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Banks’ cuppa to brew with mergers

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Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Not Much

Mains level: The step shows keenness of Government. The government wants to expedite the merger process.


Issues with Bank Merger

  1. Various governments has highlighted the need for large-sized banks to fund the huge infrastructure requirements of the country as well as compete with global lenders
  2. But a serious question arises: ‘Which chief executive will propose to merge his bank with another and lose his job?’

Seriousness of the current government

  1. Present government has no intention to make it ‘voluntary’ for the board of a bank to decide on a merger
  2. It is evident from the fact that government has wrote letters to banks to kick start the process of mergers and get their respective boards’ approval
  3. This may be the first time in recent history that an official communication has been made by the government to the banks asking them to act on mergers

Alternative Mechanism

  1. The government has also set up an ‘Alternative Mechanism’
  2. It would comprise a ministerial group, to oversee proposals for mergers among banks
  3. A framework had been conceived in which a bank’s board would first clear the decision to merge
  4. And then send the proposal to the ‘Alternative Mechanism’ for its in-principle approval
  5. After the in-principle approval comes through, the bank will take steps in accordance with law and SEBI’s requirements
  6. The final scheme will be notified by the government in consultation with the Reserve Bank of India (RBI)

No need of CCI permission, now

  1. Some hurdles have been removed to expedite the process
  2. For example, approval requirement from the Competition Commission of India(CCI) has been done away with

Post Merger Issues

  1. The merger would create a lot of complexities in terms of branch rationalisation and reduction in human resources productivity for the merged entity
  2. At present, we’ve an example of the merger of SBI with associate banks
  3. Bhartiya Mahila Bank; post merger, the merged entity fundamentals have weakened significantly
  4. Also, after its merger, SBI has seen NPAs rising significantly, from Rs. 1.01 lakh crore (6.94%) to Rs. 1.88 lakh crore (9.97%)

Centre tells PSBs to begin merger process ‘immediately’

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Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Not Much

Mains level: The step shows keenness of Government. The government wants to expedite the merger process.


Directions from the Central Government

  1. The Centre has send an official letter to public sector banks asking them to start the merger process immediately
  2. The government had also started preparing the ground to remove certain hurdles for consolidation, such as doing away with the approval from Competition Commission
  3. This is the first time in recent history that an official communication had come from the government to the banks asking them to start the merger process

Objective of the Government

  1. While giving the direction , the government cited the Narasimham committee report
  2. And highlighted the need for large-sized bank that could fund the huge infrastructure need of the country

Framework for the Merger Process

  1. The Centre has provided a broad framework to the banks to take the merger exercise forward
  2. According to the framework, once the board approves the merger plan, it has to be sent to the ‘alternative mechanism’(approved by the Union Cabinet, recently)

[op-ed snap] No silver bullet

Image result for Bank merger

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Mains Paper 3: Economy | Mobilization of resources

Once you are done reading this op-ed, you will be able to attempt the below.

“Mergers of state-owned banks are not the whole solution. Balance-sheets must be strengthened, governance improved.” Critically examine

From UPSC perspective, the following things are important:

Prelims level:  Not much

Mains level: Bank consolidation -Challenges



  • Government has announced that a ministerial panel headed by the finance minister will oversee mergers among state-owned banks


  • To create strong banks and that the merger proposals will have to come from the boards of these banks and decisions will be taken purely on commercial grounds

Why such a move?

  1. Bad loans as a ratio of total loans are already close to 10 per cent and the ratio could worsen given the current economic conditions
  2. To address twin balance-sheet problem
  3. The so-called Alternative Mechanism to oversee mergers of PSU banks could be seen as an attempt to skirt the challenge of infusing capital for banks which the government controls or divesting some of these weak banks.
  4. The RBI’s latest Financial Stability Report shows that the gross bad loan ratio of PSU banks could be as high as 14.2 per cent by March 2018 if there is no economic rebound.

Bank consolidation-Challenges?

  1. The global experience shown that they are bound to fail if they don’t meet the test of efficiency, synergy and cultural fit.
  2. Results show a deterioration in earnings of State Bank of India, after the merger of its associate banks with the parent.
  3. It is still not sure whether this planned consolidation will lead to rationalisation, both at the branch level and in terms of staff, and a more efficient banking system.
  4. Pursuing the mergers of these banks without strengthening their balance-sheets and raising governance standards poses the risk of compounding the problems being faced by these lenders.

New mechanism to spur PSB mergers

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Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: It is a step taken by government to counter rising NPA problems in banks. This step also have some other objectives.


Step for quicker consolidation among public sector banks

  1. The Cabinet has approved ‘in-principle’ the constitution of an alternative mechanism that will oversee the proposals for mergers among banks
  2. According to the government, the decision to create strong and competitive banks will be solely based on commercial considerations
  3. And such decisions must start from the boards of the banks

Why this step?

  1. Because most of the banks are facing with huge levels of NPAs, slow credit offtake and resultant pressures on capital adequacy
  2. Stronger public sector banks will help meet the credit needs of a growing economy, absorb shocks and give them the capacity to raise resources 

Amended Banking Regulation Bill gets elders’ nod

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Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Particulars of the Bill

Mains level: Banks are facing huge NPA problem in India. This will help Banks to counter issues related to NPA.


Nod from Rajya Sabha

  1. The Rajya Sabha has passed the Banking Regulation (Amendment) Bill
  2. This Bill empowers the RBI to issue instructions to the banks to act against major defaulters
  3. It  will replace the Banking Regulation (Amendment) Ordinance, 2017

Why this Amendment?

  1. According to the Finance Minster, the capacity of banks to lend money to small creditors is being impacted, the growth is impacted

ATM expansion slows due to note ban

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Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Different types of ATMs

Mains level: Article gives shows bad effects of demonetisation on banking industry, as ATMs are important for financial inclusion.


Expansion of ATMs

  1. Cash crunch following demonetisation, have led to commercial banks cutting down on the number of automated teller machines (ATMs) 
  2. According to Reserve Bank of India (RBI), there were 98,092 off-site ATMs in June 2017 against 99,989 in the same month last year
  3. However, on-site (located within a branch) ATMs rose to 110,385 from 101,346 in the same period
  4. According to bankers, demonetisation was one of the factors that impacted ATM expansion

What is NHB Residex?

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It is a prelims specific article.

From the UPSC perspective, the following things are important:

Prelims Level: Particulars of the NHB and NHB Residex.


NHB Residex from the National Housing Bank

  1. It is a set of benchmarks that aims to track housing price indicators across Indian cities
  2. It is designed by a technical advisory committee comprising Government representatives, lenders and property market player

Two sets of indices

  1. The NHB Residex currently offers two sets of quarterly Housing Price Indices (HPIs) across the cities it tracks


National Housing Bank (NHB)

  1. It is a wholly owned subsidiary of Reserve Bank of India (RBI), was set up on 9 July 1988 under the National Housing Bank Act, 1987
  2. NHB is an apex financial institution for housing
  3. NHB has been established with an objective to operate as a principal agency to promote housing finance institutions both at local and regional levels and to provide financial and other support incidental to such institutions and for matters connected therewith.
  4. NHB registers, regulates and supervises Housing Finance Company (HFCs), keeps surveillance through On-site & Off-site Mechanisms and co-ordinates with other Regulators.

Centre for more PSB mergers

  • Fresh from the successful merger of five associates with the State Bank of India, the government is looking to
    consolidate more public banks going forward, with an aim to create only a few lenders of global size and scale.
  • The Finance Ministry will soon undertake a broad study on further consolidation and look at various options for merger among the remaining 21 public sector banks.
  • There are factors like regional balance, geographical reach, financial burden and smooth human resource
    transition that have to be looked into while taking a merger decision.
  • The merger process will get a boost with the likely improvement in the NPA (non-performing asset)
    situation over the next two quarters.
  • The merger proposals in the banking sector would require clearance from the Competition Commission of

Finmin revises criteria for recapitalisation of PSU banks

  1. Change: PSU banks looking forward to the next round of capital infusion will need to fulfil a new set of criteria, including credit recovery
  2. Conditions: The second tranche of capital allocation for the current fiscal would be based on cost of operations as well as recovery and quality of credit on the basis of risk weighted assets
  3. Background: Govt in July had announced the first round of capital infusion of Rs.22,915 crore for 13 banks
  4. The first tranche was announced with the objective to enhance their lending operations and enable them to raise more money from the market

India not ready to privatise public sector banks: Arun Jaitley

  1. Finance Minister: India has not reached the point where it can consider selling majority stakes in the public sector banks that control seven tenths of assets in the financial system
  2. Also, public or political opinion has not converged to the point where we can think of privatisation in the banking sector
  3. Govt is consolidating some of the public sector banks to strengthen them, but does not plan to reduce the state’s share below a threshold of 52%

Banks should identify key areas for certification of staff: RBI committee

  1. News: A Reserve Bank of India (RBI) committee has recommended that banks should identify specialised areas for certification of staff manning key responsibilities
  2. To begin with, banks should make acquiring of a certificate course mandatory for areas like treasury operations, risk management, accounting, audit function and credit management
  3. Background: RBI had constituted a Committee on Capacity Building in July 2014, under the chairmanship of former executive director, G Gopalakrishna
  4. Objective: Implementing non-legislative recommendations of the Financial Sector Legislative Reforms Commission (FSLRC), relating to capacity building at banks and non-banks, streamlining training intervention
  5. Also, suggesting changes thereto in view of ever increasing challenges in the banking and non-banking sector

Centre injects money into public sector banks

  1. News: In a bid to boost credit growth in the economy, the Centre announced a sum of Rs 22,915 crore for recapitalisation of 13 public sector banks
  2. Union Budget: Proposed allocation of Rs 25,000 crore infusion in FY 2017, in line with the Indradhanush
  3. The remaining amount will be released later according to performance which would depend on efficiency improvements, growth in both credit and deposits, and reduction in the cost of operations
  4. The banks’ lending capacities are restricted by poor asset quality and weak capitalisation
  5. The infusions required in the current year were calculated from the Compound Annual Growth Rate (CAGR) of credit growth for the last 5 years and the banks’ projections of credit growth

State-owned banks widen reach quicker than private lenders

  1. Context: Recent data released by the Reserve Bank of India comparing private and public sector banks
  2. Public sector banks have increased their presence across the country in terms of ATMs and points of sale devices, far faster than private sector banks have
  3. ATMs & POS: There were 142,500 PSB ATMs as of March 2016, which amounts to 72% of the total number of ATMs in the country
  4. The issuance of credit cards and the share in credit card transactions are two areas where the private sector outshines the public sector
  5. There are 27 public sector banks and 19 private sector banks in operation currently

RBI to ease registration process for NBFCs

  1. Context: RBI to simplify the registration process for NBFCs
  2. The new application forms will be simpler and the number of documents required to be submitted will be reduced
  3. The entire process could be made online for ease, speed and transparency
  4. NBFC sector cannot be on a par with the banking sector and the step is meant to ‘harmonise, not equalise’
  5. Why? Totally exempting small NBFCs from regulations may not be feasible from the customer service point of view

What is Strategic Debt Restructuring (SDR)?

  1. What? It is about the terms that banks can write into the loan agreements, which will kick in at the time of default
  2. Aim: improving the working of banks faced with defaulters
  3. Restructuring: Transferring equity of the company by promoters to the lenders to compensate for their sacrifices
  4. Issues: Lack of clarity about its legal foundations
    SDR scheme adds one more layer of complexity into a complex system

RBI eases ECB norms for infra space

  1. Context: RBI allowed all companies engaged in the infrastructure sector to raise ECBs with a minimum maturity of five years
  2. NBFC: These also include the non-banking finance companies (NBFC) regulated by RBI
  3. Condition: The borrowings have to be fully hedged
  4. Limit: The individual limit of borrowing under the automatic route is $750 million
  5. NBFCs engaged in the infrastructure space were earlier allowed to raise ECB funding, but there were certain limitations

Govt, RBI move in step on banking sector

  1. Context: Govt & RBI are working together on long-overdue purging of stressed assets
  2. Both are chipping in to ensure that a capital cushion is available to banks as they go through clean-up
  3. Neither of them are sympathetic towards defaulting entities or banks that are hurting because of clean-up
  4. Political interferences in the loan approval process, an alleged reason for bad loan mess, have stopped
  5. The intensive asset quality review conducted by RBI was also aimed at clean up of balance sheets

Six or more anchor banks likely to lead consolidation

  1. Context: Recently, Gyan Sangam’ bankers’ retreat held at Gurgaon, discussed the idea of bank consolidation
  2. News: Govt. will identify 6 to 10 PSBs which will drive the consolidation process among the state-owned banks
  3. The govt will set up an expert panel for the consolidation process
  4. Reason: The health of PSU banks deteriorated sharply after RBI conducted an Asset Quality Review
  5. Parameter: Merger between the banks will be based on geographical and technological synergies, human resources and business profile



Learn about Bank Board Bureau

  1. Background: PJ Nayak committee was formed to review the governance of Board of Banks in India
  2. The committee recommended bureau as an interim step till the govt. hands over key governance roles to Bank Investment Company
  3. Composition: The bureau will have 3 ex-officio members and 3 expert members, in addition to the Chairman

Learn about Banks Board Bureau (BBB)

  1. Context: BBB will be a super authority of eminent professionals and officials for public sector banks (PSBs)
  2. Relevance: Will replace the Appointments Board of Government
  3. Structure: Chairman, 3 ex-officio members and 3 expert members
  4. Functions: Give recommendations for appointment of full-time Directors as well as non-Executive Chairman of PSBs.
  5. Give advice to PSBs in developing differentiated strategies for raising funds through innovative financial methods and instruments and to deal with issues of stressed assets

Centre’s nod for Bank Board Bureau(BBB)

  1. News: PM approved the setting up of the Bank Board Bureau with former Comptroller and Auditor-General of India Vinod Rai as its first Chairman
  2. Tenure: 2 years
  3. Why BBB? To improve the governance of public sector banks(PSBs), as part of the 7-point Indradhanush
  4. NPAs of PSBs are estimated at almost Rs. 4 lakh crore, and they need to raise capital of Rs. 2.4 lakh crore by 2018 to conform to Basel-III capital requirement norms
  5. Bureau’s Mandate: To play a critical role in reforming the troubled public sector banks
  6. By recommending appointments to leadership positions and boards in those banks and advise them on ways to raise funds and how to go ahead with mergers and acquisitions

Increase capital infusion in PSU banks, says Moody’s

  1. News: According to Moody’s, the govt should increase its proposed capital infusion in PSBs because of a surge in bad loans
  2. Reason: The credit profile of public sector banks will further worsen, if necessary steps are not taken
  3. Proposal: In 2015, the govt had proposed Rs.70,000 crore capital infusion over 4 years
  4. Criticism: Moody’s estimates that the 11 PSBs external capital requirements will be Rs.1.45 lakh crore for the four fiscal years

Government to lower stake in PSU banks to 51%

  1. Context: 9 state-owned banks have reported a combined loss of Rs 11,251 crore
  2. Background: PJ Nayak Committee report on banking reforms
  3. The news: The govt is going to announce a series of major banking reforms, including lowering its stake in state-owned banks to 51%
  4. Reason: The political govt needs to maintain arm’s-length distance from these banks and allow them to have more professionalised bank boards
  5. Importance: Public sector banks have played an important role in financial inclusion

Central bank calls for review of PSU banks’ dividend policy

  1. According to a RBI report, the dividend policy of public sector banks must be reviewed.
  2. PSBs pay hefty dividend to the shareholders irrespective of the quality of the balance sheet.
  3. The govt. is the majority shareholder in all the PSBs and it uses the dividend from its banks to meet its fiscal deficit target.
  4. As per Indradhanush reforms, PSBs are expected to work as ‘private’ entities in terms of their business strategies, operations, controls and financial target.

NBFCs’ sector-specific expertise drives sustained increase in market share

  1. The recent CII report on NBFCs shows that they have steadily eaten into retail banks’ share of credit in the Indian market over the last decade.
  2. NBFCs have taken large share in sectors such as home loans and commercial vehicle loans, due to their sector-specific expertise.
  3. NBFCs command 90% of the used commercial vehicle market, 80% of the loan against property market, and 70% of the consumer durables market.
  4. The NBFCs share of overall credit grew from 10% in 2004-05 to 13% in 2014-15.
  5. NBFCs are attractive to first-time buyers who value a strong relationship with the official from the lending agency.

Don’t cover up banks’ wrong acts, SC tells RBI

The Supreme Court held that RBI should not cover up the acts of banks and financial establishments indulging in “disreputable business practices”.

  1. RBI cannot withhold information on defaulters and other issues covered under the RTI Act.
  2. It is the responsibility of the RBI to take strict action against those banks.
  3. Earlier, CIC had directed RBI to furnish the information sought by applicants under the RTI Act.

Let’s explore some Banking terms

  1. A loan becomes a non-performing asset(NPA), if the borrower does not pay any interest or principle till 90 days.
  2. If the borrower pays his dues regularly and on time, then bank will call such loan as its Standard Asset.
  3. Banks are required to classify NPAs into 3 categories: Sub-standard, doubtful and loss, based on the period for which the asset has remained non performing.
  4. Sub-standard asset is the first category of NPA, that is when interest or principal is due for more than 90 days.

From non-performing to performing

A well-functioning insolvency resolution framework is fundamental for dealing with business failures

What’s new in IBC draft?

  • The ministry of finance recently released the draft Insolvency and Bankruptcy Code (IBC), proposed by the Bankruptcy Law Reforms Committee.
  • An effective insolvency resolution process is one tool, among others, for banks and other creditors to address low recovery rates.

What’s the issue of Banks in India?

  • Banks in India face acute problems of asset quality.
  • Perceiving that laws did not sufficiently empower secured creditors to activate recovery by seizing security.

How does single comprehensive law empowers the system, with the proposed IBC?

  • It empowers all creditors — secured, unsecured, financial and operational to trigger resolution.
  • It enables the resolution process to start at the earliest sign of financial distress.
  • It provides a single forum overseeing all insolvency and liquidation proceedings.
  • It replaces existing management during insolvency proceedings while keeping the enterprise as a going concern.

The way forward

  • The proposed framework strengthens creditors, without discrimination and it will prevent new loans from getting added to existing stock of NPAs.
  • It will aid development of alternative debt securities, spread the risk of corporate failure across larger sets of creditors.
  • It lead to the double benefit of lower systemic risk and deeper debt finance for a rapidly growing economy of entrepreneurs.

Did you know SARFAESI Act, 2002?

  1. It was enacted to regulate securitization and reconstruction of financial assets and enforcement of security interest created in respect of Financial Assets to enable realization of such assets.
  2. It allows banks and financial institution to auction residential or commercial properties to recover loans.
  3. The first asset reconstruction company (ARC) of India, ARCIL, was set up under this act.

World recognises India’s strong standing amid global economic turmoil

From economic point of view, today, world is looking up to India not only with sense of hope but also satisfaction.

  1. PM announced that a series of banking sector reforms were in the pipeline that would boost growth in rural areas.
  2. Efforts are being made to make banking premises-less, paperless and eventually currency-less, thereby curbing black money menace.
  3. The govt. has plans to infuse Rs.70,000 crore in the PSBs in the next few years to help them deal with the distressed assets issue.
  4. The global rating agency S&P has retained the sovereign credit rating for India at ‘BBB-’ with stable outlook.

RBI’s steps to create small banks

  1. RBI, has selected 10 financial institutions to set up separate small banks to lend to small businesses and farmers, who typically struggle to get funding from traditional lenders.
  2. Private-equity backed Ujjivan Financial Services Pvt Ltd and Janalakshmi Financial Services Pvt Ltd were among institutions.
  3. More than 100 million people in the country work at small businesses but only about 4 percent of small businesses have access to institutional finance.
  4. The winners will in future be able to become fully fledged banks depending on their performance and if they comply with rules for banks.

What prompted RBI to classify some banks as systemically important?

  1. In November 2011, the Basel Committee on Banking Supervision (BCBS) came out with a framework for identifying Global Systemically Important Banks (G-SIBs) and the magnitude of additional loss absorbency capital requirements applicable to these G-SIBs.
  2. The BCBS further required all member countries to have a regulatory framework to deal with Domestic Systemically Important Banks (D-SIBs).


  • Supervisory scrutiny will be more strict for them
  • Concentration risks will have to be taken more seriously in doing business
  • Strategic business shift to meet higher standards

RBI declares SBI, ICICI Bank systemically important banks

  1. RBI has declared SBI and ICICI banks as Domestic Systemically Important Banks (D-SIBs).
  2. D-SIBs are perceived as banks which are equivalent of too-big-to-fall in other countries.
  3. D-SIB category banks need to set aside more capital per loan than their peers to prevent a contagion effect, in case of financial crisis.
  4. The D-SIB framework requires the RBI to disclose the names of banks designated as D-SIBs every year in August, starting from August 2015.
  5. This is in-line to directions of Basel Committee on Banking Supervision, to all member countries to have a regulatory framework to deal with SIBs.

RBI asks Govt to speed up reforms in banking system

  1. RBI warned govt. that any delay in reform of the banking system would lead to greater risk in the economy.
  2. He emphasized the need to increase efficiency through greater entry and competition.
  3. He stressed on the need for more govt. participation in the country’s financial markets to increase their size, depth, and liquidity.
  4. Govt. can create supporting frameworks that improve transparency, contract enforcement, and protections for market participants against abusive practices.
  5. For a country as big and populous as India, reforms cannot be shots in the dark, subjecting the economy to great uncertainty and risk.

Bandhan gets final approval for banking licence from RBI

  1. On April 2, 2014, RBI had granted an in-principle approval to Bandhan and IDFC to set up a bank.
  2. As a bank, Bandhan plans to focus on retail clients and will not focus on corporate clients for lending.
  3. In early 2014, an RBI committee headed by Bimal Jalan submitted its report on the criteria, business plans and corporate governance practices of applicants applying for New Bank Licenses.

Banking sector to undergo sea change in two years: Rajan

  1. We might have a whole new set of institutions, payment banks, small finance banks, possibly a postal bank.
  2. Rajan also said the central bank was looking at allowing full capital account convertibility in a few years.
  3. Full capital convertibility means a foreign investor can repatriate his money into his own local currency at will, which is not allowed in the country now.

:( We are working on most probable questions. Do check back this section.

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