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Cabinet to Consider Holding Company for PSU Banks:  Capital infusion with foreign funds planned:


on January 16, 2013 PTI reported that   the finance ministry is contemplating a holding company structure for public sector banks. This will help the banks raise capital and government can hold on to a majority stake. The holding company is likely to be a statutory entity, to be set up under the Parliament's new Act, and may come up by the end of the current financial year 2012-13, the official told the newspaper.

The holding company may also be allowed to hold government shares in other financial companies, the official said, adding that this way the firm “would have another stream of income as dividend”.

Also, the government is contemplating letting banks hold shares in one another via the holding company, which may be permitted to be listed on the stock exchanges, he said.

Under the process of creating the holding company, the government will transfer its shares in all state-run banks to the company, which will raise capital from domestic and overseas markets, and infuse funds into the public sector banks (PSBs).

The government will transfer its shares to the holding company in a cashless transaction. The company would hold shares in all PSBs (public sector banks), raise debt from the market and infuse it into its subsidiaries.

Moreover, being a holding company, the fiscal burden on the government due to recapitalization of banks will also reduce.

The government, in the Union Budget 2012-13, proposed to provide Rs. 145.88 billion for recapitalization of public sector banks in the current fiscal, excluding Rs 13 billion for recapitalization of regional rural banks.

Once the holding company is set-up, such kind of provisioning may not be needed in the Budget and the company will be similar to other public sector units, the official said.

The holding company will be permitted to tap funds at interest rates higher than the London Interbank offered rate (LIBOR) -- the average interest rate charged by London's leading lenders when lending to other banks.

The official, however, said, “The capacity of the holding company cannot be infinite. The company's equity would increase when it infuses capital into banks.”

The company will enable the government to retain its majority stake in the state-run banks, despite the strain on budgetary resources being curtailed.

“If banks go to the market to raise funds through the equity mode, our (government) equity would come down, the official said.

The Indian government is waiting for the report of the committee, headed by State Bank of India Chairman Pratip Chaudhuri, on PSU banks' capital requirement under the proposed Basel III norms, following which the government is likely to present a proposal to the Cabinet for setting up the holding company.

Capital infusion has become imperative for public sector banks to meet the capital requirements under the Reserve Bank of India's strict Basel III norms.

Earlier this month, the RBI said that Indian banks must maintain tier I capital at a minimum 7% of risk-weighted assets when the new Basel III norms on capital regulation of banks are fully implemented by March 31, 2018, higher than the 6% suggested as per the global norms.

The guidelines are pursuant to the recent global financial crisis, which has underlined the importance of sound liquidity risk management framework to the functioning of financial institutions and markets.


The move comes after public sector banks submitted their capital requirement plans for the next eight-10 years, after taking into account the capital requirement under the new Basel-III framework. The government, which is keen on holding a minimum stake of 58 per cent in public sector banks, may find it difficult to infuse large sums of money, as this would affect the country's fiscal position. Banking industry officials say by forming a holding company, it would be possible to raise funds from the market, and the government holding can be maintained at above 58 per cent. According to the proposal, government share in the banks would be transferred to the holding company, which would hold 100 per cent stake in the bank. Since the funds would be raised by the holding company, which is an investor in the bank, the government would continue to hold on to its control of the bank's management, while inducting external capital into the holding companies. The bank would pay dividend to the holding company, and this would be used for servicing the debt for the funds raised.

Holding firm - Reserve Bank of India

MoF moots bank holding cos to help raise funds

An FHC is an entity engaged in a broad range of banking-related activities, including insurance underwriting, securities dealing and underwriting, financial and investment advisory services, merchant banking, issuing or selling securitised interests in bank-eligible assets, and generally engaging in any non-banking activity authorised by the regulators. Any non-bank commercial company that is predominantly engaged in financial activities, earning 85% or more of its gross revenues from financial services, may choose to become a financial holding company, according to the US law. These companies are required to sell any non-financial (commercial) businesses within 10 years.

The Reserve Bank of India (RBI) placed on its website discussion paper on holding companies in banking groups for comments from the public on 27 Aug2007   See “All considered, while the intermediate holding company structure should be supported with legal structure etc, for the present, there has to be a roadmap for moving to the BHC/FHC structure by private and public sector banks before the banking sector is opened up in April 2009. The latter is an international commitment. Necessary consultations among the various stakeholders must commence as early as possible," says a note circulated by the capital markets division of the finance ministry.


RBI suggests two options for Govt holding in public sector banks

The Reserve Bank Of India (RBI) on put out a report on its web site on 23-5-2011(see   Report of The Working Group on  Introduction of  Financial Holding Company Structure In India dated May 4, 2011 recommending a financial holding company model for the financial sector, which it says will protect banks from being destabilised by the activities of other firms controlled by the same promoter.

RBI has recommended two options to warehouse the government's holding in public sector banks. This is in view of the constraint of minimum government shareholding of 51 per cent in these banks.

First option

Under the first option, the government holding in public sector banks (PSBs) gets transferred to a holding company, which also holds shares in demerged bank subsidiaries.

Because of the need for the Government to hold minimum 51 per cent in a PSB, the first option will require the financial holding company (FHC) to be listed while the banking subsidiary can remain unlisted, the report states.

Further, according to the report, the Government would have to continue to support capital requirements of the bank as well as non-bank subsidiaries.

Second option

Under the second option, the Government continues to hold directly in the bank while shareholding of all private shareholders gets transferred to a holding company. The holding company will also hold shares in the demerged bank subsidiaries.

Going by the second option, the Government would be required to support only the capital requirements of the bank. The Government could also encash the value of indirect shareholding in bank subsidiaries.

Post FHC, the Government, under the second option, could continue to hold, in addition to 51 per cent in the bank, shares in various subsidiaries directly equivalent to its existing indirect shareholding. Since there is no requirement of minimum holding in these entities there will not be any need for the Government to provide capital.

The holding company would, as per the second option, effectively, not be a holding company in the sense that it would not be holding controlling stake in the bank. The shareholder dynamics in such cases needs to be examined since there will be two large shareholders — the holding company and the Government.

 The RBI report says the structure may create challenges in governance. the RBI report states. Under the second option, although the public sector character of PSBs would not get compromised and existing government powers can continue to be exercised, the challenge would be governance of the bank with two blocks of directors who could have differing interests.

The government is likely to consider within a few weeks a proposal for setting up a holding company for public sector banks to enable them to raise capital from the market instead of seeking funds from the exchequer.


IBA’s response:


Indian Banks’ Association (IBA), the umbrella organization of banks in India, has drafted a response to the Reserve Bank of India’s discussion paper on banks forming holding companies to own their insurance and asset management business.


Although there were some differences among member banks as reported in new papers on Sep 14 2007( see Economic Times ) ,who felt that the central bank is “policing” and others who felt that the central bank must continue “a strict vigil” on banks, the members arrived at a decision to support the creation of an intermediate holding company.

In a document posted on its website on Sep 145 2007(see ) ,addressing the concerns of the central bank on the difficulty in regulating the ‘multi-layered structure of the holding companies,’ the IBA suggested, it would be worthwhile for RBI to facilitate growth of home-grown financial conglomerates through intermediate holding company structure, as an interim solution, pending the end-state of FHC or BHC model in the system. the  intermediate holding company may be “regulated as any other non-banking finance company

Centre mulls holding company for PSU banks

Once again on November 2011 the central government mulled the idea of setting up holding company. “We are moving to Cabinet for setting up a holding company for the public sector banks,” said an official source in the media. It will take 2-3 weeks. There will be one holding company for all public sector banks, sources said. They said the Law Ministry’s opinion has been sought for making legislative changes as various acts will have to be synchronized and amendments will be required in the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and 1980.
As per the structure proposed, 99 % of government holding in the bank will be shifted to the Holding Company and the government will retain 1 % with itself so that it remains a state-owned bank, sources said.
The Budget 2012-13 had proposed the setting up of a financial holding company that the finance ministry has sought the opinion of the law ministry on a proposal to set up a holding company for all 24 public sector banks. Such a move will need amendments to a number of existing acts, including the bank nationalization acts of 1969 and 1980 and the State Bank of India Act 1955. Following the law ministry’s opinion, the proposal will be forwarded to the cabinet.

The setting up of a holding company, with an aim to recapitalise public sector banks, was announced in last year’s budget by then finance minister Pranab Mukherjee. The aim was to devise a mechanism to handle the growing capital requirements of public sector banks without straining the finances of the government. But it took some time for the model to be finalised as questions were raised about its financial viability as well as the possibility of increased risk since public sector banks account for nearly 75% of the market.

The government is likely to consider within a few weeks a proposal for setting up a holding company for public sector banks to enable them to raise capital from the market instead of seeking funds from the exchequer.

If the cabinet approves, the holding company could be operational from June and manage the capital requirements of banks from the next fiscal, the official said. The holding company has the approval of Reserve Bank of India.

The finance ministry has estimated the state-owned banks’ capital requirement for the next fiscal at Rs20,000 crore. But the final amount decided will be dependent on Planning Commission approval. Of this, around Rs5,000 crore could be allocated to the holding company.

The government has infused more than Rs12,000 crore into state-owned banks this fiscal. According to an estimate by consulting firm KPMG, Indian banking sector requires Rs1.1 trillion to comply with Basel-III norms.

The government said it will provide Rs15,888 crore to banks in fiscal 2012-13. This, compared with the overall need, “is just a drop in the ocean

Capital infusion with foreign funds planned

To make the model viable, the holding company may borrow from overseas markets at comparatively cheaper rates so that repayment problems do not arise. The revenue model for the company would involve dividends paid by banks. HC would help raise resources to meet capital needs of state-owned banks. Bank recapitalisation will no longer be budget business. The company would only raise money for capital infusion and apportion it to various public sector banks as per their requirements, so that the exchequer would no longer have to bother about making provisions in the budget, in managing which the government has been walking the tight rope in view of the difficult fiscal situation.

Should the proposal go through, the government will transfer most of its equity in public sector banks to the holding company, which will, in turn, leverage its huge capital base to borrow overseas to meet the capital infusion requirement of public sector banks. As result of this move the PSU banks may be delisted from stock exchanges. The holding company will also receive dividends, adding it will tap both debt and equity markets to raise capital. The resources will be primarily raised through foreign borrowings, which would then be infused as equity in various state-owned banks.

RBI pushes for consolidation...

RBI has said that consolidation in the banking sector would pave the way for stronger financial institutions with the capacity to meet corporate and infrastructure funding needs, and to rescue distressed lenders. However, it has prescribed a `non-operative bank holding company' structure to avoid

creation of complex institutions.

"Voluntary mergers and transfers help consolidation in the financial sector and pave the way for stronger financial institutions to rescue the weaker ones. Such voluntary measures, while saving the constituents of weaker institutions, provide business opportunity to the stronger ones to spread their presence in different geographies," said Anand Sinha, deputy governor, RBI. Sinha was speaking at the Financial Planning Congress 2011, organised by the Financial Planning Standards Board of India here last week. He added that India needs bigger banks to meet its infrastructure needs and to finance Large industrial projects.


However, the Competition Act, 2002 (as amended by the Competition (Amendment) Act, 2007) could come in the way of consolidation. One of its provisions requires an enterprise proposing to enter into a combination via a merger or an amalgamation to notify the Competition Commission. The commission has been allowed up to 210 days to decide on it before the default clause kicks in.


RBI's comments come at a time when many in the Indian industry feel that Indian banking has not kept pace with India Inc's funding requirements. In the two years preceding the outbreak of the 2008 global financial crisis, most business houses acquired multinationals through leveraged finance, with the support of international borrowers. "Given the crisis in the West, it would be difficult for Indian corporates to acquire international assets as none of the large lenders are in a position to extend funds for acquisition," said the head of a large consultancy firm. At the same time Indian banks do not have the balance sheet size to fund large corporates.”


The RBI group recommended a separate regulatory framework for FHCs and a new law for regulating FHCs. While the RBI should be designated as the regulator for FHCs, a separate unit within the apex bank should undertake the regulatory function with staff drawn both in-house and from other regulators. The group also recommended a consolidated supervision mechanism through memorandum of understanding between regulators.

On listing the holding company, the working group has recommended that requisite space needs to be provided to the holding company to raise capital for its subsidiaries.


“The financial services sector in India has been witnessing growth in the emergence of financial conglomerates,” the RBI has stated, adding, “With the enlargement in the scope of the financial activities driven by the need for diversification of business lines to control the enterprise-wide risk, some of the players are also experimenting with structures hitherto unfamiliar in India.” Obviously, the central bank was referring to the state-owned premier bank of the country, the State Bank of India (SBI) and the largest private bank of the country, ICICI Bank, which had recently taken steps to set up ‘intermediate holding companies’ for their non-banking operations such as insurance and asset management. In a discussion paper on the subject in August 2007, the RBI has preferred a financial holding company model over an intermediate holding company model, as the latter is seen as less transparent and difficult to regulate. The central bank had then struck down proposals from SBI and ICICI Bank to set up intermediate holding companies.




The RBI unveiled a fresh paper. The RBI also reasons that multi-layering of the corporate structure is not considered good from the investors’ point of view as they will not know where their will be eventually used. “Thus, it becomes difficult for them to assess the true risk involved in their investments. The government may transfer a part of the Rs 15,888 crore allocated for bank recapitalization to the proposed bank holding company. While enacting a legislation for the holding company, the government is also expected to amend the Bank Nationalization Act and the State Bank of India Act.

The company is expected to be modelled on the lines of the Government Investment Corporation (GIC) of Singapore, although it will confine its activities to providing equity to public sector banks. According to the plan, the holding company - which will be wholly-owned by the government initially - will be permitted to list and raise funds later. This is expected to help the government save some funds which it has been allocating to banks to ensure that they have sufficient capital to meet the regulatory and growth requirements.


The difficulty relating to PSBs has been recognised in the RBI   report itself. If the government decides to list the holding companies of the PSBs, it is saddled with supporting the capital requirements of non-bank subsidiaries. If, on the other hand, the step-down bank subsidiary is also listed, it poses administrative and implementation challenges.


Private sector banking groups are likely to be given a more straight-jacketed alternative—existing banks get a timeframe to migrate to a simple structure, wherein the resultant structure has one FHC that holds all entities directly under it. The report concludes that the one step structure is adequate for the existing size and requirement of Indian FCs and does not favour intermediary holding companies. While that may be true, it is more likely to be a self-fulfilling prophecy. Given that the entire process of creation of the regulatory framework around FHCs and the attendant legislation will take considerable time, there is a case for thinking ahead and creating a framework that will serve the need of the economy beyond what it currently is. Ability to raise capital with ease will be one of the key drivers of growth in the financial sector. The creation of a listed holding company on top of the financial services companies may have implications for investors, given the valuation discounts normally applied to holding companies and the varying valuations of stocks across asset classes such as insurance, banking and broking, not to mention the different FDI thresholds for different sectors. The option to list individual entities has its own operational challenges.


An RBI official said listing the holding company of a bank would set the stage for consolidation of accounts in systemically important financial institutions. But the differences between the government and the central bank may further delay the guidelines for new bank licences, Unless there is clarity on the rules for existing banks, the RBI cannot issue guidelines for new licences, as it will create two sets of rules - one for existing banks and another for new ones.


The RBI's draft guidelines on new banking licences also said that the NOHC would need to reduce its shareholding in the bank to 15% within 10 years and retain at that level. The RBI has suggested that the holding company of the bank gets listed while the bank itself remains unlisted


The fallout for new licensees is considered to be less than that for the existing banking and financial groups. It does, however, raise the existential question of how these developments are likely to affect the timeline.


The question which remain unanswered is ‘Achieving a simple one step holding structure and bringing all existing businesses under it may be easier said than done given that most promoter groups hold their interest through holding companies’. Also, if banking groups are to remain ‘predominantly’ banks, what happens to the existing businesses of these groups? Do they get regulatory indulgence or is it goodbye to banking dreams?


The group, headed by deputy governor of RBI Shyamala Gopinath has suggested that the FHC structure should be made mandatory for new entrants to the banking space. An FHC will typically have a bank, an insurance company, an asset management company and others of the sort operating under it. The Gopinath group has also recommended a fully-capitalised model for the holding company instead of an intermediate holding structure as that would make the relations between the operating companies and the holding company, complex.


Recently, the government of India directed Life Insurance Corp. of India Ltd, or LIC, to pick up preferential stakes in public sector banks over and above the cap of a single-investor limit of 10%. This has lead analysts to believe that government will likely let cash-rich semi-government companies to do the bank capitalisation job.


A holding company can directly go to institutions like LIC, offer ownership of itself and ask for money, freeing up the government from any criticism for taking direct help of others to mend its house in order, say analysts.


A holding company that decides on capital allocation will likely have discretionary power to capitalise certain large banks at the cost of the smaller ones. This will allow the government to actively push top five-six banks to build scale. The finance ministry is considering using the Specified Undertaking of UTI, or SUUTI, as a holding company for all the state-run banks in a bid to fast track its budget proposal to house all government holding in state-run companies under one structure to help raise capital easily.


The union cabinet has already approved a proposal to wind up SUUTI and shift its assets to a new asset management company.


The big five banks, other than State Bank of India, hold about 25% of the market share. Combined with the business of State Bank of India and its associates, these banks will control 50% of the market share with 30% shared by other public sector banks and 20% by private and foreign banks.

The need for large global Indian banks is being felt by various stakeholders as India grows rapidly. If India grows by at least 6-7% per year, the economy will be the fourth largest economy in the world, behind US, China and just behind Japan by the of the decade. This would require global banks with good financial power rather than a fragmented banking system to support the growing needs of Indian firms.

A credit growth of 20% would require banks to grow their business by 25% every year, according to bankers and this would mean increasing capital needs.


The government may subsequently pare its stake on smaller banks to below 51% and retain control on only such handful large banks.


“There is no need for the government to hold more than 51% in all public sector banks,” said a banking analyst .


“The shareholding in other banks can be allowed to fall to 26-30%, enough for effective control, while the money raised can be used to recapitalise bigger banks,” the analyst said.


The small number of banks that control half of the market share will allow the government to push through any kind of market reforms, say analysts, and this will also allow far greater access in raising fund through the market than what can be achieved through merger of banks.


A holding company, when listed, allows tapping the capital market in two ways -- the bank that needs money directly can approach the market as well as the money raised through the holding company.


Also, if the government ever wants to create large banks to be in the top-50 of the financial world, it can pool capital from smaller banks and allocate them to the ones that need money to become big.


A holding company, owned by investors, also enables the government to implement a consistent policy across banks and thus also allow better compensation for bank chiefs as well as make the banks more profitable and competitive.


The holding company may also take shape of an “investment arm of the government of India, in line of sovereign funds in other Asian countries.


Out of the 24 banks that government owns, in 10 banks it has a stake of less than 60%. The government stake in Bank of Baroda is 57.03%, the lowest that it holds in any bank. Its stake in State Bank of India, the largest lender, is 59.4%, while that in Punjab National Bank is 58%, leading less maneuverability for the government to dilute its stake in some of the banks to recapitalize them.


Earlier at the economic editors’ conference the finance minister had spoken of passing supplementary grants, if required. He had set up the committee on capital requirements with the finance secretary in the chair. It is required to come up with recommendations by November 15, 2013. The total with capital requirements of all the banks are estimated to be Rs 3,50,000 crore. Last year the government provided capital support of Rs 20,157 crore to a host of banks owned by it. Other options include issue of preferential allotment of warrants, preferential shares etc. Once Parliament approves the supplementary grants, the government will decide how much money the holding company needs to raise abroad, according to an official privy to the decision.


Now once again RBI wants bank consolidation

The Business Standard on Thursday, Jan 31, 2013 reported

 “On April 24, 2008 in   a major push towards consolidation in the banking space, the Reserve Bank of India has presented a paper to the government highlighting a proposal for merger of banks.    A proposal discussed by the RBI brass with key finance ministry functionaries in Delhi second week of April 2008week, has favoured merger of large public sector banks with small state-run entities and private players, sources close to the development told Business Standard. It has also identified the potential partners for a merger based on the RBI's inspection report for the last two-three years, they added.


The idea is to first seek consolidation on a voluntary basis — as has been the stated stance of the government and the RBI. While the government has been pushing for board-driven consolidation, almost no proposal discussed so far has materialised due to opposition from unions and political pressure. The sources said enabling legislation for forced merger of the banks has been provided under section 45 of the Banking Regulation Act. Using this provision, the RBI, under government advice, can push the merger of two banks The RBI said If such mergers do not fructify, the regulator has suggested that the government could step in to push consolidation. Sources pointed out that even in the case of merger of a small private bank with a larger player in the private sector, it takes a long time for the proposal to be approved by courts and get shareholder nod. On the other hand, the clock is ticking for the RBI and the government to open the doors to foreign banks.  According to the central bank's roadmap, foreign banks are slated to get a more liberal access from 2009”.


Large lenders asked to handhold small banks


The Business line published the following article on On December 17, 2012 

“As competition intensifies, size would matter for PSBs.


Public sector bank (PSB) consolidation was a hot topic in 2008-09. Mooted by the then Finance Minister P Chidambaram, the issue did not get the required thrust after he left the Ministry.  With him back in the saddle again, there is a growing expectation that the issue will come up on the government’s drawing board.  

At the recent Bancon meeting, while addressing bankers, the Finance Minister again raised the issue of PSB consolidation.   The emerging scenario is also turning favourable to the process of consolidation. Mounting pressures to issue new bank licences, which will induce enhanced competition from foreign banks getting full bank licences, and entry of a new set of private sector banks, will also precipitate the PSB consolidation.   The Reserve Bank (RBI) has already set the process of new licences in motion by approving the Dutch banking major Rabo Bank’s application for a full banking licence. Goldman Sachs was also given a licence to undertake primary dealership business in debt a few months back.

Big Fish


The biggest whale in the Indian banking waters, State Bank of India, is considered to be small fry in the global banking ocean.   Despite cornering about 25 per cent of the banking business in the country, SBI is ranked 60th in the list of Top 1000 Banks in the world by The Banker in July 2012. Ideally, India should have 4 or 5 global-scale banks.   Recently, the government is said to have asked SBI to do a detailed cost-benefit analysis of its merger with its five associate banks. The bank not facing any tangible problem in merging two of its subsidiaries earlier might have worked as a trigger.  

Once all its subsidiaries are merged with it, it would be among the top 10 banks in the world in terms of various parameters.  Grapevine has it that recently the Ministry of Finance called the chairmen of SBI and BoI on the issue of merger and if this were to happen, SBI will become the fifth or sixth largest bank in the world. (Why not SBI and PNB?  Emphasis ours)?   With the advent of new century, Indian corporates are spreading their tentacles by acquiring companies abroad. For funding cross-country acquisitions Indian banks should acquire size and sophistication. Thus, there is no substitute for consolidation in PSU banks.


Pros and Cons


Despite the fears raked up by the happenings to large banks in the US and Europe, that proved the hypothesis that ‘big banks cannot fail’ wrong, there are some clear advantages that large banks enjoy. Bigger banks would be in a position to take advantage of efficiencies of scale, scarce talent could be utilised more fruitfully than in a smaller bank, better exploitation of brand equity and capital utilisation.  

By experience, one can say that the larger the balance sheet you working on, more is the ability to weather economic ups and downs.


Most of the other ticklish issues coming in the way of mergers can be sorted out very easily today than four years back.  The big issue in bank consolidation then was the interface for various information technology (IT) platforms used by different banks.   Now, that is a non-issue. Most of the banks have integrated operations with Core Banking Solutions (CBS) in place, and most of these platforms are capable of talking to each other. The same is the case with ATMs.


The Department of Financial Services has worked to make PSBs become clones in terms of technology, standardisation of manpower recruitment, accounting practices, and most chairmen of PSBs are working in tandem with the advice of the Banking Division on these issues. And therefore, it would be easy for consolidation.


Human resources issues have also been smoothened with the same salary and perks structure adopted across PSBs. PSBs, having added 1.8 lakh personnel to their ranks over the previous year, are in a position to accommodate the surplus staff in the wake of mergers rather fruitfully in different roles.

Some of the overlapping branches can be converted into offices for specialised services. Even cultural issues are passé, with many employees prepared to work in areas far away from their native place.

Hierarchy issues at the top management can be handled by following the pattern adopted by State Bank of India.  The high level personnel could be accommodated at the senior levels of the merged entity by splitting the positions of the chairman and managing directors, the executive directors of merging banks could be appointed as deputy managing directors. However, the process may call for making some amendments to the Banking Companies (Acquisition and Transfer of Undertaking) Bill.

Permutations, combinations

The first question that arises after initiating the process of consolidation is who would be the predator and who would be the prey.  It should be based on a clear criterion. In the process of preparing PSBs for Basel-III guidelines, which seeks to raise the tier-I capital to 9 per cent from 8 per cent now, the government is expected to recapitalise banks to the tune of Rs 15,000 crore.

If the mergers can address this issue and give some relief to the government, it would be an added advantage, besides ensuring other synergies in scale of business, even geographical spread (branch concentration) and lower NPAs of the merged entity.

In the process, some weaker banks must be able to find some strong banks in alliance, besides it should improve the return on investment (RoI).

The following are some combination* for undertaking consolidation of PSBs, in the light of these parameters:

SBI, BOI and BOB — To be among the largest banks in the world

Canara Bank, Indian Bank, BoM, IOB and United Bank of India — To be the second largest bank

PNB, Vijaya Bank, Andhra Bank and IDBI — To be the third largest

Allahabad Bank, Central Bank, Corporation Bank and P&S Bank — To be the fourth largest

OBC, Syndicate Bank, UCO Bank and Dena Bank — To be the fifth largest

(The author is Chief Advisor, ‘Banking Law’, PDS & Associates, and former CMD of Corporation Bank)

These combinations have been formed keeping the CBS (core banking solution) platform in view, officials said.





From the chronological sequence of events mentioned above it is pellucid that the setting up holding company and consolidations of PSU  banks are ‘equally likely’ events ( not mutual excusive ) of the same side of the coins orchestrated  and endorsed by RBI, Government and IBA.




The NATION UNION OF BANK EMPLOYESS the 4th largest union in the comity of union aprioi holds firm stand that The finance ministry’s proposal to transfer all government holdings in public sector banks to a single financial holding company (FHC) needs careful consideration before it heads for cabinet consideration shortly.


·        The ostensible reason behind such a proposal is to use the combined equity strength to get a higher leverage in overseas borrowings for scaling up capitalisation of public sector banks in line with the stringent Basel III norms on capital adequacy that are set to kick in phases from 2014, going up to 2019.


·        Under the FHC model, the identity of the promoter of PSU banks will change from the President of India to the proposed FHC. Notwithstanding the fact that FHC’s promoter shareholder will still be the President of India, and therefore, the FHC will be a government-owned company responsible to the government and taxpayers, it may well be possible to divert public attention from huge amounts of capital infusion into PSU banks under the new dispensation.


·        This, especially when not all state-owned banks are known to pursue prudential norms, and require regular bailouts from the exchequer.


·        A significantly high amount of capital infusion amounting to Rs 1.4 lakh crore is required for the Basel III compliance over the next few years. Under the proposed corporate structure, PSU banks will become subsidiaries of the FHC, which will, in turn, manage their aggregate capital requirements.


·        A quick analysis by Financial Chronicle Research Bureau of 24 listed PSU banks revealed a collective market capitalisation of about Rs 4,00,000 crore, with 62 per cent of this, amounting to Rs 2,50,000 crore, being the value of government holdings. A little over 40 per cent of the government’s holdings are accounted for by just one bank, State Bank of India.


·        In the country, the holding company format has so far been used by India Inc. Recently a Reserve Bank of India committee has also suggested making the FHC framework mandatory for all new banks and insurance companies, as well as for existing banks, where the promoter is in non-banking businesses. Now, with the government also itching to use this concept for managing public finances, policy makers may be entering the grey zone.


·        While some other countries too use the holding company format to selectively manage taxpayer money, its potential for misuse has been debated upon. Loss of transparent accounting and indulgence in financial chicanery are some of the severe allegations against its use by governments. Private companies, particularly the listed ones, have to not only disclose their standalone financials to shareholders, but also consolidated numbers.


·        While it is true that an FHC for PSU banks will be able to better access foreign loans, servicing those loans and re-paying them will still be the government’s responsibility. Taxpayers have a right to be informed about the effect of foreign borrowings on the exchequer, but an FHC would only keep such liabilities hidden from the budget documents. The taxpayer deserves a better deal than that.

One of the lessons of the financial crisis was the downside of having 'too big to fail' entities.  

·        The sub-prime crisis of 2007, the consequences of which are still being felt by the world economy, highlighted glaring deficiencies in the regulation of banks and in the financial sector in general. A number of measures have been taken both at the international level (under the auspices of the Bank for International Settlements (BIS)) and by national regulators by way of tightening bank regulation. Perhaps the most comprehensive is the Dodd-Frank Act (2010) passed in the United States (US). A fundamental problem that remains unresolved is what is called the too-big-to-fail problem or the problem posed by Systemically Important Financial Institutions (SIFIs). Banks that are very big (in relation to the size of their economies) cannot be allowed to fail because the failure of these would cause significant disruption in the economy. Knowing this, managers at these banks can take enormous risks. If these work out, they will collect big rewards; if they do not, the government will rescue them


·        Under Basel 3, some disincentives for bigness have been created. A higher than normal requirement of capital is stipulated for SIFIs. This, however, is far from adequate to prevent failure and the problems associated with failure remain. Two major proposals are on the table for dealing with SIFIs. One is the recommendations of the Independent Commission on Banking (2011) in the United Kingdom (UK) (also known as the Vickers Commission, after its chairman, John Vickers). Another is the Volcker Rule which has been built into the Dodd-Frank Act in the US.


·        Volcker said the problems surrounding banks that are too systemically significant to be allowed to fail have ‘not yet been convincingly settled’, despite being ‘the heart of the reform question’ (Huffington Post, 20 September 2011).


·        It is more plausible that the problem of SIFIs is posed, not by scope, but by bigness. Beyond a certain size, banks become difficult to manage; they also pose systemic risks because of the difficulty in resolving them when they fail. There may be greater merit, therefore, in addressing size and concentration in banking than scope. The size of a bank’s assets in relation to GDP and the share of the top five or six banks in total banking assets may be more appropriate para­meters to monitor. Large banks may need to be broken up, not by limiting the scope, but by selling off assets across the entire spectrum. Given the sizes of some of the large banks and the state of financial markets, whether this is feasible at all in today’s context is a different matter.


·        We also need to address ownership structure in banking, an idea that is almost totally missing in the present debate. The scandals that have made headlines in recent months – the rigging of Libor, money-laundering, non-compliance with sanctions, etc – have prompted calls for a sweeping change in culture at banks.


·        There is more than an element of delusion to these calls. No major cultural change is possible under the incentives that go with private ownership. What we need in banking is an alternative model in the form of public ownership. It is necessary to have at least a few large banks under public ownership. Then, shareholders, customers and employees, all have a choice. They can go with the go-getting culture of private banks or the risk-averse culture of government-owned banks. The culture in the system as a whole changes, with conservatism in the public sector offsetting a greater appetite for risk in the private sector.


·        Can government-owned banks perform in the face of competition from private banks? We have tentative answers from the Indian experience. Size confers an advantage as does access to government business, managerial costs are lower, there is greater depositor confidence, and listing on stock exchanges makes for better focus on commercial performance. A track record of stability in earnings in itself can help improve market ratings.


·        Government ownership must be supported by more intrusive regulation and supervision than has happened in the recent past in the west. This must include norms for the composition of boards, approval of independent directors, and approval of top management at banks. Norms for risk management must go well beyond those prescribed by the BIS – risk management cannot be left entirely to banks or to market discipline.


·        Everybody understands that the problem of SIFIs cannot be tackled by increasing capital requirements alone. Perhaps, the time has come to recognise that limiting the scope of banks is not the answer either. We need a multi-pronged approach that addresses size and concentration, the ownership structure and entails far more intrusive regulation than we have seen in the recent past.


·        A serious issue that needs informed public debate. Recently, govt.  made seven groupings where smaller banks were assigned to bigger 7  banks. It looked like an ‘arranged courtship’. These days we are  hearing from the west a new phenomenon called ‘too big to fail’ What  will the impact of such a concern if we also just for aping the west to consolidate our banks to make them bigger with all the NPAs. The rationale for such mergers needs to be known. Also, see the stagnation of the merger of just two airlines. Will the Dept. of Financial Services play an active role or merely be a fifth wheel  ordering about the banks. Also will the political leaders use their  position and talk to labour leaders and ensure their active and ensure their active suggestion and participation


·        As one from another branch of financial services, let us dust out from the archives how the Congress ministers in the fifties successfully merged the 243 private insurance companies varying in every aspect into a single LIC in just about four years. That continues to be a classic case of excellent coordination between the political leaders-civil servants, regulators, industry officials and above all the employees and their unions.  


·        The report on currency and finance for 2006-08, released on Sep 05 2008, said the introduction of Basel II norms could prompt small banks to merge with bigger players to maintain capital adequacy. But, consolidation among large banks, in particular, would raise competition and moral hazard concerns, that is, “too big to fail”. A new report from a research division of the Reserve Bank of India, or RBI, has raised concerns about consolidation in the banking industry and warned that creating “mega banks” could lead to increased operational risks, contagion risks and systemic risks. This alone is enough to  justify  stand of NUBE against holding companies.


·        The RBI has advocated FHC/BHC structure in as much as the banks would be much better protected from the possible adverse effects from the activities of their non-banking financial subsidiaries. Infact, it may also be possible to consider allowing non banking subsidiaries under the FHC/BHC structure to undertake riskier activities hitherto not allowed to bank subsidiaries such as commodity broking.  It has therefore contended that it will be useful to explore the possibility of adopting a BHC/FHC Model. However, a proper legal framework needs to be created before such structures are floated and it is ensured that no unregulated entities are present within the structure.  It ahs further stated that  , it will be useful to contain the complexity in the BHC/FHC Model as also in the Bank Subsidiary Model of conglomeration to the bare minimum. Towards this end, it will be desirable to avoid intermediate holding company structures. 


·        The major motivation for FHC/BHSC MODEL as outline by RBI is given below


·        In terms of existing instructions, a bank’s aggregate investment in the financial services companies including subsidiaries is limited to 20% of the paid up capital and reserves of the bank. In a BHC/FHC structure, this restriction will not apply as the investment in subsidiaries and associates will be made directly by the BHC/FHC. Once the subsidiaries are separated from the banks, their growth of the subsidiaries/associates would not be constrained on account of capital.  


·        In the context of public sector banks, the Government holding through a BHC/FHC will not be possible in the existing statutes. However, if statutes are amended to count for effective holding then, the most important advantage in shifting to BHC/FHC model would be that the capital requirements of banks' subsidiaries would be de-linked from the banks’ capital.  Since the non-banking entities within the banking group would be directly owned by the BHC, the contagion and reputation risk on account of affiliates for the bank is perceived to be less severe as compared with at present.



 BHC/FHC structure as recommended by RBI is diagrammatically given below in fig 3.

 Figure-1: A typical bank-centric organization structure -             Bank Subsidiary














Asset Management















Figure 2: A Financial Conglomerate with holding company at the top



Main Banking subsidiary





Asset Management





Other banking subsidiaries


3. A Financial conglomerate with holding company at the top as well as an intermediate holding company






Main Banking subsidiary

Intermediate holding company

Housing Finance






Other banking subsidiaries


General Insurance

Life Insurance

Asset Management






·        Let us look into Recommendation 15, 16 of the working  group of RBI

      Recommendation 15:


·        If the holding company is to function as an anchor for capital support for all its subsidiaries, requisite space needs to be provided to the holding company for capital raising for its subsidiaries. In this context it is possible to envisage to have ether a listed holding company with all its subsidiaries unlisted or both the holding company with all or some of the subsidiaries being listed depending on the objectives and strategy of the financial group and the prevailing laws and regulations on investment limits .Given the circumstances prevailing in India   listing can be allowed at the FHC level as well as the subsidiary level  subject  suitable safeguards and governance /ownership norms   prescribed by regulators from time to time


     Recommendation 16 for Public Sector Banks


·        There is a constraint of minimum government shareholding of 51% in public sector banks.


·        Option I:  Government holding in PSB’s gets transferred to a holding company which also holds shares in demerged bank subsidiaries. Because of the need for government to hold minimum 51% in the bank, this option will require the FHC to be listed while bank subsidiary can remain in unlisted. Government would continue to support capital requirements of the bank as ell as no banking subsidiaries


·        Option II: Government continues to hold directly in the bank while shareholding of all private shareholders gets transferred to holding company. The holding company will also hold shares in the demerged banks subsidiaries. The government has to provide support the capital requirements of the bank. But it states further that “Although, the public sector character of banks would not get compromised and existing government powers can continue to be exercised, the challenge will be governance of the bank with two blocks of directors who could have differing interests.


·        Hence there is every likely hood the first option will be implemented by the   government. In which case with all the nationalized banks will become subsidiaries of the single monolithic, oligopolistic, financial conglomerate FHC. With the voting rights of the shareholders of public sector amended to 10% by the parliament recently, there is every possibility shareholder directors& other directors of FHC will wield considerable powers to dictate terms on the subsidiaries. This makes the board of FHC omnipotent and that of the subsidiaries rudderless and or of recommendatory nature of being accountable to the apex board of FHC.   In otherwords the policies of the subsidiaries will be defacto decided by the FHC,. as is being done by the government even now in public sector banks despite declaring autonomy to PSB’s   on paper.   That nothing is decided without the approval of Government and RBI directors despite majority directors supporting a proposal in the board underscores this irrefutable fact that board of PSB’s ‘is not above board with genuine  powers of  autonomy and all  its policies are controlled by remote by the government .  The major fallout of this option  for this pyramid model of FHC  discussed above  will not only be  on the management  of subsidiaries  but also on their recognized unions  which will become ineffective as most of HR policies arrived hitherto under bipartite culture with respective managements will be dictated by board of FHC, which in the long  run make it inactive  weakening  its identify  and paving way  for consequent deunionisation.


·        Another question which remains unanswered is the constitution of board of FHC. There is every likelihood the government will take umbrage, in as much object of the FHC is to manage only capital  requirements there is no need for workmen/officer nominees in its board.


·        In tune with the policies of IMF, even in 1981, government of India opened 3 point new chapter in Industrial relations – ordinance, notifications, and directives. Agreement, settlements, customs, practice and culture of individual banks were sealed in airtight containers and confined to the Department of Achieves (for future historians to have a field day).  Negotiations, discussions not only consume time and energy, but also require the logic and sense to meet sagacity of UNIONS. So all independent agreements on housing loans, promotions, transfers and other welfare schemes etc. between bank and their unions were replaced by directives – unilateral, arbitrary and often meaningless.


·        The same happened to powers of workmen nominee on the Board of Nationalised Bank, since the workmen directors had become “essential nuisance” for them (Government introduced ESMA in 1981) as they   had   freely, frankly, fearlessly, forthrightly participated in all the machinations of banking growth, such as analysis and sanction healthy loan proposals, and ensuring that a hard working sincere official, without God-Father also comes up in the life and given his due share of promotion.  In other words, from the trade union point of view we were not satisfied with mere participation since it would mean our agreeing to the way bank is managed. We therefore, made it our business to ensure that the management of the bank does not leave much to be desired and resolved to have a say how the bank is to be managed through our nominee to ensure ‘Board’ is above board.


·        It is because of such sincere participation and involvement of workmen directors, notification emanating from the distilled wisdom of Department of Bankers was issued replacing the powers of board on promotions with DPC. Further frequent interventions of workmen nominee, in sanctioning large proposals for industrial houses and their constant vigilance on men and matters irked the powers that be.  Therefore slowly the powers of the employee nominees were sought to be curbed.  Surreptitiously the Management Committee System was introduced where the CMD, ED, Govt.nominee, RBI nominee and the Chartered Accountant Director are the permanent members and one from the other Directors is given rotation for six months only.  The result is at the most the employee nominee could be a member of the Management Committee only once in six months during his tenure.


·        It should be noted that all vital decisions regarding sanctioning of credit proposals, writing offs; compromise proposals, etc. are decided by this all powerful and omniscient Management Committee.  In short the Management Committee usurped the powers of the Directors and ultimately made the Board a real showpiece before which matters are placed only for information and confirmation.


·        It has further been seen to it that the employee nominee does not find a place in the Audit and Inspection Committee throughout his tenure thus preventing him from having even a cursory reading of the RBI Inspection Report of the respective Banks which contains the real picture of the Institution.


·        Despite all odds, clipping of powers from time to time the “directives” of ministry, our nominees have   been   discharging their functions in the best traditions.  Who have ensured that the banks  shall be  run not only for our common good but also for the country’s good and for that there should be equal power to the true representative of bank, workmen nominee.


·        With the powers of board getting curbed in this FHC  model as explained above, in future all the internal agreements, settlements, customs, practice and culture of individual banks arrived at through bipartite culture between the union and respective banks will sealed in airtight containers and will now be replaced by   Notifications, Order, Directives(NOD’s)of the FHC , the consequeses of which will be disastrous to recognized unions in the subsidiaries( Nationalized Banks )  under the monolithic  FHC .



The very objective of setting up the holding company is to raise money for capital infusion and apportion it to various public sector banks as per their requirements, so that the exchequer would no longer have to bother about making provisions in the budget, in managing which the government has been walking the tight rope in view of the difficult fiscal situation. The holding company will raise capital to meet Capital Adequacy Ratio, as per Basel III standards which is a measure of a bank’s capital, expressed as a percentage of the bank’s risk-weighted credit exposure, is also expected to increase, as the RBI a credit growth increase.

It is pertinent to mention here the Countries that failed to enforce Basel reforms.

The scorecard issued on  Financial Times on October 18, 2011 by the Basel Committee on Banking Supervision, which writes the rules, raises serious questions about whether some of the world’s financial centers are paying lip-service to global efforts to make banks safer and prevent a repeat of the financial crisis.

Six of the 27 countries that set global banking regulations still have not fully implemented the Basel II reforms agreed in 2004, and only 11 of the 27 have drafted rules to enact the tougher Basel III standards that are supposed to replace them Both the US and China are among the countries that are in the process of implementing Basel II.

The Basel II framework is widely seen as having contributed to the 2008 banking crash by allowing banks to understate risk and hold too little capital against unexpected losses. However, its risk-based structure remains an essential part of the stricter Basel III framework, which includes higher capital requirements and the first global liquidity rules.

The scorecard is part of a larger effort to shame big countries into implementing the commitments they have made at annual meetings of the G20, a group of the world’s richest economies, and to insure that financial institutions will not avoid tougher rules by shifting to new locations.

The Basel II report card found that one member country, Argentina, had made no effort to implement the agreement at all, and five more were still in the process of implementation. As for Basel III, 11 countries have written drafts, but nine of them are members of the EU, which introduced a bloc-wide version in July. Five more countries hope to have drafts completed by the end of the year, including the US and Switzerland. The rest, including Russia, Japan and India, will take longer.

EU member countries have for months have been debating how to implement the minimum bank capital standards agreed under Basel III. Their arguments have unfolded as the EU works to complete its fourth Capital Requirements Directive and its Capital Requirement. There are reports  as of 27 May 2012 debates continued with   UK, Sweden, and Spain, with the support of the ECB ,taking  Osborne View – named after perhaps its most ardent proponent, George Osborne (UK Chancellor of the Exchequer)and Germany and France, with the support of the European Commission, opposing their views and taking Schäuble View in honour of Germany’s Minister of Finance, Wolfgang Schäuble. With regard to  Capital Requirements Directive and its Capital Requirements Regulations per Basel III.


Hence what is the  urgency to push for consolidations / FHC without a, credible, transparent, accountable social dialogue in India by the Government?

That being the case, still with the view of reducing the risk weighted credit exposure, i.e. reduce the NPA’s the UNIONS time and again had demanded the following time and gain to strengthen PBU banks in right earnestness.

·        Stringent measures should be initiated to recover the increasing Bad Loans in the Banks.


·        Securitisation Act was claimed to be used against the defaulting borrowers but nothing worthwhile has been achieved by utilizing the powers under the Act.  The Act has not been enlarged to cover attachment of personal assets of the borrowers and their kith and kin. A large number of the defaulters who created NPAs in the first place have got   their property back at a much lower price, and will not have to repay loans. If this becomes a part of the system, those who take loans from banks in future will not be serious about following norms and regulations



·        A vicious circle that will eat into the vitals of the banking system will be created. Hence the unions demands the establishment of an independent statutory audit system in banks, along the lines of the Comptroller and Auditor General (CAG).


·        Stop needless evergreening  /restructuring  of NPA’s


·        Government should Publicize the list of defaulting big Borrowers – declare willful defaults as a criminal offence – confiscate Properties of individual directors in defaulting companies – make defaulting companies/Directors ineligible for further Bank Loans and other facilities – initiate strong legal reforms to expedite recovery of Bank Loans


Needless to underscore here despite the long rope that the NPA  group gets from its bankers, it often accuses the lending institutions—in its court case—of not being as tough on other borrowers who “stand on the same footing”.

The big question is this: if the Group says it’s bankrupt, why does it fight institutions trying to take over its assets? Obviously, the Group still has assets worth fighting.



Had these measures been implemented the PSB‘s would have emerged much stronger and there is no need to adapt westerns models   which have proved ineffective and junk in their own countries. The flip-side of banking sector reforms has been the overemphasis on profits and virtual neglect of the distributive role of the banks. Now, only strong and high net worth companies within the organized sector are capable of raising funds, declaring it NPA, get ting it restructured at a considerable lower rate of interest, while the credit disbursal to small borrowers has sharply declined.


 That is why we say that "Financial Reforms" and NPA’s &Scams are like an Object and its Shadows! About which we shall cover in e our next series titled Merger Mania III .


Suffice to state, in this background, the current merger moves in any form, i.e. setting up of holding companies and /or by consolidation of PSU banks   is unwarranted. Hence the Government should drop these move and focus on efficiency Success of any economic reforms is to be judged on the touchstone of all positive Benefits to vast masses of our country where mounting unemployment and price rise of essential commodities constitute the worst curse of the nation. Any reforms of the banking system should be built on the institutional structure that has created it rather than seek to destroy it as is now being done. The banking industry is in need of true reforms in pursuit of true nationalization, but the strategy for it does not have to subvert the basic goals of development nor does it have to be forced at a pace with adhoc, arbitrary moves of mergers, FHC‘s etc tinkering of banking regulation acts, etc without any public debate and study that will result in liquidation of the institutional structure built up over decades of faith.


As Indians we should take pride that Indian banks have at historically maintained their core and overall capital well in excess of the regulatory minimum all through its chequerd, purposeful history of social banking.   Therefore the raison d’etre of the adoption of the FHC model itself is questionable.

 When the financial crisis intervened, the talks of bank mergers receded into the background in the wake of the 'too-big-to-fail' argument advanced in favour of rescuing large imprudent banks which means it is difficult to allow large banks go under, without such failure having far-reaching systemic implications. But it has come up again at the annual banking summit in Pune last week where the FM urged banks not to fear consolidation. He is entirely right. PSBs have no need to fear consolidation but, equally, they should not consolidate out of fear.


NUBE SHALL NOT ALLOW THIS “Clearance Sale” of Indian Banking Industry by the Government. We therefore have to be in readiness to launch a CAMPAIGN and fight resolutely to frustrate the evil and sinister designs of the Government.  Let us prepare ourselves to fight to preserve our IDENTITY by opposing the merger move. The one who is courageous never has a doubt of being fortunate. Even if there are difficult situations and challenges, the faith of being fortunate never fades away. This faith enables such a person to recognize and use the available resources in a worthwhile way. Even during difficult situations, there is never a need to stop as faith gives courage to move on. Let us prepare our heart and minds for this faith and struggle.



(A) Merger Mania - Part I : Overview of Bank Mergers - Government Moves







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