After two days of brainstorming at the second annual Gyan Sangam for bankers – the bankers, the regulator and the Finance Minister appeared to have hit upon consolidation – one big way forward for India’s government owned banks.
The Gyan Sangam is an annual event where bankers and officials come together to discuss fundamental issues like capital requirements, appointments, technology and generally the way forward.
Right now the threat to the banks is the massive pile up of non-performing assets or loans that are not getting paid back.
One message from the Sangam appeared to be that the government and the regulator were willing to provide a helping hand to the banks but the banks would have to pull themselves up and recover the money from defaulters.
To discuss the key takeaways and the effectiveness of this Sangam are AK Purwar, former Chairman of State Bank of India (SBI) and Leo Puri, Managing Director of UTI AMC.
Purwar says consolidation of banks is need of the economy since it will give the benefit of size and also rationalise the staff and branches. According to him the country needs at least 5-6 banks the size of SBI to compete in domestic market and globally too.
Puri says the idea is not to merge the weaker banks with the stronger ones, but to reduce the financial liability on the government and tax payers eventually. "Consolidation is part of a process to essentially create a more sustainable financial burden and eventually hopefully redefine relationship between the government and the nationalised banks," he says.
From the various discussions that are taking place one could interpret that government may thinking of exiting from the concept of nationalistaion of banks.
Below is the verbatim transcript of AK Purwar and Leo Puri’s interview with Latha Venkatesh on CNBC-TV18.
Q: This suggestion of consolidation is a very old one. P Chidambaram pursued it for a very long time. Do you think now the time has come that we will try to whittle down the number of banks?
Purwar: If you see the present position where the economy stands, the way in which the economy is growing, this country badly requires at least 5-6 banks of the size of the SBI, which are able to compete in the domestic market and which are able to complement each other in the global market place.
Therefore, consolidation in the need of the economy - for last couple of years in the last one decade and going forward, it is much more required. So not only it gives the benefit of size, it also rationalises the staff, rationalises the branches.
Q: Since you were there at the Sangam, I more wanted your view on this. I hope the idea was not to merge the weaker bank with some of the stronger banks. If at all, that idea comes then on Tuesday the strong ones shares are going to fall like a tonne of bricks. I hope that idea was not considered?
Puri: That was not the idea at all. In fact, the fundamental idea behind consolidation -- at the end of the day -- is to reduce the financial liability on the government and on us as taxpayers eventually and therefore putting weak banks together is only going to enhance as opposed to reduce that.
So it is not an end in itself. Consolidation is part of a process to essentially create a more sustainable financial burden and eventually hopefully redefine relationship between the government and the nationalised banks. Underlying this is also a broader debate, which is now the right time to be given a broader rearing and the Gyan Sangam was not necessarily the place to do it because it is only public sector bankers. However, the question we also have to start asking is have the objectives of nationalisation as they were originally conceived nearly 50 years ago have been fully met and we are now getting what our clearly diminishing returns out of the governance structure that we have and what is the exit strategy from that.
So, I think what you are seeing is the government setting in motion a discussion around that exit strategy.
Q: That is very useful if you are saying that exiting from nationalisation as a concept was what the government is thinking about is that right?
Puri: That is my interpretation of the various steps that are being taken. It is not what they are saying necessarily, it is my personal interpretation when I look at the approach of the asset quality review and the way that is being pushed through. When I look at the measures announced in the Budget vis-à-vis IDBI; when I look at the meaning and the end game if you like of consolidation I think we are seeing the beginning of a serious debate. You have to put this in the context of what happened with the Nayak Committee, the creation now of the Bank Board Bureau which might lead to bank investment.
Q: Despite the Nayak Committee very clearly saying that the government’s stake should go below the 50 percent mark the government has not been forthcoming on that issue at all and at the press conference the FM and the Minister State For Finance didn’t refer to it so let me not get to that idealistic situation right away. Let us first discuss consolidation a wee bit more. One of the things which bankers were even before the Sangam speaking were that consolidation on a platform basis, some of them have TCS technologies, some of them have Finacle Infosys technology should that be the way to go the platforms or will it be geographical? You get Indian Overseas Bank (IOB), Andhra Bank, Indian Bank together and rationlise the branches and have on branch geographically south so that cultural disturbances are not there. What would you think is a good idea?
Purwar: The way in which I look at it is that there are certain banks which are very strong having very solid presences in some select areas. In certain businesses also there are certain banks which have huge domain expertise in knowledge in a particular sort of business. So, it should be both one regional should also be attempted in a serious manner. However, more importantly the businesswise, I have always been feeling that the services sector which contribute so significantly to the growth of the Indian economy it doesn’t have any particular bank to cater to the specialised needs of the services sector of the economy.
There are some banks which are doing that, but that has to be taken forward. So, my assessment here is that this will happen, this will grow. The regional will be the fast but then activity wise also the consolidation begins.
Q: So, banks which are specialised in lending to the services sector is what you would think of. Well. There is just one more point on consolidation which I wanted to ask since he was in there was the exact opposite discussed at all? I heard a reference to niche bank. I was hoping some banks will be allowed to die. For instances Indian Overseas Bank, the south is extremely well banked. They have a tradition; some districts like Nagapattinam have also had very good private sector banks. Ernakulam is 100 percent banked; there are a bunch of private sector banks – there are Federal Bank, South Indian Bank, Karur Vysya Bank, Lakshmi Vilas Bank, City Union Bank. It is well banked and then now with technology Hyderabad, Chennai and Bangalore are digital very active cities. There are four small banks licensed over there Ujjivan Financial Services, ESAF Microfinance and Investments, Janalakshmi Financial Services and Equitas in south. It is already well banked by the private sector should we not just give euthanasia to some of those banks which have about 12 percent non-performing loans (NPLs). Was that a plan at all?
Puri: I think the minister state has been quite clear in saying that there are two routes forward. The hope is that this would in some sense pay a voluntary bottom up process so that can be debated. The idea is that either banks will come forward and accept and architecture where they see it in their interest, merge and consolidate and create more viable banks because of economy is a scale and scope around technology, talent and capital. If they chose not to do so then they have an option to develop a strategy as a differentiated bank with a niche strategy.
Now whether or not that is feasible in a world which is as competitive as it is and this was also discussed. Given the enormous shifts that have happened in the competitive arena new licenses as you say have been issued, you have technology which is driving payments banks will you really be able to compete effectively today as the niche bank.
However, nevertheless that option remains that if you don’t wish to become part of an agglomeration or an amalgamation or coming together a bank you in theory have that option to demonstrate that you can develop a viable strategy. The notion of you euthanasia is of course a premature one from a political perspective. However, I actually do think may be a year or two from now when we get back to that issue around how do we exit if you like from the decisions made 50 years ago I think that will be back on the table.
It is a market place that will determine that. I don’t think you are going to see a political decision to obviously shut down banks. It is extremely unlikely.
Q: I wish it is a market place because that is what we heard in the first Gyan Sangam that consolidation will not be forced by the ministry but that the boards of the banks will be strengthened by the Bank Boards Bureau and they will bottom-up give ideas about whom they will merge with even if it were a private sector entity. Shouldn’t that be the way forward? This whole suggestion by the bankers that an expert committee should be appointed and that committee should suggest consolidation isn’t it nonsensical? I don’t want to dismiss the thought I am not such an expert on that. Wouldn’t it better if the boards are strengthened by this Bank Boards Bureau and the boards recommend what to do whether they should be become niche or whether they should hold out their hand to another bank?
Purwar: The point which you are making theoretically, yes, it is very correct that the board should try. However, you know what happens every individual bank now that they are looking to the government for capital support. Lot of banks have huge problems in respect to the asset quality there are certain banks which are terminally sick so it has to be mixed of both. One it has to be sourced by way of reorganising some of the weak banks, some of the regional banks will have to be made and four or five banks will have to be of the size of State Bank of India. So, this is a good opportunity for this system to have to least four-five very big banks operating in the country.
Q: On this resolution, were there any strong ideas about ARCs or private equity or the stressed asset fund that Jayant Sinha was speaking about?
Puri: I think there was a very constructive discussion. In fact I think Rajan put it quite well when he said in a way many of the tools that the Reserve Bank of India (RBI) has given the banks strategic debt restructuring (SDR), 5:25 and so on, corporate debt restructuring (CDR) – all the various acronyms, these are all ways to in a way fill the gap because we don’t yet have a fully developed bankruptcy code and resolution mechanism in place although we are told that it is coming. In the interim these are the best tools that we have but there was a lot of discussion around how you could actually strengthen the Debts Recovery Tribunal (DRT) and the arbitration process and of course the hope was being held out with the Bankruptcy Bill and the insolvency process would actually come through as a legislative mechanism over the course of this parliament.
So, that would be a sea change if that were to happen. Alongside that, the mechanism for digesting the current set of assets, yes, there is a very attractive proposal around a few of the larger banks in the system coming together to create a stressed asset ARC where they will take a much more dynamic and clear responsibility for leading resolution for specific sets of loans and different banks could take the lead on different loans. I think that was a good idea and one that has the potential to work quite well actually.
Q: There is just one last issue I wanted to discuss. The Central Vigilance Commission (CVC) addressed the bankers, you think there is now greater understanding or support from the government and the CVC to the banks that if they sold a Rs 100 asset for Rs 10 they will not be questioned about cronyism or corruption, do they have that confidence now?
Puri: I think these are very nuance issues. I think there is a very sincere and very well intentioned attempt on the part of the government and the minister to provide that reassurance. However, as you know this is a broader issue across government, it is not just in the financial sector. When you use language like say honest decisions taken with good judgment, with reasonable judgment, etc will not be questioned even if they go wrong, most season bureaucrats and for that matter bankers will tell you they don’t quite sort of believe that because there is a lot of room for interpretation as to what with hindsight will have appeared a reasonable judgment and who is actually going to make that inference.
It is a bit hard if you are on their shoes to actually assume that you are being given some kind of blanket in unity simply by reassurance and reasonable judgments taken in the best interest with good intent and in the absence of any obvious corrupt intent will be if you like held to be honest mistakes. So, we don’t have a tradition or culture of actually accepting honest mistakes and I don’t therefore think that that will radically alter anything. Frankly it just epitomises how difficult it is without addressing the underlying issue of ownership and governance to change these issues, issues of talent, accountability and so on.
I commend the fact that we are trying to do everything we can in that direction but it is hard to be more than incremental on those measures under the current scheme of things. I am not sure how much solace to be honest the chairman in the room would have drawn from these reassurances.