Bank mergers, sales: End game begins

Reforms in India are a difficult business, especially when it means privatisation. It often leads to loss of employee privileges, more accountability, and results in sustained resistance due to fear of job losses.

The bank unions had called for a two-day strike recently and will progressively increase attrition once the government names the banks that it proposes to privatise along with IDBI. Opposition parties, which are strong in several states, are waiting in the wings to oppose the privatisation effort tooth and nail.

Can bad banks manage the NPA deluge? During the financial year 2017 to 2020, the government proactively decided to consolidate most of the large public sector banks without much resistance under six anchor banks namely, State Bank of India, Bank of Baroda, Punjab National Bank, Canara Bank, Union Bank and Indian Bank.

The total bad debts of these six anchor banks exceeded Rs 2 lakh crore after the mergers. It is unlikely that any of these banks under the consolidation will be sold as the balance sheets show high Non-Performing Assets (NPAs).

To clean up the balance sheets, the Indian Banking Association has been pushing for a bad bank since 2018, where the stressed assets that have a low net asset value can be junked.

The government in its 2021 Budget finally agreed to start a bad bank under the Asset Reconstruction Company (ARC) model. The idea is to help banks clean up their balance sheets. But can they, while accountability is missing and bank frauds are mounting?

There have been about a dozen Indian ARCs operating since the last decade. But the total capital employed is less than Rs 6,000 crore and the total assets handled by it is just around Rs 50,000 crore.

Another bad bank supported by the tax payer’s money can takeover junk assets of another Rs 50,000 crore. But can it dispose those assets in a reasonable time frame? Highly unlikely.

Also with gross NPAs, as per RBI, rising to around 14.7% in the post-Covid era of March 2021, the ARCs will look puny.

Which are the banks that will be sold? While 15 banks have been merged under six anchor banks, six PSU banks have been left standalone. The government has announced that two banks will be privatised in the current financial year.

The two largest among them— the Mumbai-based Bank of India (BOI) and the Chennai-based Indian Overseas Bank (IOB)— both with a large footprint in the south of India, are the most potential candidates for privatisation.

The BOI has nearly 50,000 employees as against 31,000 of IOB. While BOI has over 5,100 branches and 7,400 ATMs, the IOB has around 3,400 branches and 3,000 ATMs.

There are two dark horses too in the running. One is the Bank of Maharashtra, with an employee strength exceeding 12,000, with around 1,900 branches and 1,000 ATMs with a strong footprint in western India.

The other is the Central Bank with an employee strength of over 30,000 and over 4,600 branches and 3,600 ATMs with a strong presence in Central India. The two banks least likely to be sold are the UCO bank and the Punjab and Sind Bank as both are unlikely to find any buyers.

Bank of India had a gross NPA of 14.78 % in the year 2019-20 that amounted to nearly Rs 16,500 crore. Though its NPA has reduced by over a percentage point in the third quarter of the current year and its profits have grown sharply, the net interest income has fallen by nearly 9%.

The share price has however doubled in the past six months period to touch the Rs 80 mark as the NPAs dipped and the bank raised debt capital of Rs 750 crore through Basel-III-compliant AT-1 bonds in January.

The government currently holds 89.1% of BOI stocks. It needs to shed 40% of its stake for successful privatisation.

IOB started gaining some ground last year after losses for consecutive 18 quarters. After provisioning of over Rs 40,000 crore in the balance sheet, the gross NPA came down to Rs 19,913 crore or 14.78% in the year 2019-20 from Rs 33,398 crore (21.97%) the previous year.

The government currently holds a 95.8% stake in IOB which has increased its equity base nearly every year from 2016 onwards. Because of this, the IOB stock price is languishing at around Rs 17.

Hence, it is possible that Bank of Maharashtra with a better valuation of around Rs 23 is privatised where the government holds 92.4% stake and the total equity capital is Rs 5,824 crore as against Rs 16,437 crore for IOB. In that case, it will be BOI and BOM that will be privatised.

(The writer is a journalist and author of three books on economic governance)