putting pressure on lenders like Infrastructure Leasing & Financial Services Ltd. -- whose recent debt defaults rocked financial markets in India and sparked fears of a contagion -- as well as on debt-focused mutual funds that are liquidating holdings.

There’s more pain to come as global interest rates rise and the Reserve Bank of India proceeds with its own tightening, with most economists expecting a 25 basis-points hike on Friday. The swap market is pricing in at least 100 basis points of rate hikes in the coming 12 months.

The latest turmoil comes on top of a cash crunch in the banking system and global trade tensions that are weighing on the growth outlook. These complicate the job of the central bank, which is trying to keep inflation in check amid the currency’s slump to a record low and rising oil prices.

While headline inflation has slowed to 3.7 percent from a year ago, a sharp 10 percent-plus jump in crude oil prices since the last policy meeting in early August raises the risk it will imperil the RBI’s medium-term target. Core inflation, which strips out volatile food and fuel prices, has been sticky at near 6 percent.

“The MPC is facing some conflicting issues which are beyond the traditional growth-inflation trade off," said Samiran Chakraborty, chief India economist at Citigroup, who is assigning a 70 percent chance of a rate hike this week. But should the panel opt for a pause favouring financial stability, it risks a sharp knee-jerk reaction in the currency markets, he said.

The rupee dropped to a record low of 73.8188 on Thursday, taking the fall so far this year to more than 13 percent. The weak rupee along with costlier fuel and imports were cited as reasons for rising price pressures in the latest purchasing managers’ index. Overall, growth in the manufacturing and services sectors slowed, with the September Nikkei India Composite PMI coming in at 51.6 versus 51.9 in August.

The RBI has already raised rates twice since June to the highest level in two years and any further tightening will pressure borrowing costs for companies. Average yields on three-year rupee bonds of AAA-rated Indian companies have climbed 127 basis points this year, headed for the steepest yearly gain in eight, according to data compiled by Bloomberg.

More Pain

For borrowers and money managers, more rate increases mean more pain. “Interest rates will keep rising in the next two to three quarters, causing more strains in cash flow of corporate borrowers,” said Prabal Banerjee, group finance director at conglomerate Bajaj Group.

Signs of that are evident. The defaults by the “systemically important” IL&FS has raised the risk of money markets freezing up and jeopardizing economic activity. IL&FS’s defaults on commercial paper from August added to pressure on borrowing costs and led to a slump in corporate bond issuance.

All this is happening amid a hard line taken by Governor Urjit Patel toward cleaning up banks’ balance sheets. He has put founders and chief executives of private sector banks under the sword as he attempts to clean up the banking system, which has the dubious distinction of having one of the highest stressed assets ratios in the world.

Hawkish or Neutral?

With the RBI’s focus on fighting inflation, economists also see the possibility of the central bank changing its stance to hawkish from neutral.

The RBI has maintained a neutral stance since February 2017 when it switched from an ‘accommodative’ bias. Under a neutral stance, it retains flexibility where it can raise as well as cut rates depending upon how strong or weak economic data is.

“There is an outside probability of change in neutral stance, as three successive rate hikes with a neutral stance could contradict RBI’s message," said Soumya Kanti Ghosh, chief economic advisor at the State Bank of India. He expects the RBI to raise rates this week as core inflation has been sticky and the rupee has been under pressure.


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Structural defects in the
Financial System and Real Economy

Indira Rajaraman
The Mint
Published on October 5, 2018


Posting higher tariffs on imports will do nothing at all save perhaps afford some transient fiscal relief; for the economy to soar, the structural constraints must be recognized and removed

The default jolts from the Infrastructure Leasing and Financial Services (IL&FS) conglomerate continue to reverberate through the system. As immediately implied by the unusual statement jointly issued by the Reserve Bank of India (RBI) and the State Bank of India (SBI) on Sunday, 23 September, to soothe the markets, IL&FS is too connected to fail.

This episode happened just when the tanking rupee seemed to be stabilizing, just when a current account deficit (CAD) projected at 2.4 % of gross domestic product (GDP) for the current year had been talked through as not unduly threatening, given the size of external reserves, and just when the flight of footloose jewellers from Default Street looked to be tapering off.

Credit rating agencies had lagged behind bond market participants on evaluating IL&FS debt instruments. The capital market regulator, Securities and Exchange Board of India (SEBI), actually held a meeting with rating agencies, urging them to take cognizance of bond spreads. Further complicating the problem is that the parent holding company, of what is a large unwieldy group of subsidiaries, is not listed and, therefore, not subject to SEBI disclosure requirements.

However, three of the subsidiaries are listed, and they have notably not defaulted so far. The regulatory gaze of the RBI is confined to non-banking financial companies (NBFCs) taking deposits from the general public, in which category neither the holding company nor its subsidiaries belong. The holding company is registered with the RBI as a core investment company (CIC), and one of the subsidiaries as a systemically important, non-deposit taking NBFC (ND-SI-NBFC), but any regulation going with these categories is administered at best with a light touch.

While we pick up the pieces, it is fruitful to look at what the episode reveals about the structural defects in the Indian financial system, which underlie rating and regulatory failure.

The first of these is the oft-mentioned feature of the group, that it had marquee names on its masthead. Although the erstwhile IL&FS board was completely replaced by the government on 1 October, the larger structural problem remains in other companies, other boards. Marquee names are a huge problem in India, because they hold on tenaciously to their positions, and call for surrender in a hierarchy.

There are very sharp youngsters in the financial sector, who I suspect are restrained from standing up to stalwarts at the top of their reporting hierarchy. This may not be an Indian so much as an Asian shortcoming. There is the well documented case of Korean Air disasters in the late 1990s, where the co-pilot could not presume to correct the pilot’s error even when he knew they would all die from it.

The further problem with marquee names is that simply having them on a company board relaxes due diligence procedures among lenders. Cozy rating, cozy diligence and cozy lending are not a matter of related parties alone (although that too), but of the signalling power of a name or names on the masthead of a borrowing entity.

The second defect is the peculiarly Indian phenomenon of seemingly privately-owned entities, in which substantial stakes are held by the public sector. With this, the private entity transfers risk to the public exchequer, and engages in far riskier behaviour than if the capital being played with was entirely privately-owned. Large equity stakes in IL&FS were held by the Life Insurance Corporation (LIC, the publicly owned insurance behemoth) and public sector banks such as SBI and Central Bank of India, alongside private investors, both foreign (Orix Corporation and the Abu Dhabi Investment Authority) and domestic (Housing Development Finance Corporation). Although the annual reports of SBI and LIC may report equity exposure to other entities in some corner, there is now a desperate need for this information to be given in a centrally collated place.

The reporting requirements under the Fiscal Responsibility and Budget Management (FRBM) Act of the central government do not call for information on equity contributions and lending by cash-rich publicly-owned parastatals such as the LIC. Nor, needless to say, does it carry this information on public sector banks. If this information were given in a matrix array as part of the Union budget documents, in terms of both the stock of equity held in other (public and private) commercial enterprises, as well as the flow addition in the reporting year, we would have, for the first time, some sense of the financial stakes of the public sector as a whole in private companies like IL&FS.

The third defect in the system is the widely-known phenomenon of delays in payments from government departments to companies for work executed or products supplied. In the particular case at hand, the National Highways Authority of India (NHAI, an autonomous agency of the Union government) was in default of payments due to IL&FS for works executed. The amount claimed is in dispute and the arbitrator is expected to mandate only a fraction of the claim as actually due. This is a dispute between a fully publicly funded entity (NHAI) and a company to which the public sector has sizeable equity and debt exposure.

FRBM legislation at both central and state levels has gone seriously astray. The key words in the legislation—responsibility and management—have been interpreted to mean just deficit or public debt targets. FRBM legislation does not carry any provision whatsoever for protection of budget provisions as passed in the demands for grants by the Parliament. All expenditure flows are necessarily trenched, but there are no clear dates for tranches due, and no provisions for penalties if due dates are crossed by a certain permissible number of days. When payments are due, and a department or autonomous undertaking like NHAI has itself not received the funds with which to pay an outside contracted supplier like IL&FS, the usual procedure is to find fault with the quality of work done or goods supplied. If the work was indeed substandard, the penalties leviable should in principle have been laid down in the contract, such that the sums owed in both directions are known clearly in advance. Had there been a fully specified contract of that kind in place, there would have been no cause for delay in the payments due.

This latest financial jolt came in the face of a widening external CAD, which has raised issues about the structural defects in the real economy. On the balance of trade, there is finally some econometric evidence presented in the latest annual report of the RBI for 2017-18 that disruptions in domestic supply chains following demonetization did indeed result in a surge in imports replacing domestic industrial inputs.

The report terms this phenomenon ‘reverse import substitution’, as this is the reverse of the import substitution that we tried to do during the socialist era. The exercise, in an extremely painstaking way, isolates the impact of demonetization amid the whole host of overall macroeconomic factors, including exchange rates and domestic price conditions, which together determine the ratio of imported to domestic industrial inputs.

The regression results show that there was indeed a sizeable and statistically significant ramp up in imports of industrial inputs during a defined post-demonetisation period. It also finds that post-goods and services tax (GST), from October 2017 to May 2018, there was a decline in import intensity, although a much smaller effect, suggesting that the earlier import thrust had not been fully reversed by May 2018.

What is more worrying than the demonetization impact, which could in principle be entirely reversed, is the coefficient of a term in the estimated equation showing the ratio of imported inputs going up in response to growth in domestic industrial output more generally. This is about the demand for industrial inputs skewing more in the direction of imports than domestic supply (not the same as the income elasticity of demand of imports in aggregate, which throws together imports of final goods and inputs into the same pot). The report attributes this to “constraints on domestic availability”.

It is, however, not entirely clear whether the study covers all industrial inputs or just raw material inputs. If the latter, then constraints on domestic production of iron ore would be an example of an explicit domestic constraint (whether imposed by the judiciary or the executive). But if it extends also to produced inputs like steel, a “domestic availability constraint” suggests that it is just much easier for an industrial unit to import than to get delivery on a domestic order. That is a far more serious and debilitating phenomenon, pointing as it does to widening trade deficits going forward, since supply constraints cripple export growth as well.

This is consistent with recent work by Pranjul Bhandari in which she finds that aggregating across exports of goods and services, domestic constraints accounted for half of the decline in export performance over 2014-18 and much more in goods alone.

A more recent overlay, in the form of the failure of the GST machinery to adequately refund tax credits to exporters, can be treated in principle as a transitory factor. Even if GST gets its house fully in order, and exporters receive their refunds in time, there remains an abundance of structural factors limiting export growth.

The flip side is that the Indian economy can soar if structural constraints in both financial and real sectors are removed. The need of the hour is to recognize and remove them. Posting higher tariffs on imports will achieve nothing at all, other than maybe to afford some transient fiscal relief.

Indira Rajaraman is an economist.


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PSB mergers a good idea? The problem gets rolled over for another day unless this big issue is tackled

The Financial Express
Published on October 5, 2018


The government’s decision to merge three public sector banks, Bank of Baroda, Dena Bank and Vijaya Bank, has brought the issue of bank consolidation under the spotlight. This comes close on the heels of the merger of the State Bank of India, on April 1, 2017, with five subsidiary banks. The question is: Is consolidation of banks a good idea when the banking sector is suffering from the overhang of huge stressed assets and fragile balance sheets?

In the present circumstances, it is doubtful whether our relatively large banks can absorb weaker counterparts and make profits. The reason is that it is hard to find a single PSB that is strong enough to absorb a weaker PSB. The large banks are, at present, saddled with high NPAs. For instance, in 2017-18, the gross NPAs of Punjab National Bank stood at 18%, Bank of Baroda at 12.26%, Bank of India at 16.58%, Canara Bank at 11.84 % and Union Bank at 24.10%.

Hence, the endeavour should be to first clean up the balance-sheets of PSBs. Over the next two or three years, managerial energies should focus resolutely on addressing the NPA problem while, at the same time, also concentrate on building and nurturing talent in both old and new areas.

Consolidation can wait till the NPA situation gets better. Otherwise, mergers will only end up diverting the energy of the top management from addressing the crucial NPA issue, and the gains of consolidation would prove elusive The government may also seriously consider banking reforms, including improving governance standards, strengthening of bank boards as well as top management, providing greater autonomy and strengthening the institutional framework of the Insolvency and Bankruptcy Code (IBC).

There is also a need to privatising PSBs, a move that will alleviate the pains and ills associated with public ownership of banks. It is also a fact that India needs more banks. RBI should continue to give licences to more small banks as well as universal banks even while carrying out the experiment on consolidation. This would also be in line with the Narasimham committee which was in favour of a large number of regional and local banks at the lowest tier of banking structure.

It is anticipated that PSBs would be merged into 5-7 large or ‘global-sized’ banks through mergers and acquisitions. But, this would confer the benefits of efficiency and scale-economies only when certain parameters are fulfilled. First, it is important that the initiative comes from the banks themselves. It should be market-driven, based on commercial considerations and result from synergies among the merging entities. The government should not dictate mergers.

The government-induced consolidation effort, not backed by synergies, has not brought desirable results. This is borne out from the experience of the merger of New Bank of India with Punjab National Bank in 1993, and the Global Trust Bank (GTB) with Oriental Bank of Commerce (OBC) in 2004.

In the latter case, the decision was taken by the Reserve Bank of India (RBI) and, post the merger, it resulted in OBC’s capital adequacy ratio declining and gross NPA rising as GTB’s gross NPA was close to 26%. It took OBC some years after the merger to restore its financial health. Similarly, the SBI merger has contributed to the bad loan portfolio of the combined entities and the net profit of the bank has taken a sharp hit. Second, the likely capital size of the merged entity needs to be considered while evaluating the decision for consolidation. There should be gain, and not an erosion of capital base post the merger process.

Third, it is essential to carefully weigh and assess the likely benefits of the proposed merger through rationalisation of branches, additional business, harmonisation of procedures, productivity gains, common treasury pooling, enhanced scale of operations and rationalisation of common costs against the likely future costs such as the anticipated increase in non-performing assets, integrating technology and human resources and loss of business with closure of some branches. Fourth, banks from different geographies should be chosen for merger going ahead.

For example, a South-based bank could be merged with a North-based bank as this would enhance business through additional customers. The acquisition by Kotak Mahindra Bank of ING Vysya Bank in 2014 was primarily driven by geographical synergies. This is also one of the positives of the recent three-bank merger that is expected to increase the footprint of the merged entity in the southern states. Five, the PSBs would have to emerge as strong and valuable after consolidation; otherwise, their capacity to raise resources from the market would be constrained. Size alone does not matter.

The merged bank needs to be strong and profitable. This is one of the lessons to be learnt from the global financial crisis of 2008 wherein it was believed that no big bank could ever fail. Hence, banks would need to cut costs by shutting down unviable branches, reducing staff, avoiding duplication of work and improving on technology to retain a large capital base and stay ahead of the global competition. Six, to ensure that the integration of entities is a smooth process, the most important task would be to embark on a human resource strategy that can help address the core concerns of employees.

Many employees would fear job loss and disparities in the form of regional allegiances, benefits, reduced promotional avenues, new culture, etc. This may lower their morale and create problems which could come in the way of success of the merged entity. Seven, harmonisation and integration of technology is a challenge as various banks are currently operating on different technology platforms. Hence, IT integration strategy should be aligned with the business strategy right from the beginning to ensure a successful merger. Eighth, it is also desirable to guard against the possible monopolistic and anti-competitive tendencies which might accrue from consolidation.

To conclude, it could be said that bank consolidation, if properly leveraged, can confer significant benefits to the economy. But, consolidation should be a well thought out strategy, by looking at synergies and assessing the likely costs and benefits, so that post- merger, there is a distinct improvement in the balance sheet of banks.


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PSB losses to come down to
Rs 50,000 crore in FY19: CRISIL

The Press Trust of India
Published on October 4, 2018


Mumbai, October 4 (PTI): State-run lenders will narrow down their losses to Rs 50,000 crore in fiscal year 2018-19, from Rs 85,000 crore in the previous fiscal year, as the quantum of dud loans reduce, a report said.

This will be the third consecutive year that the 20 state-run lenders' grouping will be reporting a loss, ratings agency Crisil said in its report, adding higher provisioning requirements will ensure that the losses continue.

Profits for the entire banking system are expected to start improving from the second half of this fiscal and turn positive for the whole fiscal, as most large private banks are expected to report profits, it said.

"As a result of the high provisioning requirements, many PSBs (public sector banks) will continue to report losses for the third consecutive year, though the extent of this will be lesser at Rs 50,000 crore, compared with Rs 85,000 crore last fiscal," it said in the note.

At present, the gross non-performing asset (NPA) ratio of the PSBs is at 14.7 percent, compared with 4.7 percent for the private sector ones, it said.

The provisioning for bad assets is expected to stay elevated at Rs 2.8 lakh crore for the system, Crisil senior director Krishnan Sitaraman said, attributing it to ageing of already identified NPAs and also the money to be set aside for the second list of 26 assets to be resolved under the bankruptcy law.

He added that the fresh slippages are reducing and it is troubles of the past which is leading to the elevated provisioning.

Of the total provisioning, 80 percent will be by the PSBs due to the high increase in slippages over the past two years, it said. However, in what can be a good news for the health of the country's banks, it said the overall provision coverage ratio for bad assets will go up to 60 percent from the earlier 50 percent.

The rating agency said the first list of RBI-mandated 12 assets being resolved in the National Company Law Tribunal (NCLT) have adequate provisions, but the second list will require additional money to be set aside with the power sector being the highest.

Power sector is expected to see haircuts in excess of the current provisioning levels, it said, adding that the sector accounts for 25 percent of the 100 largest NPAs in the banking system, where provisioning for a number of stressed accounts is lower than the banking system average of 50 percent.

The focus on the retail segment, which is driving credit growth, and lower interest reversals on reduced slippages will lead to an expansion of up to 0.10 percent in the net interest margin for the system, over the 2.5 percent reported last fiscal, it said.


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The real bank crisis

Krishnamurthy Subramanian
The Financial Express
Published on October 5, 2018


RBI spotlight on private banks shines a light
 on the shortcomings of their boards.

Recent decisions by the Reserve Bank of India on the various cases relating to the management at private sector banks brings into focus the role of the boards of private sector banks in India. If the banking regulator has to put its foot down against the considered opinion of the board, it may be an indication that things have gone too far. As one of the key responsibilities of the board is to oversee the senior management, the recent decisions by the RBI beg the question: Are the boards of the private sector banks indeed acting as the custodians of the various stakeholders or are they acting as the handmaidens of the management?

Consider the recent instance, where the board of ICICI issued a statement of unconditional support for its incumbent CEO, despite the preponderance of evidence seeming to paint her in an unflattering light. Similarly, at Axis Bank and Yes Bank, RBI’s asset quality reviews had thrown up significant concerns about the quality of the loan portfolios and their reporting. Yet, the boards of these banks recommended continuation of the CEOs, which did not find favour with the RBI. The boards of private sector banks need to deeply reflect whether they would like to be held in high esteem or not. I offer some suggestions below.

First, boards must realise that real independence from the management is as important as the perception of independence as seen by outsiders. For example, though better sense eventually prevailed in the ICICI case after what one reckons was a push from the independent directors — who were worried about the damage their reputation would have to suffer — the damage to the credibility and independence of the ICICI board was already done.

Second, boards of private sector banks need to realise that oversight over the quality of financial reporting remains an important responsibility of the board. Board oversight is needed on the quality of the loan asset portfolio, as under-reporting of NPAs and other stressed assets influences the integrity of financial reporting. Clearly, all banks need to be sensitive to this. However, senior management in private sector banks are incentivised based on bank profitability, and the compensation paid to senior management through stock options depends substantially on the bank’s stock price.

The successive lines of defence against financial misreporting are the bank CEO, bank auditors, bank audit committee, bank board, and the RBI supervisors. As everyone knows, the lack of board oversight can provide strong incentives to senior management to indulge in ever-greening of assets and RBI supervisors represent the final line of defence against financial misreporting on asset quality. Evergreening identified by the regulator clearly suggests that the private-sector bank boards have failed in their oversight on asset quality and the reporting of the same.

Third, board members must realise that there is a significant information asymmetry between them and the senior management. The management has the best information about the company. In contrast, despite their best efforts at reading between the lines, board members must realise that they meet once in a few weeks and get informed about the bank through the agenda papers for the board and board committee meetings. As good news can often take the elevator while bad news slowly creeps in via the stairs, board members in banks have to be extremely vigilant, especially about asset quality. In asking the right questions of the management, board members must keep in mind that the worst outcome that can manifest is that they may not get reappointed. Not getting reappointed to the board cannot be worse than the significant reputational damage that a board member can suffer from being associated with negative events in the firm. Moreover, the board member has been appointed as a custodian of the shareholders of the firm. These perspectives can indeed provide the board member the necessary conviction to raise key questions to them management.

Fourth, when compared to the boards of firms led by professionals, boards of entrepreneur-led banks need to be particularly focused on ensuring credibility and independence. In an entrepreneur-led bank, a general, albeit incorrect, perception can prevail that the board members need to toe the line to remain in the management’s good books. As a result, any instance of the board being perceived to have not acted independently can significantly damage its credibility. If the board commands little credibility then there is a serious issue of board independence and, therefore, of governance in the bank. In such cases, permitting the controlling shareholder to remain as the CEO risks mis-governance. However, in cases where the bank board is well-diversified and commands credibility, there need be no misgivings on the controlling shareholder remaining the CEO.

Given recent events, boards of private sector banks need to retrieve lost ground. Independent and credible boards are unlikely to face the wrath of the regulator.

Source: Internet News papers and anupsen articles

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