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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

New Delhi, Jun 3 () Over 300 retailers received little or no financial support from banks to recover from the impact of the COVID-19 crisis when they needed it, according to a survey by Retailers Association of India (RAI). As per the Bank Benefits Survey by RAI "PSU banks have been comparatively more helpful than private banks" towards retailers. The survey, which took response from 311 retailers across India said 56 per cent had outstanding term loan facilities and 52 per cent did not get moratorium announced by the RBI on March 27. It further said 65 per cent of respondents already had a working capital loan and 54 per cent asked for additional working capital limit (COVID limit) from respective banks. However, only 15 per cent of retailers were provided with additional working capital loans as mandated by the RBI. While around 52 per cent of respondents are satisfied with the financial support and services extended by PSU banks during COVID-19, almost an equal percentage are dissatisfied with private banks, the RAI survey added. "Private banks have been much more reluctant than PSU banks to extend additional working capital loans to retailers despite directions issued by the Reserve Bank of India (RBI) and the government of India," RAI said. Commenting on the findings, RAI CEO Kumar Rajagopalan said retailers selling both essential and non-essential items have reported a 40 per cent and 100 per cent drop in sales, respectively, due to the COVID-19 situation. The closure of business over the past couple of months has resulted in the loss of revenue, which has rendered some of the retailers unable to pay salaries to their staff, he added. "The reluctance of banks, especially private banks, to come to their aid is unfortunate and could hurt not only retailers but the banks themselves. Banks have made huge investments in the retail sector, and if the sector struggles to get back on its feet, a significant portion of that investment could turn into non-performing assets," Rajagopalan said. RKL SHW SHW

Retailers received 'little support' from banks to tide over COVID crisis: RAI Survey

Mumbai, May 5 () State-owned banks' non-performing loans are likely to rise by 2-4 percentage points, which will put up to USD 15 billion recapitalisation pressure on the government in FY21, a foreign brokerage firm said on Tuesday.The consolidated fiscal deficit target is likely to overrun by 2 percentage points due to stimulus spends, lower tax receipts and dip in divestments, and will have to look for different ways of raising resources for recapitalisation, analysts at Bank of America said.The government can issue recapitalisation bonds, or the RBI's huge reserves of over USD 127 can also be dipped into to help the state-owned bank's recapitalisation needs, it said.There is a near-unanimity among analysts that the ongoing COVID-19 pandemic will lead to an increase in bank's gross non performing assets with some reports pegging the stock to double as well.The brokerage said the increase in non-performing assets by 2-4 percentage points will need a government recapitalisation requirement by USD 7-15 billion.It said the recap bonds is a tried and tested instrument which has helped the banks in the past."The government will infuse capital into PSU banks and fund it by issuing recapitalisation bonds to them. PSU banks will invest the capital received in recapitalisation bonds," Bank of America said.Asserting that such a move does not entail a moral hazard, it elaborated saying PSU banks can heal their broken balance sheets and meet adequate capital requirements through the bonds and once growth recovers, the government can gradually convert these recap bonds into normal G-secs and sell them to the market.The interest cost on the bonds will impact the Center's fiscal deficit, although that will also be partly moderated by profit transfers from PSU banks holding recap bonds, it said.Recapitalisation bonds enter the fiscal deficit in the year of their maturity and it is because of this this that the bonds were issued without any fixed maturity in the past instances, it added.Apart from the bonds, the RBI's revaluation reserves of USD 127 billion can also be deployed, it suggested, adding that such a move will be neutral from a fiscal deficit perspective. AA BALBAL

PSB NPAs likely to rise 2-4 pc points; may push govt to recapitalise via RBI reserves, bonds: Report

<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>

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

Mumbai, May 5 () Non-performing loans of state-owned banks are expected to rise by 2-4 percentage points resulting in an up to USD 15 billion of recapitalisation burden on the government in 2020-21, a foreign brokerage said on Tuesday. The consolidated fiscal deficit target is likely to overrun by 2 percentage points due to stimulus spends, lower tax receipts and dip in divestments, and will have to look for various ways of raising the resources for recapitalisation, analysts at Bank of America said. The government can issue recapitalisation bonds, or the Reserve Bank of India's (RBI) huge reserves of over USD 127 can also be dipped into to help the state-run banks' recapitalisation needs, it said. There is a near-unanimity among analysts that the ongoing COVID-19 pandemic will lead to an increase in bank's gross non-performing assets with some reports pegging the stock to double as well. The brokerage said the increase in non-performing assets by 2-4 per cent of the assets will need a government recapitalisation requirement by USD 7-15 billion. It said the recap bonds is a tried and tested instrument which has helped the banks in the past. "The government will infuse capital into PSU banks and fund it by issuing recapitalisation bonds to them. PSU banks will invest the capital received in recapitalisation bonds," it said. Asserting that such a move does not entail a moral hazard, it elaborated saying that public sector banks (PSBs) can heal their broken balance sheets and meet adequate capital requirements through the bonds and once growth recovers, the government can gradually convert these recap bonds into normal g-secs and sell them to the market. The interest cost on the bonds will impact the Center's fiscal deficit, although that will also be partly moderated by profit transfers from PSU banks holding recap bonds, it said. Recapitalisation bonds enter the fiscal deficit in the year of their maturity and it is because of this that the bonds were issued without any fixed maturity in the past instances, it said. Apart from the bonds, the RBI's revaluation reserves of USD 127 billion can also be deployed, it suggested adding that such a move will be neutral from a fiscal deficit front perspective. AA HRS

State-owned bank NPAs may rise in FY21, govt's fiscal deficit to widen: Bank of America

The Narendra Modi-led government has scrapped the appointment of six public sector bank CMDs selected by the United Progressive Alliance (UPA) government. The extreme step has been taken as some irregularities were found in the process of selection. 
 The <keyword id="26374" type="ORGANIZATION" weightage="60" keywordseo="UPA-government">UPA government</keyword> had shortlisted chairman and managing directors for Bank of Baroda, Canara Bank, Indian Overseas Bank, Oriental Bank of Commerce, United Bank and Vijaya Bank. The names were forwarded to the Finance Ministry for ratification by the Appointments Committee of the Cabinet. 
 "After receipt of the report of the committee, the government has decided to cancel the current selection process of CMDs/EDs of public sector banks (PSBs). The government constituted a committee consisting of secretary, secretary and governor, <keyword id="30067" type="ORGANIZATION" weightage="80" keywordseo="RBI">RBI</keyword> to examine the selection process adopted for the selections to the posts of CMDs/EDs for 2014-15," a Finance Ministry statement said. "...Eight posts of CMDs and 14 posts of EDs would require to be filled-up de novo," it added. 
 
A high-level committee comprising of expenditure secretary, RBI governor and secretary, school education was set up to examine the selections. The posts will now be filled through a fresh selection process. 
 
Images: indiatimes

Modi Govt Overturns UPA's Selection Of Six PSU Bank CMDs

There were several key messages from the budget this year, but the three which seem to stand out are in the areas of boosting infrastructure growth, reinvigorating rural demand and the rebooting financial sector. 
 
For boosting infrastructure, the roads sector is given an unprecedented Rs 97,000 crore of investment allocated in this year's budget. It is expected to have a multiplier effect on the economy in the coming years and help in efficient transportation. This along with the Rs 1.21 lakh crore CAPEX in railways seems to be a major thrust of the union government going ahead. 
 
The government is expected to approve 10,000 km of National Highways in Fiscal 2016-17 apart from the plan to upgrade 50,000 Km of state highways to national highways. 
 
Apart from this, the move to develop airstrips of AAI in some of the towns in India is another positive step concerning infrastructure. Similarly, the plan to reinvigorate PPPs in infrastructure is also a positive one which may help private sector step in for some investment. 
 
Second, for reinvigorating rural demand two related sectors have been targeted. One is the agriculture sector which has seen two back to back seasons of scanty rainfall. For the farmers in the sector, the announcement of a Fasal Bima Yojana will provide relief. And so will the move to create irrigation infrastructure through the strengthening of the Pradhan Mantri Krishi Sinchai Yojana over the long term. 
 The creation of the e-platform for farmers to sell their produce in wholesale markets across the country will aid in more freedom to the farmers to sell their produce. The change in the APMC Act in 12 states about the same is a progressive step. For the rural sector, which is the second sector, the structural step to give more funds to Panchayats and Municipalities (Rs 2.87 lakh crore) as per the recommendations of the Fourteenth <keyword id="74136" type="ORGANIZATION" weightage="20" keywordseo="finance-commission">Finance Commission</keyword> is taken. It is an appropriate step as it will lead to a massive devolution of funds to the third tier of governance. Similarly, the steps for development of urban clusters for market access and job generation will aid in strengthening the rural economy in the long term. The substantial allocations to MGNREGS (Rs 38500 crore) and the rural sector overall (Rs 87,765 crore) underlie the impetus that is being given to rural economy and demand in the sector. 
 
Third, another major focus area for the budget has been addressing the challenges of the financial sector. The introduction of the comprehensive Code on Resolution of Financial Firms in Parliament, as well as the code on Bankruptcy when enacted, will help in resolution as well as help bring in more accountability in the financial system. Also, the PSU banks have been facing problems due to asset quality and rising NPA. 
 
In addition to the comprehensive INDRADHANUSH already being implemented, the budget has done well to provide an allocation of Rs 25,000 crore for the recapitalisation of PSU banks. Also, the motivation to solve people's problem at the retail level are worth mentioning. These include the intent to tackling the issue of illicit deposit taking schemes as well as the intent to provide better access to financial services in rural areas through the rollout of ATM's and Micro ATM's over the next three years. 
 
Apart from these broader sectors other things where the government has done well at the macro level include sticking to the fiscal deficit target of 3.9 percent and 3.5 percent for the years 2015-16 (R) and 2016-17 (B) respectively. 
 
The government has also announced a committee to look into the FRBM Act, 2003 which is a good thing considering that market conditions in India are different than they used to be in the past. On the personal tax front, not much is seen for the middle class and the EPF taxation seems to be a negative move that has seen some visible backlash on social media. Another negative on the personal front seems to be on duties on several items where almost everything seems to get expensive from jewellery to cars to mobile phones to air travel. The only thing that is getting cheaper it seems are shoes and footwear. All in all the budget seems to be good for the rural economy and infrastructure sector and seems to take care of the financial sector problems at hand but leaves much to done for the middle class. 
 
 
(The article is co-authored with Sankalp Sharma, Senior Researcher at the Institute for Competitiveness, India. Amit Kapoor is Chair, Institute for Competitiveness &amp; Editor of Thinkers. The views expressed are personal. Amit can be reached at <a href="mailto:amit.kapoor@competitiveness.in">amit.kapoor@competitiveness.in</a> and tweets @kautiliya)

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

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

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Modi Govt Overturns UPA's Selection Of Six PSU Bank CMDs

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