Impact of Covid-19 Pandemic and Amalgamation In Indian Banks

Introduction
The corona virus (COVID-19) outbreak is causing widespread concern and economic hardship for consumers, businesses and communities across the globe including banking industry as a whole. The predicament for Rs 166 lakh crore banking sector are far from over. A few months ago when bank non- performing assets (NPAs) declined from its peak of over 10 per cent of the advances and profitability returned, the telecom AGR (adjusted gross revenue) liability and the Yes Bank debacle hit them hard both in terms of sentiment and loss in market valuations.

The Covid-19 pandemic was like a volt from the blue. Over the last seven years, the banks had braved the first of its kind balance sheet clean up with RBI’s asset quality review for stressed loans. The demonetization in 2016 disrupted their focus and business in the interim. The GST came as a shocker as many micro, small and medium enterprises (MSMEs) got wiped out and the banks were forced to restructure many of the loans to MSMEs. Another path-breaking change, the Insolvency and bankruptcy code (IBC), created a huge provisioning pressure in their books with realisation still far from satisfaction. We analyse how prepared the banking sector, after amalgamation, is to weather the Covid-19 storm which is playing out in full force globally.

Challenges:
Public sector banks in consolidation mode
The government move to consolidate 27-odd public sector banks (PSBs) into 10 large banks has taken place when the Covid-19 is creating yet another direct disruption in sectors such as travel, transportation, tourism, hospitality and trade by creating an imbalance in supply chain globally, etc. The anchor banks such as Union Bank of India, Punjab National Bank, Indian Bank and Canara Bank are in the process of branch and people rationalisation, technology integration and stressed loan strategy etc. The two other large PSBs – Bank of Baroda and IDBI Bank Ltd – have challenges of their own. The Bank of Baroda, which merged Dena Bank and Vijaya Bank into itself, has seen the complete exit of leadership, which was hired to create a template for other PSBs to follow. Similarly, the new promoter LIC in IDBI Bank has pumped in capital of over Rs 35,000 crore to revive the bank.

The latest set of mergers will change the pecking order among the country’s nationalised banks and give many of them a wider geographical reach and make balance sheets stronger.

For instance, PNB become the second largest state-owned bank with over 11,000 branches, 13,000 plus ATMs and a business mix of over Rs 16 lakh crore. There will be over 1 lakh employees in the merged entity.

Canara Bank became India’s fourth largest public sector bank. Post amalgamation of Syndicate Bank, Canara Bank will have a network of 10,391 branches, 12,829 ATMs and a business size of over Rs 16 lakh crore. The staff strength will now go up to 91,685 employees.

Union Bank became the fifth largest nationalized bank, with over 9,600 branches and a business of Rs 14.59 lakh crore.
Indian Bank, with a combined branch network of 6,060 branches and 2,870 ATMs, and a business of Rs 8.08 lakh crore became the seventh largest state-owned lender.

Merger of such huge scale is bound to have some impact on the network and employees. The government had already clarified that there won’t be any job losses. However, while banks say branches are unlikely to close right away, there will be some overlap and therefore some restructuring will happen in due course. For instance, Indian Bank’s MD and CEO Padmaja Chunduru had said that 150-200 branches that had been identified would either be merged or their location shifted.

This mega merger of PSU banks came into effect at a time the country is in a 21-day lockdown to control the spread of COVID-19 outbreak with no ruling out of a further extension and banks are functioning with limited manpower and shorter working hours than normal.

Half a dozen weak banks under RBI’s PCA
A dozen banks were under the RBI’s prompt corrective action (PCA) but half of them released because of merger of PSBs and the additional capital provided by the government. There hasn’t been any material improvement in their profitability or NPAs to send them out of PCA. In fact, half a dozen banks are still very weak to restart the lending business. IDBI Bank, Indian Overseas Bank, UCO Bank, Central Bank of India and Laxmi Vilas Bank are currently under the RBI’s monitoring with restricted lending.

Private sector banks not out of the woods
For long it was PSBs that shared all the blame for poor corporate governance and leadership, but now private sector’s weak links are also exposed. Chanda Kochhar and Rana Kapoor came under the scanner of investigating agencies for corruption charges or violating the service rules. Similarly, the growing NPAs in their book showed the bad lending practices. Currently, the leadership at large private banks is stabilising with a new strategy in place. The largest private bank, the HDFC Bank, will see a leadership transition by the year-end whereas in IndusInd Bank, Sumant Kathpalia has taken over from Romesh Sobti as the MD & CEO by the month-end. Many private banks are in the process of capital raising. In fact, the equity dilution will be higher now as their valuation has fallen big time over the last one month.

Loss of trust in the banking entities
For the first time in many decades, a private sector bank saw a moratorium being imposed by the RBI. A moratorium by the regulator is the last resort as PCA framework is available to nurse the bank back on health. Yes Bank’s balance size of over Rs 3 lakh crore was enough to create panic in the market. The debacle of multi-state cooperative bank Punjab and Maharashtra Cooperative Bank (PMC) Bank and Yes Bank have once again raised the trust issue in the banking industry. The government, on its part, has also raised the deposit insurance limit from Rs 1 lakh to Rs 5 lakh per depositor per bank. In fact, the banks in India are well capitalized with the exception of few but the recent debacle has done the damage by jolting the small depositors’ trust in the banking industry.

The resolution of bad loan is stuck
The IBC is a path-breaking law for the banking sector as it is creating a deterrent in the market for defaulters. But the new code is yet to see faster resolution of cases. The banks have made all the NPA provisioning in the books, but the recovery is still far away. While the NCLT courts are flooded with cases, there is lack of interest from buyer’s especially global distressed funds because of too many amendments in a short period of time and legal challenges at every stage. The buyers are probably waiting for clearer signals from the economy, which is on a downhill journey.

Fitch Cuts India GDP Growth Forecast To 30-Year Low Of 2% for FY21
Fitch Ratings on Friday said it has slashed India’s growth forecast for the current fiscal to a 30-year low of 2 percent, from 5.1 percent projected earlier, as economic recession gripped global economy following the lockdown due to the Covid-19 pandemic. “The initial disruptions to regional manufacturing supply chains from a lockdown in China as the corona virus spread have now broadened to include local discretionary spending and exports even as parts of China return to work. “Fitch now expects a global recession this year and recently cut our gross domestic product growth forecast for India to 2 percent for the fiscal year ending March 2021 after lowering it to 5.1 percent previously, which would make it the slowest growth in India over the past 30 years,” it said in a statement.

MSME Sector:
According to a recent GOQii survey, about 26% of businesses surveyed said their sales and purchases have been impacted due to the virus outbreak. MSMEs are grappling with problems like low liquidity or cash flow and lack of workforce as the daily-wagers have gone to their villages.

Businesses that are into manufacturing will also take a hit on export business as the situation remains uncertain. The services sector is also slowing down.

Steps taken by Govt. and Banks:
Banks came into the corona virus pandemic much stronger than they went into the global financial crisis, but will the capital and liquidity buffers they have built be sufficient to see them through the most dramatic economic crash in history?

The government has started taking steps to keep the MSME segment afloat. The Reserve Bank of India recently introduced Long Term Repo Operations (LTRO) worth Rs 100,000 crore to help banks increase lending at cheaper interest rates.

In addition, Finance Minister, Nirmala Sithraman, also announced the extension of the last date to file belated Income Tax Return for all businesses for the FY 2018-19 from March 31 to June 30. The deadline for GST returns filing for March, April and May is now June 30.

Banks are also being encouraged to keep loans worth Rs 60,000 crore ready.
1. Why assemble in India, when we can Make-in-India?
Now could be the right time for the Government to roll out sops to MSMEs that manufacture locally. The Government eMarketplace (GeM) could be of great use to suppliers looking for purchasers and vice versa. Investing in online infrastructure while also encouraging small businesses to source locally could help improve manufacturing while also cutting on our import costs.

2. Delay MSME loan repayments or extend the period:
As the RBI pumps in more cash into the banking sector, deferring or relieving the MSMEs of loan repayments could come as a welcome move. Most businesses are looking for financial support from the government and doing this can help them cope with cash flow problems. Relaxing bad loan norms could also be a saving move for this sector.

3. Transparency in Communication:
It is a key part of effective crisis management. For banks, this takes on heightened importance because trust and reputation are integral to what they offer to clients. Unlike a cyber breach or a reputational scandal, COVID-19 affects all firms, and, for the most part, regulators and clients already understand the basic facts about what’s happening.

Frequent and honest communication to clients to update them on banker’s approach will help them to understand that their situation is being addressed by Banks and if/when they should revise the way they think about risk.

The way forward:
In a time of global uncertainty, it’s easy to lose sight of the big picture. This is particularly true when memories of the last recession are still relatively fresh. But it’s worth acknowledging just how different the current situation is from where we were a decade ago, Today’s financial system is far more resilient. Many of the structural reforms put in place have led to increased oversight and reserves post amalgamation. These are designed to strengthen Indian banks ability to withstand systemic shocks and, by all accounts, they seem to be working although it may take months together to accelerate the desired growth in Indian economy as a whole.

References:
https://www.businesstoday.in/
https://www.theweek.in/
https://economictimes.indiatimes.com/
https://www.bloombergquint.com/
PWC United States

 

About the author

Vijay Kumarr Shaw
Chief Manager, Centre In-Charge
Union Bank of India Staff Training Centre Kolkata