Bank mergers part of a long-drawn cleanup process: Rajiv Kumar, Finance Secretary


“The challenge before the boards and before the government is to stick to whatever we have announced,” Rajiv Kumar, Finance Secretary told ET Now in an interaction. Excerpts…


ET NOW: What was the parameter behind the PSU bank merger?


Rajiv Kumar: If you look at the entire landscape in the financial institution sector, there were various issues as you were aware in the past, be it with private sector banks, public sector banks, rating agencies, auditors, NBFCs or HFCs. In the last four-five years, there are a number of steps which have been taken to ensure a strong and clean responsible behaviour. All stakeholders have to be responsible — be it creditor, debtor, rating agencies, auditors, board members, boards, senior management, everyone.

So number one, we have been cleaning the PSU banking space up for the last three-four years. Every bank now there has recorded recoveries, there is a record level of provisioning, there is also a record level of resolution which is happening. Having laid a strong foundation, now the time is to leap forward.

What is that leap forward? It is to look for banks with heft, with size so that you gain the benefits of efficiency. Efficiency comes from common procurements. If you are a big bank, you can invest in technology, partner with fin techs, work from a position of strength. And therefore, what was required is scale and size. So we have created six banks which are absolutely fine and robust. We have shown you their figures, their capital adequacy norms. We have shown you almost all are above or near 10.875 which is the CRAR. All of them are by and large above 7. CET1 which is also 1% higher than the Basel norms. So we are maintaining more than the Basel norms. And then they are also well provisioned.

Two, we have left national space, national pan-India approach and a strong regional connect. Therefore, the entire consolidation process is complete. Now with certainty, they can work and the rationale behind was that they should be on the same platform so that there is no disruption and discomfort to the customer.

ET Now: But the bigger question and this is what everybody has been asking for whosoever has been looking at the banking space for a very long time: does it mean goodbye to the good old market-oriented reforms because it is the government that is pushing the bank boards to look at this merger because we should really be looking at commercial considerations, what were the commercial considerations with respect to the merger and the amalgamation that we are looking at?


Rajiv Kumar: So, who decides what are the commercial considerations. The commercial considerations are derived out of the efficiency gains which they are going to have.

We mentioned about Bank of Baroda, Vijaya and Dena Bank. So the first advantage was that Dena Bank customers started getting credit because they came out of PCA. Then all their advantages were in terms of efficiencies through operations, through verticals which they have created. The banks are simultaneously seeing growth, their ability to extend credit has improved and so has their capacity. They have a very robust way to look at risks. Look at the product mix, loan book mix – corporate, retail, MSMEs, there is strong commercial viability.

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And as you said about boards, we were in consultation with the banks, all the stakeholders. We were in consultation with them for the last four-five months and then were waiting for the time when they were robust. There is no point merging just for the sake of merging. You combine the weak with the strong and even pull down the strong one is not the reason. Since you are going to create them to support the credit needs of an aspirational Indian, you have to wait for the right time. And now the boards will take the call. They will consider. The decision is to ask the boards independently to consider this proposal. All of their suggestions will be factored in.

ET Now: Since you are saying that whatever suggestions that will come in, the government is going to factor in, the question is some of the banks that will be amalgamated into a bigger banks have higher NPAs which also means that there will be stronger banks now which will be impacted by the fact that there will be an amalgamation and their NPAs too will see a rise. What happens in that case? How are you looking to provide for those banks?


Rajiv Kumar: There are three parameters for amalgamation — they should have a CRR ratio of 10.875 plus and they should have CET of 7 plus which is 1% higher than Basel norms. They should have NPAs below 6 per cent and all of them as combined entities are close to that. Syndicate and Canara are below this. Indian and Allahabad are meeting all these requirements. So, essentially that entire capital is going to go towards the growth in PNB or in one or more. With the kind of capital which has been infused only a small portion would go towards maintaining those ratios and rest will be used for facilitating growth. The capital we have allocated is on a tentative basis. We will consider the board recommendations when they tell us what exactly they need. But the entire exercise has taken into account clearly that all of them, in the combined entity, on the effective date should remain compliant to all the regulatory norms and should have sufficient growth capital.

ET Now: From 27 we have seen 12 banks out of which 6 will be the bigger banks. How will you — A) align them with global standards and B) when you have such big banks of such big magnitude how will you ensure that frauds do not happen? Also, they are very close to the ‘too big to fail’ category, so are we over-dependent on the large banks?


Rajiv Kumar: Why were frauds happening? They were happening because of the appraisals, because of the non-separation of the roles, because of the non-specialised monitoring of the large value loans. It is not a premature action, it is after you have put everything in place through the reforms that you have gone forward and merged them.

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Now, coming to ‘too big to fail’, we are already 1% plus Basel and 0.25% for domestically important banks is also built into it. So they will not only maintain regulatory capital which is 1% higher, but they will also maintain 0.25% extra and the government is there. The public sector banks are the one where you go to in rural areas or in small towns. It is their reach and when you are diverting the attention towards financial inclusion, you have to have the size and reach to cater to everybody. We are aspiring to have an account for every adult in the country. We are almost there. Then we have Mudra and other products to provide social security and it will reach them through these PSU banks.

ET Now: Banks have been nudged for the last couple of months in order to transmit rates, to provide higher credit to the economy. I want to understand from you that is there a demand problem that there are not enough people who are taking the loans or is it the problem with banks, what has been your assessment being in the government? you have been announcing one measure after the other, where does the problem really lie because the RBI yesterday in its report also mentioned that these are cyclical issues but if it persists for very long, the RBI has said that it is kind of pretty difficult to a certain that where are the worries really coming in from?


Rajiv Kumar: The transmission has to happen according to the MCLR linked processes and also according to the repo linked processes. There is no nudging at all. We talk to them and it is their duty to be efficient. MCLR is linked on the basis of what? The cost of deposit you have. Approximately 60% deposit comes from where? It comes from a fixed tenure term which you cannot change in between. So there is a time gap in transmission. What is the solution? The solution is to simultaneously give the option to the customers that you also have a repo-linked rate. The challenge before the boards and before the government is to stick to whatever we have announced.

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ET Now: In terms of governance reforms a lot has been done. You are empowering the boards in a big way. What more can we expect in terms of governance reforms, are there more in the offing because the PJ Nayak Committee also suggested a slew of reforms or has the government pretty much taken and done everything that was recommended as a part of that report?


Rajiv Kumar: If you look at the entire metric today, it is not only consolidation. It is capitalisation and it is also governance reforms and governance reforms have a direction. That direction is to make the boards independent. The idea is to transfer from the government as much as power as possible, make DFS as redundant as possible, empower bank boards and appointments outside the DFS. I do not have any role. This is based on merit cum preference they give. It is not easy to transfer powers but you have to ensure they are run professionally. If there’s anything remaining, it is an evolving process, the direction is to make it a board-governed entity.

ET Now: Firstly on the recapitalisation amount, Rs 55,000 crore is what you have promised right now. Help us understand is this growth capital? How soon will this money really be put into the banks and also what happens to the remaining Rs 15,000 crore?


Rajiv Kumar: A small part will be used for regulatory purposes if required, otherwise it is all for growth. The amount is for both regulatory and growth requirements but fundamentals will show you that very minimal is needed for regulatory measures. It should not take more than 7-15 days to release this amount. And as for the Rs 55,000 crore figure, we are waiting for the board considerations. There might be a minor adjustment there but it is within the range of Rs 55,000 crore as per our assessments. But we are open to the boards’ decisions.

ET Now: On RBI approvals, at what stage will RBI be consulted? An initial level of consultation has already happened with the RBI but where from here, how soon in terms of time-line can we expect the mergers and the synergies to come into place?


Rajiv Kumar: The process goes like this: after the alternate mechanisms decision the announcement is made, boards are requested to give their views, they will give back to us, we will analyse it and after compiling it, we will send it to RBI for formal consultation. Once the consultation is received, the scheme of amalgamation will be made, that will again be sent to RBI because that is a two-stage consultation. Then after it is finalised, will the final decision be made. So effective date will be decided within a short term time but it will be somewhere between seven-eight months.





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