Nine have net NPAs of over 5%, close to PCA risk threshold
Out of the 10 banks that the government has decided to merge to create four, nine have net non-performing assets (NPAs) of over 5%. Only Indian Bank’s net NPA is below 5%, at 3.75%, as on March 31, 2019.
United Bank of India, for example, has a net NPA of 8.67% as on March 31 with provision coverage ratio (PCR) of only 51.17%. As a result, the merged entity will have a net NPA of 6.61% and PCR of 59.59%.
United Bank of India is also under the prompt corrective action framework (PCA) of the RBI due to high NPA.
Punjab National Bank (PNB), which suffered a loss of about ₹14,000 crore last year in the Nirav Modi scam, has a net NPA of 6.55%, while Oriental Bank of Commerce, which came out of the PCA framework earlier this year, has a net NPA of 5.93%. These three banks will create the second largest public sector bank after State Bank of India with around ₹18 lakh crore of business.
Net NPA of 6% is one of the risk threshold of PCA, the breach of which could invite restrictions by RBI.
Both banks in the second merger — Canara Bank and Syndicate Bank — have low a provision coverage ratio of 41.5% and 48.8% respectively. The merged entity’s PCR will be 44.32%, much lower than the regulatory comfort of 70%. The net NPAs are also high at 5.37% for Canara and 6.16% for Syndicate.
Net NPAs of all the three banks in the third merger — Union Bank, Andhra Bank and Corporation Bank — are around 6%, with Union Bank having the highest at 6.85%. Andhra Bank’s net NPA is 5.73%, while that of Corporation Bank is 5.7%. The combined NPA will be 6.3%.
Harmony in asset quality
“The amalgamation will require harmonisation of asset quality and provisioning levels among the merging banks and may spike the credit provisions this year as was seen in the recent merger of Bank of Baroda,” said Anil Gupta, vice-president and sector head — Financial Sector Ratings, ICRA. He added that given the sizeable capital infusion being announced for amalgamating banks, the merger was unlikely to be credit negative for merging banks.
Asset quality of the fourth set — Indian Bank with Allahabad Bank — looks much better, mainly because of the lower NPA of the former. The combined net NPA is 4.39%. Indian Bank’s provision coverage ratio is, however lower, at 49.13%.
Due to high bad loans of the merged entities, profitability could be impacted in the near term.
“Merger related issues including HR/IT related synchronisation, branch rationalisation ad realigning NPAs could impact interim profitability,” said Mona Khetan, banking analyst with Reliance Securities.
The fourth set also has geographical synergies. Allahabad Bank, headquartered in Kolkata, is stronger in east and north India, while Indian Bank has strong presence in the south.
This geographical synergy is somewhat missing in the other three sets. In the first set, both PNB and OBC are north-based, with strong presence. Similarly, both Canara Bank and Syndicate Bank have strong presence in the south. In the third set, Andhra Bank and Corporation Bank have strong presence in the south, while Union Bank is headquartered in Mumbai, with a national presence.
However, in all the four sets of merger, there is technological synergy as all the banks in a particular bucket have similar core banking solution platforms.
‘After reviewing banks’ fundamentals, we see no reason for recapitalisation to exceed ₹70,000 crore’
Finance Minister Nirmala Sitharaman on Friday laid out the broad strokes for the recapitalisation plan for public sector banks, providing the approximate allocation breakup for about ₹55,000 crore of the ₹70,000 crore promised in the Budget.
Ms. Sitharaman, while speaking at a press conference to announce the merger of 10 public sector banks into four entities, said that the final figures for the allocation would be decided following consultation with the banks themselves, but that the figures provided on Friday were reasonably accurate.
Finance Secretary Rajiv Kumar said, as of now, the recapitalisation amount would remain at ₹70,000 crore, and added that the mergers announced on Friday were all that the government had envisaged so far.
“As the Finance Minister said, the government is fully committed to making the banks robust,” Mr. Kumar said at the press conference. “However, after seeing the fundamentals of the banks before and after the merger, we see no reason for the recapitalisation amount to exceed the ₹70,000 crore announced.”
“As of now, the roadmap for mergers is final,” Mr. Kumar added. “Twelve is the right number of banks which should remain.” Punjab National Bank, which will now be merged with Oriental Bank of Commerce and United Bank, will receive the highest share of the capital infusion of about ₹16,000 crore. Union Bank of India, which is to be merged with Andhra Bank and Corporation Bank, will receive about ₹11,700 crore.
Punjab National Bank will, post-merger, become the second-largest bank in the country, after State Bank of India. The amalgamated Union Bank of India will become the fifth-largest bank.
Bank of Baroda, which had earlier been merged with Dena Bank and Vijaya Bank, will likely receive ₹7,000 crore, and will be the third-largest bank in India.
Canara Bank, to be merged with Syndicate Bank, will receive about ₹6,500 crore of the capital infusion. It will be the fourth-largest bank in India, post-merger. Indian Bank, which will be merged with Allahabad Bank, will receive about ₹2,500 crore, and will be the seventh-largest bank.
The government also announced the tentative recapitalisation breakup for the remaining smaller banks. Of these, Indian Overseas Bank is to receive about ₹3,800 crore, Central Bank of India ₹3,300 crore, UCO Bank ₹2,100 crore, United Bank of India ₹1,600 crore, and Punjab & Sind Bank will get about ₹750 crore.
The Finance Minister had announced the ₹70,000 crore recapitalisation package for public sector banks in the Budget, and had said that given the stronger financials of the banking sector, this amount would be used as growth capital and to increase credit outflow.
Finance Minister cites reduction in interest rates, launch of more repo rate-linked loan products
Finance Minister Nirmala Sitharaman on Friday said that several steps had already been taken to implement the reform measures she had announced last week for the banking sector, including the launch of more repo rate-linked loan products by banks.
“The seven announcements we have made, particularly on the interest rate reduction and also for the banks to follow up, you’ve had quite a few product launches by the public sector banks and instructions for compliance have all been issued,” Ms. Sitharaman said at a press conference on Friday to announce the second wave of reforms the government is initiating to revive the economy.
According to the Finance Minister, eight public sector banks have launched repo rate-linked home loans, vehicle loans, mortgage, and cash-credit loan products. Last week, she had said that the government had consulted banks and that they had agreed to launch such products aimed at ensuring the transmission of rate cuts by the RBI to end consumers.
Ms. Sitharaman also said that instructions had been given to the banks to ensure the time-bound return of loan documents following the closure of loans. This mechanism would be done through the core banking system and regional managers would be responsible. Last week, she had said that banks would return loan documents within 15 days of the closure of the loan.
Similarly, to facilitate online tracking of loan documents, as announced last week, the Finance Minister said that such a system had been initiated, with borrowers able to track their loans on the loan management systems of their banks.
The government had last week announced a transparent one-time policy that will be issued by banks to enable MSME and retail borrowers to settle their overdues. Instructions for this had been issued to the banks, Ms. Sitharaman said.
“Particularly for the NBFCs, the support we had promised, which includes housing finance corporations, the partial credit guarantee schemes have all been executed,” Ms. Sitharaman said. “Sanction has begun with ₹3,300 crore already given, and above ₹30,000 crore is in the pipeline. So, liquidity is reaching them.”
The Finance Minister also said that the plan for the co-origination of loans between banks and NBFCs announced last week had already rolled into motion, with bank-NBFC tie-ups, with four NBFCs already in place.
Centre sought $314 mn towards its share of ‘profit petroleum’
The government’s demand to recover $314 million along with applicable interest from Videocon Industries Ltd. towards the former’s share of profit petroleum from Ravva Oil Field has been dismissed by the National Company Law Appellate Tribunal (NCLAT).
The government, through the Petroleum Ministry, had issued a demand notice dated October 22, 2018 to Videocon Industries, raising a demand to assign and allocate 100% of the sale proceeds/oil and gas invoices in favour of the government with immediate effect. This was for recovering the provisional sum of $314 million together with applicable interest towards the unpaid government share of profit petroleum.
“It is open to the corporate debtor [Videocon] to recover any amount as per law and award, if any, passed in its favour. It was in this background the adjudicating authority rightly held that during the period of moratorium, the Union of India, Ministry of Petroleum and Natural Gas (Exploration Division), cannot recover any amount, nor can issue demand notice to the corporate debtor through ‘Interim Resolution Professional’ to pay any amount. In the aforesaid background, we hold that the adjudicating authority rightly stayed [the] demand notice dated October 22, 2018 during the pendency of the resolution process as long as the moratorium is applicable on the corporate debtor,” the order reviewed by The Hindu said.
The share of profit petroleum belongs to the Ravva Oil Field, in which Videocon Industries has 25% participating interest.
NCLAT also upheld the NCLT’s decision that Ministry of Petroleum can lodge its claim for any legally enforceable right of recovery through ‘resolution professional’, thereby not rendering it without any remedy.
HR and IT are the key issues, says Canara Bank MD & CEO
R.A. Sankara Narayanan
The merger process of 10 public sector banks is expected to be completed by March 31, 2020.
“March 31 could be the timeline for all the approvals. Technically it is possible to roll out on April 1,” said R.A. Sankara Narayanan, MD & CEO, Canara Bank, which will be merged with Syndicate Bank.
Mr. Narayanan is the only CEO who would have executed two public sector bank mergers in one year. Earlier, he was the MD and CEO of Vijaya Bank.
The Bank of Baroda-Dena Bank-Vijaya Bank merger, which was announced on September 17, 2018, was completed by March 31, 2019.
On the current merger, Mr. Narayanan said the integration of human resources (HR) and information technology (IT) were the key issues for a successful merger.
“HR integration without retrenchment…without losing any quality or motivation is the first thing,” he said.
Canara Bank has an employee strength of 58,350, while Syndicate Bank has 31,535.
“Another thing is IT. It must be well planned and executed. If that happens, then the process is through. These are the two major issues — HR and IT,” Mr. Narayanan said.
He also added there would not be any branch closure in the near future though Canara and Syndicate had a strong presence in south India.
“Not immediately [branch rationalisation]. Even in the previous merger, there was no closure of branches or loss of opportunity. Even if two branches are doing well in one street or in a building, why should we close them? Our aim is to improve on overall parameters,” he added.