<p>Soon after the acquisition of the ailing IDBI Bank by insurance giant LIC, the government announced the merger of Bank of Baroda with two smaller banks not in the pink of health. The short-term profitability of the BOB will not be affected by the merger, but that the net assets of the three banks and the consolidation of branches and operations will be smooth and beneficial in the long run for the merged monolith.</p>

<p>Bank mergers have long been viewed with scepticism after the SBI shares and profits were pulled down following the merger with its five associate banks. Although the merger catapulted SBI to the ranks of the top 50 global banks in terms of assets, its NPAs rose from Rs 1.07 lakh crore to Rs 1.89 lakh crore after the merger, which was over 9 per cent of total advances. The real benefits of consolidation are long term after the branch reduction takes place and the cost-cutting follows after all duplicate operations and redundancies are rationalised.</p>

<p><strong>Consolidation mooted long back</strong></p>

<p>The consolidation of 21 public sector banks has been discussed ever since the Narsimham committee report was tabled during the early days of liberalisation in 1991. The banking sector reforms proposed by the former RBI Governor in 1991 and 1998 never took off because there was no political compulsion. Simply speaking, bank nationalisation was done because it empowered millions with banking facility and endeared Indira Gandhi to the masses. But PSU banks were out of focus post-Indira Gandhi and politicians found no reason to consolidate operations and nurture them.</p>

<p>But PM Narendra Modi’s politics is around banking the unbanked like Indira Gandhi. He has to nurture the PSU banks and make them healthy if they have to be milked for empowering the masses. For new social initiatives like Mudra loans, the PSU banks must be healthy. Turning the PSU banks healthy is no mean task because for decades NPAs had accumulated without stressed assets resolution.</p>

<p>When Raghuram Rajan tried to crack the whip on the banks under UPA II, he did not get political support. He was able to implement the Asset Quality Review norms for banks only in 2015 after which the Bank NPAs have steadily risen each quarter. The Insolvency and Bankruptcy Code IBC 2016 was thereafter put in place for resolution of stressed assets.</p>

<p>So, though NPAs have soared after 2015, the banks are writing off or selling its bad loans each quarter. Additionally, the weaker banks will be merged with the stronger banks to ensure that no bank becomes a liability that cannot be revived. But it is not only the weak bank with the strong bank that is going to be the consideration for mergers. There will be many other areas including the location of branches and type of advances that needs to be studied before the pairing of banks is done for the merger. Let us see why the Bank of Baroda, Vijaya Bank and Dena Bank have been paired for merger and how it should fair in the longer run.</p>

<p><strong>Will merger lead to higher efficiencies?</strong></p>

<p>The key issue will be whether the banks that are merging will be healthy, efficient and more viable in its operations than the current entities. Secretary Department of Financial Services Rajiv Kumar says “that the new entity is positioned for a substantial rise in customer base, market reach, operational efficiency and a wider bouquet of products and services for customers.” The merged banks will create the third largest bank in India with total business of Rs 14.82 lakh crore.</p>

<p>Each bank gains from the merger in some ways. The amalgamation will also give a chance for the consolidated bank to shut down the many branches that will become redundant after the merger. That will effectively cut costs and result in huge savings. For example, Vijaya Bank is traditionally strong in the southern states while Bank of Baroda is stronger in the west. Dena Bank has a very high number of branches that do little business. Each bank will have to rationalise its branches and shut down those which are doing less business at the same location. These are post-merger issues that need to be tackled with finesse, but the consolidation was overdue and the first target should be to bring down the 21 nationalised banks to anywhere between 6 to 10 amalgamated banks that are then nurtured back to health.</p>

<p><em>(This article was first published on The DNA. Read the <a href="https://www.dnaindia.com/analysis/column-mergers-likely-to-help-banking-sector-in-the-long-run-2665642">original article</a>.)</em></p>

<p><em>(Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL)</em><br />
&nbsp;</p>


Soon after the acquisition of the ailing IDBI Bank by insurance giant LIC, the government announced the merger of Bank of Baroda with two smaller banks not in the pink of health.

Soon after the acquisition of the ailing IDBI Bank by insurance giant LIC, the government announced the merger of Bank of Baroda with two smaller banks not in the pink of health. The short-term profitability of the BOB will not be affected by the merger, but that the net assets of the three banks and the consolidation of branches and operations will be smooth and beneficial in the long run for the merged monolith. Bank mergers have long been viewed with scepticism after the SBI shares and profits were pulled down following the merger with its five associate banks. Although the merger catapulted SBI to the ranks of the top 50 global banks in terms of assets, its NPAs rose from Rs 1.07 lakh crore to Rs 1.89 lakh crore after the merger, which was over 9 per cent of total advances. The real benefits of consolidation are long term after the branch reduction takes place and the cost-cutting follows after all duplicate operations and redundancies are rationalised. Consolidation mooted long back The consolidation of 21 public sector banks has been discussed ever since the Narsimham committee report was tabled during the early days of liberalisation in 1991. The banking sector reforms proposed by the former RBI Governor in 1991 and 1998 never took off because there was no political compulsion. Simply speaking, bank nationalisation was done because it empowered millions with banking facility and endeared Indira Gandhi to the masses. But PSU banks were out of focus post-Indira Gandhi and politicians found no reason to consolidate operations and nurture them. But PM Narendra Modi’s politics is around banking the unbanked like Indira Gandhi. He has to nurture the PSU banks and make them healthy if they have to be milked for empowering the masses. For new social initiatives like Mudra loans, the PSU banks must be healthy. Turning the PSU banks healthy is no mean task because for decades NPAs had accumulated without stressed assets resolution. When Raghuram Rajan tried to crack the whip on the banks under UPA II, he did not get political support. He was able to implement the Asset Quality Review norms for banks only in 2015 after which the Bank NPAs have steadily risen each quarter. The Insolvency and Bankruptcy Code IBC 2016 was thereafter put in place for resolution of stressed assets. So, though NPAs have soared after 2015, the banks are writing off or selling its bad loans each quarter. Additionally, the weaker banks will be merged with the stronger banks to ensure that no bank becomes a liability that cannot be revived. But it is not only the weak bank with the strong bank that is going to be the consideration for mergers. There will be many other areas including the location of branches and type of advances that needs to be studied before the pairing of banks is done for the merger. Let us see why the Bank of Baroda, Vijaya Bank and Dena Bank have been paired for merger and how it should fair in the longer run. Will merger lead to higher efficiencies? The key issue will be whether the banks that are merging will be healthy, efficient and more viable in its operations than the current entities. Secretary Department of Financial Services Rajiv Kumar says “that the new entity is positioned for a substantial rise in customer base, market reach, operational efficiency and a wider bouquet of products and services for customers.” The merged banks will create the third largest bank in India with total business of Rs 14.82 lakh crore. Each bank gains from the merger in some ways. The amalgamation will also give a chance for the consolidated bank to shut down the many branches that will become redundant after the merger. That will effectively cut costs and result in huge savings. For example, Vijaya Bank is traditionally strong in the southern states while Bank of Baroda is stronger in the west. Dena Bank has a very high number of branches that do little business. Each bank will have to rationalise its branches and shut down those which are doing less business at the same location. These are post-merger issues that need to be tackled with finesse, but the consolidation was overdue and the first target should be to bring down the 21 nationalised banks to anywhere between 6 to 10 amalgamated banks that are then nurtured back to health. (This article was first published on The DNA. Read the original article.) (Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL)

Opinion: Mergers likely to help banking sector in the long run

<p>&nbsp;</p>

<p>&nbsp;</p>

<p>As the hustle and bustle over demonetisation shows signs of slowly ebbing away, the question of the hour is, how will&nbsp; the Indian government use demonetisation to empower the poor?</p>

<p>Free market thinkers, such as economist C.K. Prahalad, were categorical in their pronouncement that one of the best ways to empower the poor would be to generate additional income for them. Prahalad reasoned, India&rsquo;s acute poverty could be far&nbsp;quickly tackled if the poor consumers situated at the Bottom of the Pyramid (BoP) markets get access to&nbsp;a formal financial support system.&nbsp;</p>

<p>&nbsp;Over a decade ago, Prahalad observed that the total market for credit in rural India is INR 15,000 billion; moneylenders mostly supply this need at 100 per cent interest rate. Unfortunately, the nationalised banks have just scratched the surface, providing only INR 40 billion of the total need.&nbsp;</p>

<p>Prahalad saw the economic potential of bridging this lacuna by bringing organised banking to the poor: &quot;even if the organized sector only got to INR 10,000 billion and reduced the interest rate from 100 per cent to 20 per cent, you can calculate the income generated for the poor.&rdquo;&nbsp;</p>

<p>&nbsp;</p>

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<h5>Four years ago 557 million people were outside the banking facility but in 2015 it is down to 233 million</h5>
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<p>&nbsp;</p>

<p>Unfortunately, however, until as late as 2014 only 40 per cent of India&rsquo;s population had bank accounts. To counter the trend, the Modi Government has introduced Jan Dhan account for over 250 million Indians that are operational at zero balance.&nbsp;</p>

<p>Courtesy the newly introduced banking scheme, PricewaterhouseCoopers <a href="http://www.cnbc.com/2015/10/15/india-sees-massive-drop-in-unbanked-population.html">reports</a>, the unbanked population in India dropped by a whopping 57 per cent;&nbsp; four years ago 557 million people were outside the banking facility but in 2015 it is down to 233 million.&nbsp;</p>

<p>A week after demonetisation, the finance ministry stated that as of 16 November 2016, INR 640 billion had been deposited in Jan Dhan accounts. Despite this success, the Prime Minister&#39;s People&#39;s Wealth Scheme website <a href="http://pmjdy.gov.in/account">reports</a> that close to a quarter of these accounts have zero balance.&nbsp;</p>

<p>&nbsp;</p>

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<h5>Slow cash flow into the economy due to demonetisation has hurt the segment situated at the bottom of the pyramid the most</h5>
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<p>&nbsp;</p>

<p>&nbsp;</p>

<p>For the sake of argument, if we say half of this unbanked population is destitute and in no position to own INR 500 and INR 1000 notes, it leaves over 100 million who had cash but did not have the facility to deposit their high denomination notes in the banking system. This is, indeed significant and distressing.&nbsp;</p>

<p>&nbsp;</p>

<p>More traumatic is the fact that the slow cash flow into the economy due to demonetisation has hurt the segment situated at the bottom of the pyramid the most, simply because if the rich spend less than the poor earn less. Like it or not, a large part of what the rich spend goes as daily wages for the poor in the manufacturing sector, service sector, and farm sector as well as those working as domestic help.&nbsp;</p>

<p>So, if demonetisation has hurt the rich spenders by squeezing cash flow off the economy, it has hurt the poor even more because it hurt their earnings.</p>

<p>In India&rsquo;s shrill Left versus Right political discourse, the Opposition has highlighted the acute distress of the cash-starved poor. Whereas the government has touted the long term benefits of its digitalisation move.&nbsp;</p>

<p>As per initial reports, the artisans employed, particularly in the unorganised cottage industries, such as weaving, pottery and carpentry have been the hardest hit, followed by the farming sector. Not surprisingly, the Muslims who are predominant in these sectors have been the one hit hardest by demonetisation.&nbsp;</p>

<p>&nbsp;</p>

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<h5>This makes Mamata Banerjee, Mulayam Singh Yadav, Rahul Gandhi and Arvind Kejriwal bristle because demonetisation ends up hurting their vote banks the most</h5>
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<p>&nbsp;</p>

<p>&nbsp;This makes Mamata Banerjee, Mulayam Singh Yadav, Rahul Gandhi and Arvind Kejriwal bristle because demonetisation ends up hurting their vote banks the most. This is possibly the reason why the ruling party is less sensitive to the woes of the affected populace without realising that deep distress has taken the sheen out of the demonetisation drive.&nbsp;</p>

<p>Also, resourceful moneylenders have stepped into the cash vacuum. They were the only source of ready cash for the unbanked, albeit at high interest rates. Professor Prahalad would not have possibly envisaged that the effort to bring the population into the banking sector would have unwittingly pushed nearly a 100 million of the rural poor into the arms of the loan sharks.&nbsp;</p>

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<h5>A process based system has been recommended that would provide prompt digital approval of micro-credit to all Jan Dhan account holders</h5>
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<p>&nbsp;</p>

<p>The Indian government would do well to boost micro-credit and simplify terms of lending for Jan Dhan account holders to make demonetisation a pro-poor move. As shown by Grameen Bank of Bangladesh or even Bandhan Bank in India, micro-financing has seen much better success rate globally in terms of rate of return than retail or commercial banking. Licenses to 10 micro finance units have been granted by Reserve Bank of India in September 2015, making it possible to take micro financing in India rapidly to scalable levels.&nbsp;</p>

<p>Now that most of the INR 14,000 billion of currency in circulation have returned to the banks, it has increased bank liabilities dramatically. Unless the cash is quickly circulated back into the economy, the banks will have to shell out interests worth billions of rupees in the coming year, that could splash ink on their balance sheets.&nbsp; The simple way to do it quickly would be to offer micro-credit on the Jan Dhan deposits without additional paperwork.&nbsp;</p>

<p>For instance, a process-based system has been recommended that would provide prompt digital approval of micro-credit to all Jan Dhan account holders. This would be of great benefit to a fifth of India&rsquo;s population who have recently entered the banking system.&nbsp;</p>

<p>For Prime Minister Narendra Modi, fighting to gain people&#39;s approval in four major poll-bound Indian states, this step would translate into good economics as well as good politics.&nbsp;</p>

<p>&nbsp;</p>

<p>&nbsp;</p>


The Indian government should use the surge in Jan Dhan accounts following demonetisation to extend micro loans to the poor

As the hustle and bustle over demonetisation shows signs of slowly ebbing away, the question of the hour is, how will the Indian government use demonetisation to empower the poor? Free market thinkers, such as economist C.K. Prahalad, were categorical in their pronouncement that one of the best ways to empower the poor would be to generate additional income for them. Prahalad reasoned, India’s acute poverty could be far quickly tackled if the poor consumers situated at the Bottom of the Pyramid (BoP) markets get access to a formal financial support system. Over a decade ago, Prahalad observed that the total market for credit in rural India is INR 15,000 billion; moneylenders mostly supply this need at 100 per cent interest rate. Unfortunately, the nationalised banks have just scratched the surface, providing only INR 40 billion of the total need. Prahalad saw the economic potential of bridging this lacuna by bringing organised banking to the poor: "even if the organized sector only got to INR 10,000 billion and reduced the interest rate from 100 per cent to 20 per cent, you can calculate the income generated for the poor.” Four years ago 557 million people were outside the banking facility but in 2015 it is down to 233 million × Unfortunately, however, until as late as 2014 only 40 per cent of India’s population had bank accounts. To counter the trend, the Modi Government has introduced Jan Dhan account for over 250 million Indians that are operational at zero balance. Courtesy the newly introduced banking scheme, PricewaterhouseCoopers reports, the unbanked population in India dropped by a whopping 57 per cent; four years ago 557 million people were outside the banking facility but in 2015 it is down to 233 million. A week after demonetisation, the finance ministry stated that as of 16 November 2016, INR 640 billion had been deposited in Jan Dhan accounts. Despite this success, the Prime Minister's People's Wealth Scheme website reports that close to a quarter of these accounts have zero balance. Slow cash flow into the economy due to demonetisation has hurt the segment situated at the bottom of the pyramid the most × For the sake of argument, if we say half of this unbanked population is destitute and in no position to own INR 500 and INR 1000 notes, it leaves over 100 million who had cash but did not have the facility to deposit their high denomination notes in the banking system. This is, indeed significant and distressing. More traumatic is the fact that the slow cash flow into the economy due to demonetisation has hurt the segment situated at the bottom of the pyramid the most, simply because if the rich spend less than the poor earn less. Like it or not, a large part of what the rich spend goes as daily wages for the poor in the manufacturing sector, service sector, and farm sector as well as those working as domestic help. So, if demonetisation has hurt the rich spenders by squeezing cash flow off the economy, it has hurt the poor even more because it hurt their earnings. In India’s shrill Left versus Right political discourse, the Opposition has highlighted the acute distress of the cash-starved poor. Whereas the government has touted the long term benefits of its digitalisation move. As per initial reports, the artisans employed, particularly in the unorganised cottage industries, such as weaving, pottery and carpentry have been the hardest hit, followed by the farming sector. Not surprisingly, the Muslims who are predominant in these sectors have been the one hit hardest by demonetisation. This makes Mamata Banerjee, Mulayam Singh Yadav, Rahul Gandhi and Arvind Kejriwal bristle because demonetisation ends up hurting their vote banks the most × This makes Mamata Banerjee, Mulayam Singh Yadav, Rahul Gandhi and Arvind Kejriwal bristle because demonetisation ends up hurting their vote banks the most. This is possibly the reason why the ruling party is less sensitive to the woes of the affected populace without realising that deep distress has taken the sheen out of the demonetisation drive. Also, resourceful moneylenders have stepped into the cash vacuum. They were the only source of ready cash for the unbanked, albeit at high interest rates. Professor Prahalad would not have possibly envisaged that the effort to bring the population into the banking sector would have unwittingly pushed nearly a 100 million of the rural poor into the arms of the loan sharks. A process based system has been recommended that would provide prompt digital approval of micro-credit to all Jan Dhan account holders × The Indian government would do well to boost micro-credit and simplify terms of lending for Jan Dhan account holders to make demonetisation a pro-poor move. As shown by Grameen Bank of Bangladesh or even Bandhan Bank in India, micro-financing has seen much better success rate globally in terms of rate of return than retail or commercial banking. Licenses to 10 micro finance units have been granted by Reserve Bank of India in September 2015, making it possible to take micro financing in India rapidly to scalable levels. Now that most of the INR 14,000 billion of currency in circulation have returned to the banks, it has increased bank liabilities dramatically. Unless the cash is quickly circulated back into the economy, the banks will have to shell out interests worth billions of rupees in the coming year, that could splash ink on their balance sheets. The simple way to do it quickly would be to offer micro-credit on the Jan Dhan deposits without additional paperwork. For instance, a process-based system has been recommended that would provide prompt digital approval of micro-credit to all Jan Dhan account holders. This would be of great benefit to a fifth of India’s population who have recently entered the banking system. For Prime Minister Narendra Modi, fighting to gain people's approval in four major poll-bound Indian states, this step would translate into good economics as well as good politics.

Empowering the poor: Has demonetisation boosted micro-credit?

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Sandip Sen

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