Project Sashakt & Banking Merger

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Project Sashakt

Union Finance Minister Piyush Goyal on July 2, 2018 approved the Sunil Mehta Committee’s suggestions of a 5-pronged strategy to tackle the Non-Performing Assets (NPA).
  • The committee led by Punjab National Bank Chairman Sunil Mehta has submitted its draft report titled 'Sashakt' to the Finance Ministry with a strategy to tackle stress in the banking sector.
  • However, there is no proposal or recommendation to create a bad bank.
    • Bad loans of up to ₹50 crores will be managed at the bank level, with a deadline of 90 days.
    • For bad loans of ₹50-500 crore, banks will enter an inter-creditor agreement, authorizing the lead bank to implement a resolution plan in 180 days, or refer the asset to NCLT.
    • For loans above ₹500 crores, the panel recommended an independent AMC (Assert Management Company), supported by institutional funding through the AIF.
Banking Merger
1 Punjab National Bank (PNB), Oriental Bank of Commerce   (OBC), and United Bank of India PNB
2 Canara Bank and Syndicate Bank Canara Bank
3 Union Bank of India, Andhra Bank, and Corporation Bank Union Bank of India
4 Indian Bank and Allahabad Bank Indian Bank
Merger
  • Now, the total number of PSBs after consolidation has come down to 12 from 27 in 2017.
The earlier mergers were
  • Vijaya Bank and Dena Bank with Bank of Baroda (BoB) – effective from April 01, 2019.
  • State Bank of India absorbed five of its associates and the Bharatiya Mahila Bank (Bank by Women for Women, & Merge to SBI in 2017).
Benefits of Merger
  • Competetive: The consolidation of PSBs helps in strengthening its presence globally, nationally and regionally.
  • Capital and Governance: The government's intention is not just to give capital but also give good governance.
  • Hence, post-consolidation, boards will be given the flexibility to introduce the chief general manager level as per business needs.
  • They will also recruit chief risk officer at market-linked compensation to attract the best talent.
  • Efficiency: It has the potential to reduce operational costs due to the presence of shared overlapping networks.
  • And this enhanced operational efficiency will reduce the lending costs of the banks.
  • Technological Synergy: All merged banks in a particular bucket share common Core Banking Solutions (CBS) platform synergizing them technologically.
  • Self-Sufficiency: Larger banks have a better ability to raise resources from the market rather than relying on State exchequer.
  • Consolidation also helps in improving the professional standards.
  • This will also end the unhealthy and intense competition going on even among public sector banks as of now.
  • In the global market, the Indian banks will gain greater recognition and higher rating.
  • The volume of inter-bank transactions will come down, resulting in saving of considerable time in clearing and reconciliation of accounts.
  • Recovery: The loan tracking mechanism in PSU banks is being improved for the benefit of customers.
  • Monitoring: With the number of PSBs coming down after the process of merger – capital allocation, performance milestones, and monitoring would become easier for the government.
Challenges
  • Decision Making: The banks that are getting merged are expected to see a slowdown in decision making at the top level as senior officials of such banks would put all the decisions on the back-burner and it will lead to a drop in credit delivery in the system.
  • Geographical Synergy: During the process of merger, the geographical synergy between the merged banks is somewhat missing.
  • In three of the four merger cases, the merged banks serve only one specific region of the country.
  • Slowdown in Economy: The move is a good one but the timings are not just apt. There is already a slowdown in the economy, and private consumption and investments are on a declining trend.
  • Hence, there is a need to lift the economy and increase the credit flow in the short-term, & this decision will block that credit in the short-term.
  • Mergers will result in shifting/closure of many ATMs, Branches and controlling offices,
  • Mergers will result in immediate job losses on account of large number of people taking VRS on one side and slow down or stoppage of further recruitment on the other.
  • This will worsen the unemployment situation further and may create law and order problems and social disturbances.
  • Mergers will result in clash of different organizational cultures. Conflicts will arise in the area of systems and processes too.
  • When a big bank books huge loss or crumbles, there will be a big jolt in the entire banking industry. Its repercussions will be felt everywhere.
Recapitalisation Bond
(Public Sector Bank (PSB) sell Recapitalisation bonds to public & get capital & Run Business. If PSB not able to pay back form bond, Govt solve it).
  • Recapitalisation bonds are dedicated bonds to be issued at the behest of the government for recapitalizing the trouble hit Public Sector Banks (PSBs).
  • Bonds worth of Rs 1.35 trillion is to be issued to inject capital into PSBs who are affected by high level of NPAs.
  • Recapitalization bonds are proposed as a part of the Rs 2.11 trillion capital infusion package declared by the government on October 24th, 2017.
  • In December 2018, the government announced the issue of additional Rs 41000 crores worth of recapitalisation bonds.
  • The term recapitalisation means giving equity money to cover debt of an entity.
  • In the case of PSBs, their NPAs (debts) will be replaced by equity capital from recapitalisation by the government.
  • Money obtained from the sale of the bonds will be injected into the PSBs as government equity funding.
  • Procedures for the issue of the bonds and the working mechanisms are yet to be decided by the government.
Who will issue the RCBs?
  • RCBs will be issued by a holding company that is specifically created to hold government equities in PSBs.
  • If such a company issues the bonds, the bond issue will not come under government debt and thus the debt will not add to fiscal deficit.
  • “A holding company can be formed to which the government share in all PSBs will be transferred.”
  • “The company will then issue the proposed bonds. 

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