Two large Mumbai-based state-run banks may merge
What's the story
Two large Indian state-run banks may be merged in the next fiscal year, said Banks Board Bureau Chairman Vinod Rai ahead of the launch of a new process to resolve stressed assets. Preliminary talks on merging two large public sector banks based in Mumbai have begun. He added the merger would take place after the state-run banks successfully get rid of their bad loans.
Introduction
What is Banks Board Bureau?
Banks Board Bureau is a Mumbai-based autonomous body of the Indian Government that has been constituted to improve the governance of Public Sector Banks. It recommends the appointment of the chiefs of state-owned banks and financial institutions and helps them develop strategies and raise capital. It started functioning from Apr'16; former Auditor General Vinod Rai is the Chairman of the Banks Board Bureau.
Information
Mergers vital for restoring health to banks
In May'16, Vinod Rai said in an interview that all 27 Indian public sector banks need to merge into six well-capitalized institutions. He added restoring the health of banks was vital for PM Narendra Modi to revive lending, investment and create jobs for Indians.
Stressed Loans
Stressed loans hobbled PM Modi's growth agenda
Vinod Rai declined to identify the "two large Mumbai-based banks" that are yet to cleanse their bad balance sheets. He said consolidating Indian public sector banks would be the final step in "rebuilding a financial system capable of underwriting credit growth and job-creating investment." The state-run banks account for 88% of stressed loans that reached $138 billion in Jun'16 hobbling PM Modi's growth agenda.
Merger
A smaller, weaker bank to merge with consolidated entity
Vinod Rai said after the consolidation of the state-run banks, a smaller, weaker bank would be merged into the entity. The 68-year-old former Auditor General didn't provide further details but said deliberations depend on the success of restructuring the public sector banks' balance sheets. Apart from State Bank of India, Bank of Baroda and Bank of India are also among the largest state-run banks.
Seeking resolution
Scheme for Sustainable Structuring of Stressed Assets
The RBI had notified the proposal to constitute an advisory committee to review write-down proposals on irrevocable loans in Jun'16. Even the new RBI Governor Urjit Patel backed the Scheme for Sustainable Structuring of Stressed Assets (S4A). The two-man committee, comprising former SBI Chairman Janki Ballabh and ex-Chief Vigilance Commissioner Pradeep Kumar, will soon review the first three loan restricting cases.
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Vinod Rai's statement
"I have had detailed discussions with the new governor (Urjit Patel). If bankers find that it is easy to use this channel (S4A) to get a resolution, they will queue up. It takes the onus of the decision off their backs."
NPAs
Recapitalizing public sector banks
Vinod Rai said from the 2018 fiscal year, state-run banks' minority shareholders would be able to subscribe to rights issues (offering of new shares) along with the state. He stated these investments would be attractive as several state-run banks are valued at discounted book values. He added the above process should move ahead only when the issue of Non-Performing Assets (NPAs) is dealt with.
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Huge amounts of NPAs on bank books
As of Jun'16, non-performing loans constitute 11.3% of the total loans at the Indian public sector banks. Raid stated: "Recapitalizing the banks when they are carrying huge amounts of NPAs on their books makes no sense. It just gets lost into that big black hole."