Financial Daily from THE HINDU group of publications
Wednesday, Oct 02, 2002

News
Features
Stocks
Port Info
Archives

Group Sites

Opinion - Banking
Money & Banking - Mergers & Acquisitions


Bank in distress — Is merger only solution?

V. H. Ramakrishnan

THE IMF is often blamed that it prescribes the same medicine for all illnesses. Now, the Reserve Bank of India also seems to be following the same policy. If press reports are to be believed, Nedungadi bank is likely to be merged with Punjab National Bank. The question that arises is, is it right to wipe out an organisation, which has been serving the people for more than a century, from the banking map just because of a major accident? Let us examine the pros and cons of this move and also alternative solutions.

Pros

The advantage of this merger is that because of the sheer size of the PNB, all the financial problems of Nedungadi Bank will become invisible. It will not be difficult for PNB to absorb the future shocks, if any.

The gain for PNB is that it will get a branch network across in Kerala and can thus attract NRI deposits from Gulf remittances.

Cons

Each bank has its own culture and style of functioning. Merger of a bank in extreme south with another in extreme north will have its own problems. For instance, 90 per cent of the staff of Nedungadi Bank may not have moved out of Kerala. After the merger, many may have to pack up and go North. Language will be a constraint if a person is not posted to a Metro. Officers will find it difficult to adjust to PNB's work culture.

Both PNB and Nedungadi Bank, being listed companies, the take over will be based on the share price to be fixed which, in turn, will depend on the valuation of assets and their realisable value. The shareholders of Nedungadi Bank may have to take the hit — as a penalty for the poor performance of the bank.

Alternative solution

The RBI/Government is willing to give a long rope to nationalised banks like Indian Bank, United Commercial Bank, and United Bank of India to reorganise themselves and get out of trouble. This policy has yielded positive results due to many factors, the most important being:

_ Change in management,

_ MoU with the RBI with specific parameters for different areas of operations,

_ Implementation of VRS,

_ Active treasury operations in a favourable market scenario,

_ Vigorous follow up of recovery of NPAs, and

_ Contribution of fresh capital by the government.

When with a close monitoring by RBI these banks can turnaround, why should not old private banks such as Nedungadi Bank be given an opportunity to overcome their difficulties. It is agreed that monitoring a private bank is more difficult compared to a nationalised bank.

The following methodology is suggested not only in the case of Nedungadi Bank but also in the case of other private banks in distress:

Change in management: A new chief executive officer should be appointed in place of one in whose term the `mishap' has occurred. If need be the entire board also should be recast. At present the RBI insists on changing the CEO, but the interviews for selection of a new CEO is conducted by the board members. The RBI should advise the board to induct a management expert in the selection committee so that he will help in the selection of the best applicant.

Restructuring plan: A restructuring plan for five years should be drawn, if necessary with the guidance of a Consultant firm who has knowledge of local conditions.

Appointment of advisor/monitor: The RBI should appoint a monitor to keep track of the fulfilment of the set objectives in the MoU. The monitor should directly report to the RBI. In fact, he will be the eyes and the ears of the RBI. He will not be involved in the day-to-day operations or decision taking. He will attend all the board and committee meetings.

Induction of fresh capital: This is the crucial factor. To maintain the capital adequacy ratio, the bank will need funds by way of Tier II capital or II Capital. The Government cannot directly contribute capital as it did for nationalised banks.

So the following alternatives are suggested:

— The shareholders of the bank should be interested in reviving the bank. Hence, the rights issue should be the first option.

— Issue of bonds for Tier II capital.

— It may be difficult to raise funds for a bank in distress, by both the above methods. In that event the board can be on the lookout for a `white knight' to help them. It may be FDI or an industrial group or another finance company. Alternatively, the bank may be allowed to continue with a negative CAR or a low CAR but with a Commitment to raise the ratio to 9 per cent over a specified period.

Permanent solution for funding: A permanent solution for helping the banks in distress can be worked out. It is commonly known that in a small town if a trader gets into problem, other businessmen try to help him by pooling their resources. The same method can be adopted. A funding (finance) company can be set up by all private banks with the object of helping an outfit in distress.

This funding company can be set up with capital subscribed by all the private banks. Every year a small percentage of profits earned by the private banks should be contributed to the capital of the funding company. The funds with this company can be utilised to contribute to the capital of the bank in distress like a venture capital company. It can sell the shares held by it in the bank in distress at a later date when a stipulated return is available. It can also extend a soft loan to the bank. The interest and dividends earned by this funding company can be distributed as dividends to its shareholders. Contributions to the funding company can be made flexible or even suspended based on the need. Idle funds can be invested in government securities.

We should distinguish between a planned and a forced merger. ICCI Bank-Bank of Madura was a planned merger of two profit-making outfits. Each knew what to expect. The road map was clear. In a forced merger, both parties work with some reservation. The `good' bank always fears about some hidden NPAs of the Bank in distress. The latter feels it is not able to negotiate for better terms. The ultimate sufferers are the employees and stakeholders of the bank in distress.

It is wiser to keep the merger route as a last resort after exploring all the other alternatives.

(The author is former General Manager, Bank of India.)

Send this article to Friends by E-Mail
Comment on this article to BLFeedback@thehindu.co.in

Stories in this Section
Can influencing govt be ended?


Brazil's dilemma: The IMF (election) agenda
Bank in distress — Is merger only solution?
PSU divestment brooks no delay
Move in join UPOV — Farmers' rights in jeopardy
Remembering Gandhi
Micro-credit movement


The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription
Group Sites: The Hindu | Business Line | The Sportstar | Frontline | Home |

Copyright 2002, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line