Banks Prepare To Identfy Takeover Target

Big banks preparing blueprint to identify takeover targets-Times of India

MUMBAI: India's banking sector may be getting ready for a wave of consolidation as the country tries to build institutions of world-class proportions. Four big state-run banks — State Bank of India, Punjab National Bank, Bank of Baroda and Bank of India — have already begun an exercise to identify takeover targets to gain access to franchises that would augment their capabilities, said three top bankers familiar with the move.

The top managements of the four banks are in the process of preparing a blueprint that would explain the rationale for absorbing one or two entities, said the people cited above, none of whom wanted to be named.

Employees at these state-run banks are engaged in the exercise after finance minister Arun Jaitley gave the lenders the go-ahead to decide how they would strategise to remain relevant in the emerging economic scenario.

"We are hearing from the corridors of finance ministry that there is seriousness on consolidation of banks," said an executive from one of the top four banks.

"The sense we are getting is that first there could be merger of at least one SBI associate bank with SBI to kick off the consolidation process."

Although no names of likely acquisition targets are being discussed at these four banks, the key conditions for a smaller bank will be regional, technological and cultural advantages.

For instance, a bank such as Bank of Baroda, which does not have a presence in the East, may prefer one from that part of the country.

State-run banks have weakened over the years as governments have treated them as an organ of the administration and used them to push their social agenda.

Meanwhile, lenders in neighbouring China have acquired scale while those in India are puny by comparison, giving them little clout in global markets. The economic downturn, with growth having almost halved from the peak, has exposed the fault lines in the system.

The parlous financial position of the government has left banks capitalstarved — the allocation for this year is tiny compared with the amount needed to meet Basel III standards. And, to access capital from the market, the staterun banks need a strategy to turn more profitable. Currently, they are labouring under bad debt on account of companies finding it difficult to repay loans because of the slump.

"Government has made it clear that they will not give any capital," said one of the bankers. "Banks that have the capital and the capability to raise capital could look at acquisitions," he said, while adding "Nothing has reached the drawing board. Banks are only doing all kinds of permutations and combinations."

To be sure, state-run bank consolidation has been discussed for nearly a decade, but little progress has been made, except for shotgun weddings that were aimed at rescuing ventures in poor shape. Inertia among banks, cultural issues and fears of trade union unrest held up any such move. That may now change with the new government. "There have been some suggestions for consolidation of public sector banks," Jaitley said in his July 10 Budget speech. "Government, in principle, agrees to consider these suggestions."

A committee set up by the Reserve Bank of India under former Axis Bank chairman PJ Nayak had suggested that the health of state-run banks was poor. To strengthen them, the report said it will be better "either to privatise these banks and allow their future solvency to be subject to market competition, including through mergers; or to design a radically new governance structure for these banks which would better ensure their ability to compete successfully, in order that repeated claims for capital support from the government, unconnected with market returns, are avoided."

The market share of the public sector banks is forecast to decline from 80% in 2000 to just over 60% in 2025, Nayak had said. They stack up poorly in many respects against non-state institutions.

For instance, net profit per employee at the new private sector banks was about four times that of the SBI Group in the year ended March 2013
http://timesofindia.indiatimes.com/business/india-business/Big-banks-preparing-blueprint-to-identify-takeover-targets/articleshow/39153722.cms

Do we need more banks to push financial inclusion?--DNA

New small banks would help push financial inclusion, tap savings of the poor, and allow new financial services to thrive

India has 155 commercial banks, including 151 scheduled commercial banks, and 115,014 banking offices. Not counting scores of cooperative banks and ATMs that dot the nooks and corners in the country. Yet Reserve Bank of India (RBI) is promoting new kind of differentiated banks like payment banks or small banks. But do we really need them?
Experts say there is huge room for several kinds of banks to thrive as India is woefully short on banking infrastructure.

According to Crisil's financial inclusion index, called Inclusix, which covers three parameters of branch, deposit and credit penetration, the index is placed, on a scale of 100, at 40.1.
This means only 40% of the country is properly covered under the banking net.

"Under-penetration is evident in terms of number of ATMs and point of sales too. Hence, there is a need for much greater banking and credit penetration, going forward. This is because despite efforts to develop the corporate bond market, the Indian financial system remains bank-dominated with commercial banks accounting for over 60% of the financial sector assets," said H R Khan, deputy governor of RBI, at a banking conference, recently.

With a stated key objective of achieving financial inclusion, promoting deposit habit with banks among the poor appears to be what RBI is focusing on.
"Both payments banks and small banks are niche or differentiated banks; with the common objective of furthering financial inclusion. While small banks will provide a whole suite of basic banking products, such as deposits and supply of credit, but in a limited area of operation, payments banks will provide a limited range of products, such as, acceptance of demand deposits and remittances of funds," RBI said while announcing the differentiated bank concept last week.
In a stroke, the central bank has created opportunities for banking correspondents, telcos, super-market chains, companies and also real sector cooperatives to enter the banking system.
These entities have a deep penetration across the length and breath of the country, which will help achieve the most important feature of financial inclusion: deposit mobilisation.

"The financially excluded segment's highest requirement is for savings services, which unfortunately regular commercial banks are unable to provide. That is the reason we periodically have the 'Sarada' type of crisis which wipes out hard earned savings of the poor," Samit Ghosh of Ujjivan Financial Services and president of Micro Finance Institutions Network, told dna.

But to achieve that the banking sector needs human intervention where people would have to reach out to the un-banked in rural as well as urban areas.

And that human resources is available with the microfinance outfits, the likes of Bandhan or Ujjivan, or with business correspondents.

"Business correspondents can definitely play a bigger role in the evolving banking environment. We have the people resource to make the poor and the illiterate open bank accounts and bring in Rs 50,000 crore into the banking channel every year," said Kumar Saha, managing director of Senrysa Technologies Pvt Ltd, a business correspondent with IDBI Bank, told dna.

But to achieve greater and meaningful involvement of business correspondents, the players should be allowed to undertake multiple financial products beyond just opening accounts or facilitating transactions, activities which alone cannot sustain the sector, said Saha.

The new kind of banks would also help companies like Sahaj e-Village Ltd, which has meticulously created infrastructure in rural areas operating over 26,000 Common Services Centres across six states.

"The new banks may completely revolutionise the financial outlook in rural India. With strict screening procedures, small banks project would let serious players like Sahaj, having one of the largest IT connected rural networks, carry forth its benefits across the country. Though there are restrictions like disallowing account holders to hold more that Rs 1 lakh in their accounts, it is envisaged that this introduction would be largely beneficial," said Sanjay Panigrahi, CEO of Sahaj, a Srei group outfit. It would however help if these small banks are allowed to execute government disbursements and are given options to invest collected deposits in infra projects, highest rated bonds, rural housing and power, he said