Repositioning PSBs for a $5 trillion economy

The government last month announced a slew of financial sector reforms, including mergers of public sector banks that would be imperative for a growth path from a $2.6 trillion economy to a $5 trillion economy.

The government also proposed to loosen control over banks by not interfering in commercial decisions of banks. The IBC has also withdrawn the loan restructuring schemes of stressed assets, which is often without actual resolution.
The number of banks in a lenders consortiums has now been brought down from 30-31 members to 7- 9. Specialised agencies will now monitor loans of above Rs250 crore.
To make management accountable, the board committee of nationalised banks will appraise performance of higher executives such as GM and above (including MD). To make span of control manageable in large PSBs, post consolidation, boards have been given flexibility to introduce CGM level as per business needs. This includes hiring of Chief Risk Officer from outside, at market-linked compensation to attract best available talent.
To enable succession planning, boards have been empowered to decide system of individual development plans for all senior executive positions.
To ensure sufficient tenure, boards have been given flexibility to prescribe residual service of two years for appointment of GM and above.
PSB boards have been empowered with Risk Management Committee given mandate to fix accountability for compliance of Risk Appetite Framework.
Directors on management committee of board (MCB) have been longer term to enable them to contribute effectively.
MCB’s loan sanction thresholds have been enhanced by up to 100 per cent, to enable focussed attention to higher value loan proposals.
Boards of large PSBs have been given flexibility to enhance sitting fees of non-official directors (NODs).
For better board committee functioning, boards have been given mandate to trim/and rationalise board committees.
NODs will perform role analogous to independent director.
Boards have been given mandate for training of directors, both for induction and for specialised purposes.
Boards will evaluate NOD performance annually on peer-review basis.
Creation of leadership pipeline under BBB’s Leadership Development Programme.
Executive Directors’ strength in larger banks has been raised to 4, for better functional focus and thrust to technology.
Quick follow-up on measures announced on 23 August 2019:
  • Banks to launch Repo rate linked loan products - 8 PSBs have launched repo-linked home/vehicle/mortgage/cash-credit loans; 
  • For customer ease, instructions have been issued for time-bound return of loan documents. This will be enforced through CBS and regional managers are responsible;
  • Also, implementation of online tracking of loan applications has been initiated with retail/MSME on Loan Management Systems; 
  • Instructions have been issued on transparent one time settlement (OTS) policy;
  • To support to NBFCs/HFCs, the government will provide partial credit guarantees and an amount of Rs3,300 crore has been sanctioned and Rs30,000 crore more is in pipeline;
  • Co-origination of loans by PSBs jointly with NBFCs - Bank-NBFCs tie-ups already in place and more are in pipeline.
The government also followed up with fresh mergers after the merger of Bank of Baroda with Vijaya Bank, merger of Indian Overseas Bank, UCO Bank, Bank of Maharashtra and Punjab and Sind Bank and Dena Bank and the amalgamation of SBI subsidiaries with the parent.
Accordingly, 10 public sector banks will now form four large entities, creating the second, fifth and seventh largest banks in the country.
PNB + Oriental Bank of Commerce + United Bank
Will create the second largest PSB with business of Rs17.95 lakh crore (~1.5 times PNB), with the largest branch network in India, of 11,437 branches. It will create high CASA and lending capacity combined in consolidated bank. 
Besides, the merger is expected to result in large cost reduction potential due to network overlaps, besides cost saving and income opportunities for JVs and subsidiaries.
The amalgamated PNB-OBC-United Bank of India will have total business of Rs11,82,224 crore + Rs4,04,194 crore + Rs2,08,106 crore (Rs17,94,526 crore); gross advances of Rs5,06,194 crore + Rs1,71,549 crore + Rs73,123 crore (Rs7,50,867 crore); deposits of Rs6,76,030 crore + Rs2,32,645 crore + Rs1,34,983 crore (Rs10,43,659 crore); CASA ratios of  42.16 per cent 29.40 per cent and 51.45 per cent (average of 40.52 per cent); domestic branches of 6,992,  2,390  and 2,055 (11,437); PCR of 61.72 per cent, 56.53 per cent and 51.17 per cent (average 59.59 per cent); CET-I ratio of 6.21 per cent, 9.86 per cent and 10.14 per cent (average 7.46 per cent); CRAR ratios of 9.73 per cent, 12.73 per cent and 13.00 per cent (average 10.77 per cent); net NPA ratios of 6.55 per cent, 5.93 per cent and 8.67 per cent (averaging to 6.61 per cent) and employees of 65,116, 21,729 and 13,804 (adding up to 1,00,649) as per March 2019 financials.
All three banks work on the CBS platform (Finacle), which will enable quick realisation of gains. 
Canara Bank + Syndicate Bank 
The merger will create the fifth largest PSB with business of Rs14.59 lakh crore (~2 times Union Bank of India), with the fourth largest branch network in India 0f 9,609 branches. Total business is expected to become twice to 4-½ times existing bank business.
It will result in large cost reduction due to network consolidation besides cost saving and income opportunities for JVs and subsidiaries.
The amalgamated bank will have total business of Rs10,43,249 crore + 4,77,046 crore = (Rs15,20,295 crore); gross advances of Rs4,44,216 crore + Rs2,17,149 crore + (Rs6,61,365 crore); deposits of Rs5,99,033 crore +Rs2,59,897 crore = Rs8,58,930 crore; CASA ratio of 29.18 per cent and 32.58 per cent (30.21 per cent); domestic branches of 6,310 and 4,032 (10,342); PCR of 41.48 per cent and 48.83 per cent (44.32 per cent); CET-I ratio of 8.31 per cent and 9.31 per cent (8.62 per cent); CRAR ratio of 11.90 per cent and 14.23 percent (12.63 per cent); Net NPA ratio of 5.37 per cent and 6.16 per cent (5.62 per cent) and employees of 58,350 and 31,535 (89,885) as per March 2019 financials.
Union Bank + Andhra Bank + Corporation Bank
The combined entity will have business of Rs7,41,307 crore, Rs3,98,511 crore and Rs3,19,616 crore, adding up to Rs14,59,434 crore, gross advances of Rs3,25,392 crore, Rs1,78,690 core and Rs1,35,048 crore, adding up to Rs6,39,130 crore; deposits of Rs4,15,915 crore, Rs2,19,821 crore and Rs1,84,568 crore, adding up to Rs8,20,304 rore); CASA ratios of 36.10 per cent, 31.39 per cent and 31.59 per cent, averaging to 33.82 per cent; domestic branches of 4,292 2,885 and 2,432, totalling 9,609; PCR of 58.27 per cent, 68.62 per cent and 66.60 per cent, averaging to 63.07 per cent; CET-I ratios of 8.02 per cent, 8.43 per cent and 10.39 per cent, averaging to 8.63 per cent; CRAR ratios of  11.78 per cent, 13.69 per cent and 12.30 per cent (averaging to 12.39 per cent); net NPA ratios of 6.85 per cent, 5.73 per cent and 5.71 per cent (averaging to 6.30 per cent) and total employees of 37,262, 20,346 and 17,776, adding up to 75,384, as per March 2019 financials.
Indian Bank + Allahabad Bank 
The amalgamation of Indian Bank and Allahabad Bank will create the country’s seventh largest PSB with business of Rs 8.08 lakh crore (~1.9 times that of Indian Bank), nationwide presence with strong networks in the South, North and East and doubling of business size.
The merged entity will have total business of Rs4,29,972 crore and Rs3,77,887 crore, adding up to Rs8,07,859 crore; gross advances of Rs1,87,896 crore and Rs1,63,552 crore, totalling Rs3,51,448 crore; deposits of Rs2,42,076 and Rs2,14,335 crore, adding up to Rs4,56,411 crore; CASA ratios of 34.71 per cent and 49.49 per cent, averaging to 41.65 per cent; domestic branches of 2,875 and 3,229, totalling 6,104; PCR of 49.13 per cent and 74.15 per cent, averaging 66.21 per cent; CET-I ratios 10.96 per cent and 9.65 per cent, adding up to 10.36 per cent; CRAR ratios of 13.21 per cent and 12.51 per cent, averaging 12.89 per cent; net NPA ratios of 3.75 per cent and 5.22 per cent, averaging 4.39 per cent and employees of 19,604 and 23,210, totalling42,814 as per March 2019 financials.
Both banks work on the CBS platform (BaNCS), which would enable quick realisation of gains.