Mumbai /New Delhi: India announced its most sweeping bank overhaul in decades, minutes before data showed economic growth in Asia’s No. 3 economy slumped to a six-year low.
Four new lenders that result from a series of state-bank mergers will hold business worth 55.8 lakh crore rupees ($781 billion), or about 56% of the Indian banking industry, Finance Minister Nirmala Sitharaman said at a briefing in New Delhi on Friday. The government will inject a combined 552.5 billion rupees of capital into these entities, she said.
Prime Minister Narendra Modi is counting on larger and healthier banks to spur fresh credit and revive economic growth that came in far lower than economists expected. A slump in domestic demand and the world’s worst bad-loan ratio had been restricting scope for a revival in investment.
“Banks with strong national presence and global reach is what we want,” Sitharaman said at the briefing. “Scaling up will only allow them to have lot more resources and therefore the lending cost can come down.”
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Details of the mergers:
- Punjab National Bank, Oriental Bank of Commerce and United Bank of India will combine to form the nation’s second-largest lender with loans worth 7.5 lakh crore rupees
- Canara Bank will join Syndicate Bank; 6.6 lakh crore rupees
- Union Bank of India with Andhra Bank and Corporation Bank; 6.4 lakh crore rupees
- Indian Bank with Allahabad Bank; 3.5 lakh crore rupees
The government will ensure that no bank employee is hurt by the decisions, Finance Secretary Rajiv Kumar said at the briefing. He added that no one lost their job when the government helped facilitate a merger of Dena Bank and Vijaya Bank with Bank of Baroda last year, creating the third-largest bank by loans in the country.
India will now have 12 state-run banks instead of 27. The 10-member S&P BSE Bankex index rose 0.6% in Mumbai on Friday before the decisions were announced, compared with a 0.7% gain in the benchmark gauge.
‘Bigger Issue’
“Just increasing the size of balance sheets and combining operations of banks will only reduce the number of state-owned lenders but asset quality stress is unlikely to be taken care of,” said Avinash Gorakshakar, head of research at Joindre Capital Services Ltd. in Mumbai. “The bigger issue still remains as how risk profiling would improve banks’ bad-loan ratio ahead.”
After returning to power with a stronger mandate, Modi has been grappling with an economy still hurting from the fallout of his cash ban in 2016 and the botched rollout of a nationwide sales tax. A bad-loan clean up in the banking sector has contained credit to companies and a crisis among shadow lenders is denying consumers loans to buy goods like cars and refrigerators. Meanwhile unemployment is at a 45-year high as companies refrain from new investments.
Data on Friday showed gross domestic product growth slowed for a fifth straight quarter to 5% in the three months ended June. That’s slower than the 5.7% expansion predicted in a Bloomberg survey. The rupee pared gains in the offshore market.
Details of GDP growth:
- Manufacturing growth, hit by cuts in production and a slump in automobile sales, plunged to 0.6% in April-June from 12.1% a year earlier
- Growth in construction, the sector that creates the highest number of jobs, slowed to 5.7% from 9.6%
- Financial and real estate services grew 5.9% versus 6.5%
- Private consumption, which accounts for more than half of GDP, grew at an 18-quarter low of 3.1%
- Capital investment, such as new factories and machinery, was a “lackluster” 4%, according to Devendra Pant, chief economist at India Ratings and Research
- Only government expenditure provided support, expanding 8.8%
India’s state banks last week pledged that they would pass on all policy-rate cuts to their customers, which means Indian borrowers would benefit from the most aggressive monetary easing in Asia this year. In a spate of announcements within the space of a week, the government has eased foreign investment rules and given concessions on vehicle purchases. It also secured more fiscal space to stimulate the economy with a windfall from the central bank in excess of $24 billion.
“Clearly consolidation from our perspective is not a remedy or a panacea,” Saswata Guha, director and head of financial institutions at Fitch Ratings in India, told BloombergQuint. “Those issues still need to be resolved.”- Bloomberg
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1. Ms Nirmala Sitharaman, our Union Finance minister, has made an important announcement yesterday about merger of many public sector banks (PSBs) and it is a welcome announcement. It is also my wish that the Union cabinet soon takes a decision regarding according much-desirable autonomy to Boards of Directors of all the PSBs Mergers of PSBs would definitely provide strength to the PSBs. (2) In this context we cannot overlook fact that during last few years government has been compelled to infuse more and more funds in weak PSBs. (3) One can understand if employees have genuine grievances about mergers of PSBs and they have to be addressed to. But I say that United Forum of Bank Employees, (UFBU) as also the Officers’ Associations would be making a grave mistake if they oppose mergers just announced by Ms Nirmala Sitharaman. 4. Many of these Unions and Associations are controlled by the left parties. The Banks’ Union leadership is strongly opposed to BJP and one can understand that as ideologies of the Left and BJP are totally different. But citizen-voters like me wish that UFBU should not think of calling employees’ strike just to say that they are opposed to PSBs’ mergers. 5. There is little doubt that consolidation of PSBs would be a big step in meeting government’s goal of a 5 trillion economy.
According to news reports on 30 August , 2019 , RBI Annual Report has suggested that bank frauds saw a whopping 74% jump in value in 2018-19 as compared to the previous year. In terms of number of cases , it was up by 15%. Besides , GDP for Q1 of 2019-20 covering April -June in 2019 reportedly grew at 5% , lowest in over six years past. In the context of these major worrisome concerns in financial and economic sector in India , it is apt to refer readers to this Vedic astrology writer’s predictive alerts in article – “ The year 2019 astrologically for India” – published last year 2018 on 7 October at theindiapost.com. The predictive alert for more care and appropriate strategy reads like this in the article :-
“ February –March onward in 2019……………….Some sort of crisis or worrisome concerns in financial and economic sector look to be there.
July to September in 2019. These three months may also call for more care and appropriate strategy against floods , landslides , etc. Over reaction may not drag us to war or wastage. Distribution of central finances may be disputed by a State or States. Liabilities or restrictive complexion of the past policies may weigh heavily on the success or completion of the ongoing ambitious projects , particularly those related to energy generation.” These themes were also dealt with in predictive alerts in another article – “ World trends in April to August 2019” – brought to public domain widely in March and subsequently on 5 April 2019. The alert had said that a period of four and a half months from mid- April to August , particularly June around , in present year 2019 looked to be having major worrisome concerns in – “ financial and economic sector in India as well” calling for more care and appropriate strategy. A review of planetary impacts around May had suggested that such trends could reach out as far as mid-October , particularly about 7 August to 9 October , in 2019.
For all it’s so called differences with the Congress and the left, this government prescribed more of the same. A government that has learnt nothing and forgotten nothing. Just like the Air India – Indian airlines merger in the past, which continues to bleed the tax payer to date, now a PSB merger which promises more of the same. A government that wishes to run airlines, Banks, temples, hotels and what have you, all at tax payer’s expense. Instead of addressing the root cause, the government indulges in window dressing.