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<ul><li>Five years on, their combined market value increased by ₹2.2 trillion, which is significantly lower than the invested value </li><li>Nine of 19 PSBs reported current value of investment higher than the investment amount. </li><li>This year, the central bank has cut interest rates thrice by a net 100 basis points or 1% (before this week’s rate cut), but banks passed on only 29 basis points of this benefit to customers. </li></ul> The Government of India and the country’s largest insurer LIC made a losing bet on Indian public sector banks (PSBs). In the last five years, both of them invested a massive ₹3 trillion into 19 such banks. Five years on, their combined market value increased by ₹2.2 trillion, which is significantly lower than the invested value, said a report by India Ratings and Research. “Nine of 19 PSBs reported current value of investment higher than the investment amount. The key banks among them are Indian Bank, State Bank of India, Bank of Baroda,) and Canara Bank,” said the report. A large chunk of the market value contribution, by around 53% came from the country’s largest bank, SBI. When the government kicked off its ‘Indradhanush’ (meaning Rainbow) plan to recapitalise banks, they were not looking out only for a return on their investment. They also wanted banks to push credit growth in a country where growth has been slowing down. The Quicksand Unfortunately, loss-ridden banks with toxic loans dragging them down, could neither help themselves nor consumers, and definitely not the country’s economy. “In reality, the capital infused was largely consumed to tide over losses resulting from provisions required on non-performing assets,” the report said, calling it a quicksand. This has been the case with Reserve Bank of India’s (RBI) interest rate cuts as well. In the last one year, the central bank has cut interest rates thrice by a net 100 basis points or 1%, but banks passed on only 29 basis points of this benefit to customers, swallowing most of it to fill their own money pit. This month, the central bank cut interest rates by another 35 basis points and promised to take “<a href="https://www.businessinsider.in/business/rbi-policy-update-asks-banks-to-cut-lending-rates/articleshow/70567837.cms">whatever steps necessary </a>to make banks pass them on”. Kickstarting the economy Like the government, RBI also wants to push for growth, as it predicts that it will fall top 6.9% this year, below their earlier estimates. Yet, helping banks to ensure <a href="https://www.businessinsider.in/business/india-gdp-growth-may-fall-below-7-says-crisil/articleshow/70481459.cms">growth is </a>not a strategy that is working. Whatever little credit growth that India saw came from private and foreign banks, shadow banks and mutual funds. In fact, the share of state-owned banks in total loans fell from around 61% to 46.5%, in the last five years in spite of government support. India Ratings suggests that PSBs should look at management overhaul, lengthen the tenure of top management, bringing in private sector leaders and link their pay with stock performance. “Without structural reforms in place, the government will have to continue to inject capital into banks in times of stress, which will strain its own finances and hinder efforts for fiscal consolidation,” the rating agency said.

Indian government’s ₹3 trillion gift to banks ended in a money pit

<ul><li>The Indian government has decided to merge 10 state-owned banks into four, a move that has been cheered by many market participants.</li><li>These mergers can be a challenging process and take at least until April 2020 to materialise, according to CLSA.</li><li>In the meantime, competing banks will gain market share as the 10 banks focus on executing the mergers and consolidating the business and not on growing the franchise.</li><li>These expectations from the brokerage are based on similar mergers that have taken place in recent years.</li></ul>The Indian government has decided to merge 10 state-owned banks into four, a move that has been cheered by many market participants. As a part of the merger, Punjab National Bank (PNB) will be merging with Oriental Bank and United Bank which will be the second largest public sector bank in India. While PNB will retain its identity as the anchor bank, it will be ‘acquiring’ the other two smaller banks. Canara Bank will merge with Syndicate Bank to become the fourth largest bank. Union Bank of India will subsume with Andhra Bank and Corporation Bank to turn into the fifth largest state-owned bank. Indian Bank and Allahabad Bank will also merge to become the seventh largest public sector bank. However, despite these moves, the country's largest lender, the State Bank of India, may emerge as a big winner. This may help SBI's share price that is reeling near a six-month low at this point. Even the private banks like ICICI Bank, HDFC Bank, and Axis Bank, may gain more customers despite the reach of their government peers in the time that these proposed mergers are executed. The following expectations from the brokerage are based on similar mergers that have taken place in recent years. 1. The mergers may be effective from April 1, 2020. The merger of Bank of Baroda, Vijaya Bank, and Dena Bank was announced around mid-September 2018 and was effective by April 1, 2019. 2. Generally growth suffers during the merger process but over the medium-term consolidation of infrastructure does improve profitability. 3. Low-cost savings and deposits grow faster than loans and advances. 4. The investors in anchor banks-- in the current scenario PNB, Canara Bank, and Indian Bank-- will get a better deal in the merger. This will offset some of the pain and price erosion of having to share the burden of weaker banks. Bank of Baroda shareholders had an advantage of 8-9% in the share swap deal during the merger with VIjaya Bank and Dena Bank. 5. Between the merger announcement and the listing of merged shares, Bank of Baroda, Vijaya Bank, and Dena Bank underperformed the PSU-bank Index, and SBI fared better. 6. With many PSU banks focussed on merger and integration, SBI and private banks will be better placed to gain market share. SEE ALSO: <a href="https://www.businessinsider.in/business/indian-government-merges-ten-public-sector-banks-to-form-four-large-entities/articleshow/70910392.cms" data-type="tilCustomLink" target="_blank">Indian government decides to merge ten public sector banks to form four large entities</a>

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Indian government’s ₹3 trillion gift to banks ended in a money pit

Katya Naidu

SBI and private banks may gain customers from India's government banks' mergers

Sriram Iyer

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