Merger Mania VII

7/29/2019 Merger Mania VII

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MERGER MANIA VII

BY

S.SRINIVASAN

PRESIDENT

NATIONAL UNION OF BANK EMPLOYEES

(NUBE)

INDIAN BANKS LONG WAY TO GO .

Inclusion and consolidation

Consolidation or inorganic growth is thought of as a way of graduating to a globalsize. The proposal is actually old. The Narasimham Committee II had suggestedthis in 1997.

Although the Government has taken care to mention that every proposal to mergeor take over has to emanate from the individual bank's board but has notadvocated that it should be supported equally by the employees.

Very recently, the government ahs was changing headlines each day having aneye on election 2014 announcing populist, adhoc measures. One such intuitive is tconsolidating the banking industry. The idea of encouraging mergers amongbanks to create global sized' institutions sounds attractive but may not be theright way to boost capital adequacy. The merged entity's capital will be justsufficient to support the aggregate business. A merger does not necessarily freecapital from either of the merging banks. Any of the existing PSBs is unlikely tohave spare' capital. Moreover, there are fundamental objections to the mergerroute. The Finance Minister has advocated gradualism, preferring individualbanks to decide. The RBI feels financial inclusion is a more importantobjective than bank consolidation.

According to the latest RBI data, as of December-end 2011, public sector banksaccounted for about 74 per cent of deposits and advances in the banking sector

More recently, the government has been looking at consolidating the bankingindustry. The idea of encouraging mergers among banks to create global sized'institutions sounds attractive but may not be the right way to boost capital


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adequacy. The merged entity's capital will be just sufficient to support theaggregate business. A merger does not necessarily free capital from either of themerging banks. Any of the existing PSBs is unlikely to have spare' capital.Moreover, there are fundamental objections to the merger route. The FinanceMinister has advocated gradualism, preferring individual banks to decide.

The RBI feels financial inclusion is a more important objective than bankconsolidation. The two main motives for mergers and acquisitions

(consolidation) are the rationalization of costs and the diversification of

growth throughclosure of branches and rationalization in the branchbanking system which only accentuates further sectoral and regional

imbalances, thus defeating the objective expansion of financial inclusion

widely talked about..Hencefinancial inclusion and consolidation are

antithesis

The number of people living on less than Rs60(less than 1.5 US$) in India is

significantly greater than that of the entire population of US. From the socialperspective this is humanitarian pandemic.

To repeat the basic objectives of Nationalistion of Banks in India.are

To provide banking services in previously unbanked and underbanked ruralareas.

To promote substantial credit to specific activities including agriculture andcottage industries.

To provide credit to certain disadvantaged groups and weaker sections ofsociety.

The analysis of the Distribution of commercial branches in India bank groupwise and population group wise -2009 vindicates there is an uneven distributionof banking services in the country. Only public sector banks and RRBs , have

huge presence in rural areas and the respective share of the Private Banks AndForeign Banks is a mere 6.4 % and 1.4% while presence in metro areas is34.8% and 79.3% respectively as shown in Table A & B

A) Distribution of commercial branches in India bank group wise

and population group wise -2009 @


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Bank Numbe

r

Rural

(%)

Semi urban

( %)

Urban

(%)

Metro

( %)

Total

SBI &

Associates

7 34.5 30.2 19.0 16.3 16260

Natioanlised 19 34.2 22.1 22.6 21.1 39095

Other public

sector

1 9.9 19.8 34.6 35.7 566

Old private 15 18.0 33.3 28.8 19.9 4701

New private 7 6.4 26.2 32.6 34.8 4264

Foreign 32 1.4 1.4 18.0 79.3 295

RRB 86 76.8 18.2 4.4 0.6 15144

Non scheduled

commercial

banks ( local

area banks )

4 25 45.5 29.5 Nil 44

Total 171 39.6 23.8 19.4 17.2 80,369

Source: Report on Trend and Progress of Banking in India 2008-09As on June 30, 2009.@: Population group wise classification of branches is based on 2001 Census.Note: 1. Number of branches data exclude administrative offices.3. Figures in parentheses are percentage to the total in each group.

B) Credit coverage of adult population by region for March 2009

Region %

North 14.9North east 9.2

East 9.0

Central 9.9

west 32.7

South 26.1

All india 18.3


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Source: Report on Trend and Progress of Banking in India 2008-09

Note: No. of Borrowal accounts is as per place of sanction as on 31st March

2009; Adult population estimate is on the basis of Census 2001 and assuming a

growth rate of 1.3% (World Bank, World Development Report )

This bears testimony for their lackadaisical concern towards social banking

and over emphasis on class banking.

And yet the finance minster is advocating grating of more licenses to new

private and foreign banks? But disregarding this trend the finance minister a

reiterated again in the recent BANCON 2012 conference

We have written to RBI recently urging them to proceed to finalize theguidelines and proceed to receive applications for new banking licences in

anticipation of the amendment in the Banking Regulation Act,

We hope that RBI will pick up the thread and finalize the guidelines and startreceiving the applications, he added. Mr. Chidambaram also said that the poweror the authority that RBI wants is already available under other provisions of thelaw and the central banks own regulations and guidelines for handing out newbanking licences."

A day after finance ministerP. Chidambaram prodded the Reserve Bank of India(RBI) to speed up the process of licensing new banks, governorD. Subbarao said

on Friday that the central bank would do so only after making sure that thegroundwork is in place and all enabling conditions are met.

The RBI chiefs remarks seemed to indicate a widening divide on policy betweenthe finance ministry and the central bank, which have also differed over thetiming of interest rate cuts to prop up sagging economic growth. We have beenpreparing for launching this process (of issuing new bank licences), but all thegroundwork, all the enabling conditions for launching this work have to befulfilled,Mr Subbarao told reporters in Pune soon after the BANCON 2012conference

RBI hasnt licensed any new banks since 2002.

But FM once again reiterated he had asked RBI to finalize the guidelines for newbank licences and start accepting applications from potential new banks withoutwaiting for an amendment of banking rules.
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The RBI governors reluctance to toe the line of the finance ministry is the secondinstance in recent times of the central bank and the government diverging oncritical policy issues this year

In the second quarterly monetary policy review in October, governor of RBI kept

policy rates unchanged, citing high inflation, although Chidambaram had beenkeen that the central bank pare its policy rate to prop up economic growth.

In a bid to convince RBI about the governments serious intent to rein in the fiscaldeficit, the finance minister laid down a five-year fiscal consolidation road map aday ahead of the monetary policy review.

But the RBI governor was unmoved. While leaving interest rates unchanged, hecut the banks cash reserve ratio, or the portion of deposits that commercial banksneed to keep with the central bank, and hinted at a rate cut only in January.

Growth is as much a concern as inflation, a visibly upset FM said then. Thegovernment has to walk alone to face the challenge of growth.

The RBI governor said inflation remains high, although the central bank isconscious about the economic slowdown. At 7.45%, inflation is certainly quitehigh,Mr. Subbarao told reporters, adding that the central bank is always on highalert on the inflation front.

The passage of the amendments to the banking law has been one of the main

preconditions of the central bank for handing out new bank licences to privatesector companies. To push for early bank licences, the finance ministry isexploring if RBI can be empowered to supersede the boards through executiveactions instead of amending the law.

Experts opine that The shape and the form of the final policy on new banklicences calls for alignment of multiple stakeholders, regulators as well aseconomic interests.

The finance ministry appears to be fast losing patience with the Reserve Bank ofIndia on the issue of offering new bank licences to private sector players. It hasasked RBI to finalize guidelines and initiate the process of inviting applications"without any further delay".

In a letter addressed to RBI deputy governor Anand Sinha, financial servicessecretary D K Mittal said the government hopes to get the Banking RegulationBill 2011 passed during the winter session. The letter pointed out that RBI doesn'tneed to wait till the bill is passed as under certain existing laws the banking
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regulator has the powers to govern these entities.

"In any case, if RBI issues the final guidelines, the process of granting a licence toa new private sector bank would take six months to a year, and in the meanwhile,the bill would be passed.

Along with differences overinterest rate cuts, the government and RBI have beenat loggerheads over the issue of new bank licence

RBI is painfully aware of the pitfalls in allowing industrial houses to opencommercial banks, but the regulator will ensure that these entities conform withthe rules, deputy governorAnand Sinha had said at an event organized byMintinPune in early October.2012

Does that mean that we also should not allow big houses to float banks? We will

certainly take a chance, he had said. We are painfully aware of the pitfalls, butwe will make sure that regulations are not subverted.

RBI will ensure that banks floated by big business houses will be at an armslength from their subsidiaries through amendments in the Banking RegulationAct, Sinha had said at the seminar.

RBI licensed KotakMahindra Bank Ltd and Yes BankLtd in 2002. In 1994,

it opened the door for the first set of 10 new private banks, seeking to

introduce greater competition in the sector. This time around, the objective

is the expansion of banking services, or so-called financial inclusion. About40% of Indias adult population does not have access to banking services as

yet. The stand of RBI as per the status and esteem it holds in the internationallevel as prudent regulator of having warded off the threat of the global financialcrisis is as sound as its other poicy dciisons in the interest of the nation. TheRBIunlike the ruling government does not harness election 2014 populist agendas.The RBI is correct when it states financial inclusion is a more important

objective than bank consolidation.

In support of the stand taken by RBI in granting new licenses to new private andforeign (which they do not deserve if one grimaces data in table A) banks weadduce further data

Of the total 611 districts in the country, 375 districts are under-banked. The totaldistricts include 82 districts of the North-Eastern Region of which 54 districts areunder-banked. The under-banked district is the district where the AveragePopulation per Branch Office (APPBO) is more than the national average. Thereis a need for banks to open branches at these locations and establishing
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connectivity with the core banking solution.( Satellite Connectivity to facilitatepenetration of banking services Need for financial incentives to banks:

Discussion Paper of RBI)

The achievement of financial inclusion is directly proportional to the

demographic penetration of bank branches. As cited by Dr K. C. Chakrabarty,Deputy Governor,Reserve Bank of India, although the financial penetrationindicators of India have improved over the years there is still much scope forimprovement when compared to OECD economies as shown in Table B

B) Penetration of banks in IndiaIndicators 2005 2009 OECD Benchmark

Branches per100,000 people

6.33 6.33 10-69

ATM per 100,000

people

1.63 4.3 47-167

Deposit per1000people

432.11 467.35 976-1671

Loans per 1000people

71.42 89.03 248.513

Branches per100sq. kms.

22.99 26 1-159

Soruce: The World Bank 2010. Getting Finance in South Asia

Trend and Progress of Banking in India 2008-09, Basic Statistical Returns of

SCBs in India.Note: The Benchmark Indicator ranges are for selected high-income OECD

member countries (Australia, Canada, France, Germany, Italy, Japan, the

Republic of Korea, New Zealand and the United States).

In his view, the efficiency of the banks has shown limited improvement indicatingthat the cost of low value transactions has not reduced.. Business from urban andbig city areas accounts for more than 75% of thebanks business and has beengrowing over the years. The size of deposits and advances per account has alsoincreased significantly indicating that the increase in usiness is not due to the

acquisition of additional customers at the bottom of the pyramid.

The intermediation costs of banks in India are still higher than those of developedbanking markets. Further, as stated in the latest annual report4 of RBI, even in the26 districts that were declared 100% financially included by the State LevelBankers Committees (SLBCs), actual financial inclusion was not achieved to thefull extent in all the districts. An RBI-sponsored evaluation study indicated that


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most of the accounts that were opened in these districts under the financialinclusion drive remained inoperative for various reasons and awareness withregard to no-frills accounts continued to be virtually non-existent in manydistricts. In another paper, Mrs Usha Thorat, then Deputy Governor, RBIadmitted that while there has been positive growth in covering excluded

households, a vast majority of the population remains un-served. The growth inthe number of small credit (borrowal) accounts shows that:

The number of such accounts of size `25,000 & below in the bankingsystem rose from 36.8 million in 2004 to 39.2 million in 2009 an increaseof 2.4 million (just 6.5%).

The number of borrowers with credit accounts of less than `200,000

increased from 61.9 million in 2004 to 95.8 million in 2009 an increase ofnearly 34 million (or 54.8%). It becomes apparent that for the coverage of those

borrowing less than`200,000 to increase to at least 50% of the adult population inthe next three years, the number of credit accounts would have to increaseannually by at least 41.3%. The analysis of region-wise credit (borrowal)accounts in Table C shows an improvement in all regions.

In terms of the number of such accounts relative to the adult population in theregion, the western region showed signifi cant improvement from 10.2% (creditaccounts/adult population) in 2004 to 32.7% in 2009. The southern regionconsolidated its coverage from 21.2% in 2004 to 26.1% in 2009.

The coverage in other regions remained quite low, and yet this assumes that eachborrowing adult has just ne account. The proportion is likely to be much lowerconsidering that many individuals have multiple accounts.

C) Credit coverage of adult population by region for March 2009

Region %

North 14.9

North east 9.2

East 9.0

Central 9.9west 32.7

South 26.1

All india 18.3

Source: Report on Trend and Progress of Banking in India 2008-09


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Note: No. of Borrowal accounts is as per place of sanction as on 31st March

2009; Adult population estimate is on the basis of Census 2001 and assuming

a growth rate of 1.3% (World Bank, World Development Report )

In short building banking infrastructure reaching the nook and corner of the

country, providing strength and stability to the system, mobilization of savingsand an equitable distribution of bank credit with a degree of cross subsidization ofinterest rates are some of the avowed objectives of nationalization. But the gapbetween rhetoric and performance exists even today.The UNDESA data estimates that the number of India's poor was 33.6 millionhigher in 2009 than would have been the case if the growth rates of the years from2004 to 2007 had been maintained. In 2009 alone, an estimated 13.6 million morepeople in India became poor or remained in poverty than would have been thecase at 2008 growth rates. In other words, while a dip from the 8.8% growth inGDP averaged from 2004-05 to 2006-07 to the 6.7% estimated for 2008-09 may

be nothing like the recession faced by the West, its human consequences for Indiawere probably worse. The 2.1% decline in India's GDP growth rate haseffectively translated into a 2.8% increase in the incidence of poverty. Accordingto the UNDESA's World Economic Situation and Prospects 2010, 47 millionmore people globally became poor or remained in poverty in 2009 than wouldhave been the case at 2008 growth rates, and 84 million more than would havepoor at 2004-7 growth rates. Of these, 19 and 40 million respectively are in southAsia. The report uses the World Bank's definition of poverty, which is peopleliving on less than $1.25 per day in 2005 Purchasing Power Parity (PPP) dollars.The estimates assume that there has been no change in income distribution. If

inequality grew in India in 2009, the number of poor would be even higher thanthese projections. The UNDESA report attributes this increase in poverty to acombination of reduced household incomes, rising unemployment and pressureon public services. Job losses in India were primarily in export-oriented industrieslike textiles while employment levels in Indian firms catering to the domesticmarket were largely unaffected, the report says. Monetary and fiscal policyintervention gave Indian growth some resilience, while safety nets like India'sNational Rural Employment Guarantee Act (NREGA) helped to mitigate theeffects of the slowdown, the report adds. Surveys conducted by the labour bureaudid show big job losses through most of 2008, but a pick up by mid-2009," said

economist and Planning Commission In addition to job losses, food price inflationis a major factor in a decline in poverty reduction in India, said leading EconomistAmritya Sen. "It is not yet clear to what extent the spike in food prices is linked tothe global financial situation, the poor monsoon or other factors", he added.

The report is clear that the situation is picking up, but celebrations would bepremature -- "global economic recovery is expected to remain sluggish,employment prospects will remain bleak". Job creation will lag output growth and


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as social protection coverage is limited, working poverty levels will rise and bedifficult to reverse, the report warns. There is no agreement yet on the number ofpoor people in India. The last official (National Sample Survey) household

expenditure figures are for 2004-5 and the next round (2009-10) is yet to be

completed. Further, the definition of poverty remains disputed, the Suresh

Tendulkar committee's recommendation that India move away from calorificnorms being the latest iteration. This committee pegged the number of poor inIndia at 408 million in 2005

These poor in India represent an opportunity for Public sector banks. Lending topoor, after nationalization is considered financially viable. Indian banking afternationalization has converted the poor to customers, at the same time empoweringpoor. It is verified that the current financial crisis in the US is not only due tocomplex financial engineering and poor regulatory frame work but primarily dueto the quality of customers the banking had picked. Hence it is imperative PSBs

evolve alternate models of credit evaluation, contract enforcement and build trustamong the rural and urban poor..The micro credit and Self help groups (SHG) movements as per above dataanalysis are in its infancy in India, but are gathering force. More innovation inthe form of business facilitators, and correspondents will be needed for banks toincrease their outreach for banks to ensure financial inclusion. New entrants to thebanking system need household at their door step. The economy is presently in aphase of extant economic activities as well as creation of new activities.Corporate profitability and consumer incomes are increasing rapidly riding on the

growth momentum.

All these developments suggest that the demand for financial services both forsavings as well as production purposes will be greater than has been in the pastand there will be many new entrants in the need of financial services who haveso far not been served.

As the poverty levels decline and household have greater level of discretionaryincomes, they will be first time financial savers. They will therefore need to haveeasy access to formal financial systems to get into the banking habit. PSBs willneed to innovate and devise newer methods of including such customers from therural areas and urban slums into their fold. Here the importance of no frillsaccount and expanding the range of identity documents that is acceptable to openan account without sacrificing objectivity of the process can never be overemphasized. Banks will need to go to their customers, rather than other wayround.


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To conclude we wish to stress that with the higher economic growth the role ofbanking sector is poised to increase the financing pattern of economic activitieswithin the country, to meet, the growing credit demands, banks need to mobilizeresources from a wider deposit base and extend credit to activities which are sofar not financed by the banks. The trend of increasing commercialization in

agriculture, and focus of government of National Rural Employment GuaranteeSchemes (NREG) and rural activities should generate greener pastures and publicsector banks should examine the benefits of increasing penetration there in.Financial inclusion will strengthen financial deepening and provide resources tothe banks to expand credit delivery. Thus financial inclusion, helps to accelerateeconomic growth further and achieve the avowed objectives of nationalization inletter and spirit. Financial inclusion and mergers are mutually exclusiveconcepts. HenceMergers not a solution

Conclusion

Even as the economic theories that the West trusted till the crisis in 2008 arebeing re-written by it, the current Indian reforms are based on the obsoleteeconomic ideas of the pre-crisis West. Tectonic changes have taken place in theeconomic thinking of West, including the United States, since the US-led globalmeltdown in 2008. Here are a few examples. Big banks, once seen as thecynosure, are now feared as too big to fail and too big to save; financialinstruments like derivatives, then viewed as advanced, are now seen asdestructive; the consumption-driven economic model celebrated prior to 2008 isnow viewed as unsustainable; in the G20 meet in April 2010, France and

Germany castigated the equity-driven free market financial model of the US asAnglo-Saxon and threatened to walk out the meet if the US did not agree torule-changes. The Economist confessed in June 2010 that much of the macroeconomic theories developed in the last 30 years are useless at best or positivelyharmful at worst. Look at what these useless to harmful macro economictheories have done to the US and to the world at large.

These theories drove the US to pursue market-based read stock-marketdriven financial model as more efficient, in place of a bank-based financialmodel even though neutral studies showed that a bank-based model was not less

successful. The market-based idea postulated that stock market, not banks, couldefficiently allocate finance. What then would banks do? Even big banks wouldcease to be lenders and become brokers and intermediaries earning fees. See howthe theory worked in the United States. Policies were devised to cut interest ratesto move people away from banks and into stocks. In 1990, the US interest rateswere 9 per cent and only a quarter of US families had held stocks; in 2001 the USinterest rate was cut to one per cent, forcing more than half US households move


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to stocks. With their interest rated incomes crashing, pension, retirement andinsurance funds shifted their huge investments from banks to stocks. According toAmericas Investment Company Institute (ICI) Fact Book, in 1990, the tax-exempted retirement funds held 42 per cent of their funds in bank deposits, whichcame down to 7 per cent in 2007; correspondingly, the share of stocks and mutual

funds rose from 22 per cent to 48 per cent. As pension and retirement fundsploughed huge sums into stocks, the US stock indices roared, which, in turn,attracted more and more pension and retirement funds into stocks. Thus pensionfunds and stock indices acted as escalator for each other. According to ICI, theUS pension and retirement funds exploded from $3.9 trillion in 1990 to $17.8trillion in 2007; of which almost $6 trillion flooded the mutual funds. Out of it, atsunami of $2.7 trillion money hit the stock market. The result: the US marketcapitalisation in 1990 which was $3 trillion, rose up by five times to over $15trillion in 2008.

This caused huge, unsustainable rise in stock prices generating assetappreciation or paper wealth. The artificial asset appreciation was certified asbankable equity to extend easy credit to consumers. Americans were encouragedto buy lavishly even as the US ran huge trade deficits with China. The high stockprices, which classical economists would have dreaded as an asset bubble, wasregarded as real wealth effect by modern economists. Modern economists rightlysaw commodity price rise as inflation and therefore wrong, but they celebratedasset price rise as wealth and prosperity! At least twice once in 1987 and laterin 2000 huge asset bubbles nearly exploded the US stock markets. On bothoccasions, interest rates were cut, more credit was infused into markets to lift

market sentiments. The strategy succeeded. The US Federal Reserve head, AlanGreenspan, who turned the market on both occasions, was regarded as the Godof Money! He taught that producing paper money and making credit available toall by securitising it was at the core of economic policy. For that, he said,managing investor sentiments in the market which produces monies out of thinair, namely, asset prices rise was critical. The world mesmerised by him wokeup in the 2008 crisis that showed that the God of Money was without clothesafter all! Greenspan himself admitted to the US Congress on October 23, 2008that the whole intellectual edifice (of market-based economics) has collapsed.However, he had already bankrupted US families. Just months before, in his bookThe Age of Turbulence (p385) he had brushed aside family savings as the virtueof underdeveloped and insecure people. The developed US people, he said, are aconfident lot; therefore, they borrow beyond their income and spend. TheAmericans did it and did in the US first and later, the world itself. The US coulddo it for two reasons. One, their local currency, the US dollar, was also the globalcurrency; so the United States could limitlessly borrow to fund its current deficitof $10 trillion so far and continue to borrow. Two, the US had become theunipolar power. Yet, the 2008 crisis has shown that the US (Anglo-Saxon)


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financial capitalism is failing in the US itself. Yet the bank-based India stilllooks at the market-based US only for its reform agenda.

Take Japan, Germany, France and other Continental European nations. The GMEConsulting study on the saving behaviour of West, citing researches on market-based and bank-based economies, says, one of the fundamental differencescontinues to be the traditional division between the Anglo-Saxon market-basedeconomies and the Continental bank-based model. Germany and other southernEuropean countries remain heavily dominated by their banking sector. It alsoshows that the savings rate in bank-based economies is higher. According toBusiness Week (September 30, 2010), in the end of 2009, stocks constituted just3.9 per cent of German household financial assets; life insurance 28 per cent andcash and bank deposits 38 per cent. Japan is identical. In a paper presented to the

Bank of International Settlements in May 2009, Bank of Japan officials point outthat Japanese households prefer bank deposits over risky financial assets whenall the financial instruments are so well-developed and heavily traded in Japanunlike in other Asian markets. The bank-based Japan and Germany are asefficient as the market-based US, if not more.

Indian households too prefer bank deposits, insurance and similar instruments.The bank deposits to gross domestic product (GDP) ratio in India in 1991 was 34per cent; it has almost doubled to 67 per cent in 2011, according to the EconomicSurvey 2012 (p94). So, like in Japan and Germany, savers in India

overwhelmingly prefer banks. Only some 5 per cent of Indian savings gets intostocks (Hindu Business Line, November 9, 2011). So India, with itsoverwhelmingly bank-based economic model, is closer to the bank-basedJapan and Germany, and other Continental European nations. It is nowhere nearthe Anglo-Saxon United States. Yet the economic reforms of bank-based Indiatend to follow the market-based US economic theories, especially when the verytheories threaten to become outdated in the US itself. Look at how things havechanged even in India. In his previous tenure as Union finance minister PChidambaram dreamt of reforming the banking sector by creating four or fivelarge banks for India by merging all medium sized banks. Would he now repeatthat idea when the West is itself afraid of big banks? Never. The prime ministertold the Indian savers not to go to banks but to Dalal Street in Mumbai and buystocks instead. The people of India, however, did not oblige him. The governmentcant reform culturally defined financial habits of the people.

The West is rethinking and seriously introspecting about its economics that wetend to follow. On May 24-25, a continuing project titled Responder initiated bythe Research Institute for Managing Sustainability (RIMAS), Vienna University


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of Economics and Business, had organised a global meet on The Role ofHousehold Savings and Debt in a Sustainable Economy. Its declared intent wasto review the savings-drying and consumption-driven economic model of theWest that was, till the 2008 meltdown, considered as the fast track growth model.Till 2008 all countries tended to adopt the United States model not thereafter.

That is why the World Bank in its newsletter for May 2008 confessed that there isno economic or financial model that fits all and each country has to choose themodel that suits its specifics. No nation can copy another nation.

QED: Indian reform process has to be endogenous. Not exogenous. Yet, Indianreformers are habituated to search the waste paper baskets of the market-basedUS for its outdated ideas to reform the Indian economy. Are the reformerslistening?

Success of any economic reforms is to be judged on the touchstone of all positive

Benefits to vast masses of our country where mounting unemployment and pricerise of essential commodities constitute the worst curse of the nation. As per thestatistical data published by Indian Statistical Organization (ISO), about 220million people of our country still live below the povety line, whereas anotherlarge group of about 330 million populations are still well below the averageinternational index of living with one dollar per day income criteria. Public SectorBanking is a tool in fighting against this menace whereas private banking wouldfurther escalate these problems. Public Sector Banks as strong national championshave played critical roles in saving the country from national disaster. Today theIndian Accounting Standards rank among the top five while the financial

disclosures are among the top three in the world. The Government/Reserve Bankof India could not have asked for anything more.

Any reforms of the banking system should be built on the institutional structurethat has created it rather than seek to destroy it as is now being done. The bankingindustry is in need of true reforms in pursuit of true nationalization, but thestrategy for it does not have to subvert the basic goals of development nor does ithave to be forced at a pace with adhoc ,arbitrary moves of mergers , tinkering ofbanking regulation acts ,etc without any public debate and study that will resultin liquidation of the institutional structure built up over decades of faith

Parliament recently approved the Banking Laws (Amendment) Bill that wouldgive RBI powers it had sought in relation to the boards of banks.

A focus on inclusion would be most timely. It would coincide with theintroduction of direct cash transfers. The scheme is billed as a game-changer forrouting government payments and subsidies.


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It could prove a game-changer for banks as well. Millions of accounts will haveto be opened that carry the promise of huge float funds. Because it mesheseconomic priorities with the long-term commercial interests of banks, financialinclusion should now be the focus of banking reform.

If this is accepted, we have a basis for dealing with licences for NPBs. Amongnon-banking finance companies, those that have a network of branches in theinterior should have priority.

As for industrial houses, the issue of licences must be clearly linked to theobjective of financial inclusion. It is not enough to specify that at least 25% ofbranches should be in under-banked centres, as the present policy does. A bankset up by an industrial house can easily acquire a critical mass of deposits from itsbusiness entities and affiliates. It will not require a large branch network. It mayset up a few branches in under-banked areas to comply with the regulatory norms,

but it does not have to put them to use.

In other words, it can grow without meeting the objective of inclusion on theliabilities side. If the objective of inclusion is to be met, there must be restrictionson the amount of deposits the bank can raise from other business entities in thehouse.

Financial inclusion norms must be more stringent and must specify the number ofaccounts to be opened in under-banked centres, the volume of business per branchin under-banked areas, etc. In the absence of such norms, industrial houses would

have an advantage over existing banks, especially PSBs, which have to bear theburden of inclusion.

Thus, the policy on licensingNPBs must derive from the primary objective ofbanking reform. If the objective is to shrink the role of PSBs in the system,consolidation of PSBs along with the entry of new banks is the way to go.

If it is simply to drive down margins in banking, then we let industrial housesprovide serious competition. However, if financial inclusion is to be theoverriding objective, it is better to allow the dominance of PSBs in the system tocontinue while setting stiff norms for inclusion for new entrants

Thus Inclusive growth though has been a priority of the Government of India(GoI) over the past decade. Progress towards this goal has been relatively limitedso far and it is apparent that the governments effort to encourage the banking
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system to promote Financial inclusion in an intensive manner needs a substantialimpetus if it is to achieve adequate results. Neglecting financial inclusion andadvocating consolidation with the main motive is closure many branches, downsizing of staff , tantamount to Social exclusion of services low income families.This will result in illiteracy, inhibition and poor physical access. It also limits

awareness, ability to overcome prejudice about their bank-worthiness andenhances the transaction costs incurred these families for using the financialservices available in the country and becomes breeding ground for extremistsmanipulations.

The Indian State recognized the vital link between land and livelihood soon afterindependence and launched land reform measures which included threecomponents: abolition of intermediaries such as zamindars, security of tenancyand a ceiling on agricultural holdings for distribution of the surplus to thelandless. However, as time passed the commitment to land reform has weakened

and it remains an unfinished agenda of governance. The poor have dependedupon common property resources such as forests, pastures and water sources forthe satisfaction of their basic survival needs. With the increasing tendency to seeall such resources as sources of profit the poor are being deprived of whateveraccess they had to such resources In this situation it should not cause surprise thata large section of the people are angry and feel alienated from the polity andfoundational causes lead to unrest, discontent and extremism. While the officialpolicy documents recognize that there is a direct correlation between what istermed as extremism and poverty, or take note of the fact that the implementationof all development schemes is ineffective, or point to the deep relationship

between tribals and forests, or that the tribals suffer unduly from displacement,the governments have in practice treated unrest merely as a law and orderproblem. It is necessary to change this mindset and bring about congruencebetween policy and implementation There can be no higher priority for nationalaction and no higher claim on the national conscience than this Theseconclusions are equally valid in respect of the widespread rural violence that isbeing witnessed in India today..To combat and avert the same, under democratic polity there is need for thegovernment to mount programmes on a scale equal to the dimensions of theproblem; To aim these programmes for high impact in the immediate future inorder to close the gap between promise and performance; To undertake newinitiatives and experiments that can change the system of failure and frustrationthat dominates and weakens our society. These programmes will requireunprecedented levels of funding, planning and performance, which canundertaken without disturbing the regional, ethnic origins and equilibrium balanceof present 20 public sector banks and the will to nationalize other private banksin pursuance of financial penetration and inclusion in the vast hinterlands of ourgreat country to fulfill the above objectives. .


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.There will be peace, harmony and social progress only if there is equity, justiceand dignity for every one.

Our system is built on distrust in people:

Trust in people must be substituted for trust in bureaucracy.

Public servants must be servants of the people, not its masters

Mr. Allen Octavian Hume, I.C.S., 1860

To be continued

Merger Mania VII

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Transcript of Merger Mania VII