After a difficult few years, some of India’s banks are struggling while others are looking to mergers. Rekha Gupta Menon looks at the response of public and private sector banks to the challenges.

Bank of India

Public sector banks 

India’s state owned public sector banks have seen massive consolidation over the past three years. From 27 public sector banks in 2017, the total number has reduced to 12 today. According to India’s Ministry of Finance, these mergers will create bigger, more efficient banks with a strong national presence and a global reach. Their ability to raise funds from the market will also be enhanced. The table below shows the current public sector banks ranked according to size of business (loans and deposits) by the Ministry of Finance, as of March 31, 2019. 

 

Rank Name Amalgamating banks Business size (loans+deposits) as of March 31, 2019
1 State Bank of India (SBI) SBI + five associate banks + Bharatiya Mahila Bank Rs52,050bn
2 Punjab National Bank (PNB) PNB + Oriental Bank of Commerce + United Bank of India Rs17,940bn
3 Bank of Baroda (BoB) BoB + Vijaya Bank + Dena Bank Rs16,130bn
4 Canara Bank Canara Bank + Syndicate Bank Rs15,200bn
5 Union Bank of India (UBI) UBI + Andhra Bank + Corporation Bank Rs14,590bn
6 Bank of India   Rs9,030bn
7 Indian Bank Indian Bank + Allahabad Bank Rs8,080bn
8 Central Bank of India    Rs4,680bn
9 Indian Overseas Bank    Rs3,750bn
10 UCO Bank   Rs3,170bn
11 Bank of Maharashtra    Rs2,340bn
12 Punjab and Sind Bank    Rs1,710bn

Source: Ministry of Finance, Government of India

1. State Bank of India

India’s largest bank, government-owned State Bank of India (SBI), is ranked 57th in The Banker’s Top 1000 World Banks ranking. With assets of more than $556bn, 22,000 branches and 58,555 ATMs across the country, SBI services more than 400 million customers. In the financial year 2019-20, SBI declared pre-tax profits of $4.4bn, a nearly fivefold increase from the previous year. Much of this came from a one-time sale of a stake in its SBI Cards subsidiary. Over the 12 months ending March 2020, SBI has shown a steady improvement in asset quality. The proportion of bad loans to total loans, its gross non-performing assets (GNPA) ratio, has dropped from 7.53% in March 2019 to 6.94% in December 2019 and 6.1% in March 2020. In 2019-20, the retail segment mainly drove credit growth, which grew by 5.64% year-on-year. Home loans, which constitute 22% of SBI’s domestic advances, grew by 13.86%.

Digital banking remains a key focus area for the bank. It has 73 million internet banking customers and 21 million customers on its digital banking platform. Local media reports suggest that SBI has been able to cut non-performing assets in the small personal loan category from 15% to 10% by adopting end-to-end digitisation. 

2. Punjab National Bank

As part of India’s mega public sector bank consolidation exercise over the past year, Punjab National Bank (PNB) has merged with two smaller banks, United Bank of India and Oriental Bank of Commerce (OBC). Operating under the PNB umbrella, the amalgamated bank has more than 11,000 branches, 13,000 ATMs and 100,000 employees. According to the bank, total business (deposits and advances) after this amalgamation is around Rs18,000bn ($238bn). PNB is now the second largest public sector bank in the country after SBI, in terms of both business and branch network. “The bigger geographical footprint will help us serve our customers more effectively and efficiently,” PNB managing director SS Mallikarjuna Rao said in a press release. A robust risk governance mechanism has been set up to mitigate risks and make the banking experience secure and safe, PNB says. 

Although the financial performance of the three banks has improved in recent years, their profitability and asset quality remain relatively weak. All three banks reported pre-tax losses in the financial year 2018-19. PNB's losses stood at $2.2bn, OBC's losses stood at $524m, while United Bank reported pre-tax losses of $662m. The proportion of bad loans to total loans, the GNPA ratio, was also high: as at end March 2019, the GNPA ratio at PNB was 15.85%, 12.66% at OBC and 16.48% at United Bank. In September 2019, to help boost the capital base, the Indian government injected Rs160.9bn into PNB and Rs16.66bn into United Bank. In December 2019, PNB raised Rs15m from Tier 2 bonds. 

3. Bank of Baroda

Established in July 1908, Bank of Baroda (BoB) today is India’s third largest public sector bank after SBI and the newly amalgamated PNB. While BoB’s merger with Vijaya Bank and Dena Bank came into effect in April 2019, the integration process is still continuing. The bank now has around 9500 branches in India, more than 13,000 ATMs and cash recyclers, 85,000 employees, 100 overseas offices in 21 countries, and around 131 million customers. 

As of the third quarter of the just-concluded financial year, 2019-20, BoB’s total business (deposits and advances) stood at Rs15,500bn. Domestic advances increased by 0.67% on an annual basis led by retail loans, which increased by 15.31% from December 2018. Bank of Baroda has a significant international presence, which grew from 13.8% of the total business in December 2018 to 14.4% in December 2019. Despite fresh slippages for the third quarter of the financial year 2019-20 to the tune of Rs10bn, the bank’s asset quality has remained reasonably constant.

Between December 2018 and December 2019, it saw a marginal decline in its GNPA ratio from 10.91% to 10.43%. The bank, however, declared losses for the third quarter of 2019-20 of Rs14bn as against a profit of Rs4.4bn in the previous quarter, which it said was due to higher provisioning. In light of Covid-19, the bank announced in March 2020 that digital transactions would not incur any charges for three months, to provide customers with an enhanced and uninterrupted banking experience. 

4. Canara Bank 

Canara Bank and Syndicate Bank’s merger creates the fourth largest public sector bank in the country with 10,342 branches. As of March 2019, the combined business (loans and deposits) of these two banks was an estimated Rs15,200bn, around one and a half times the size of Canara Bank’s business. When announcing the merger, India’s Ministry of Finance stated that the amalgamated entity would enjoy scale and synergy benefits through network overlaps. A similar culture would enable smooth consolidation and with both banks using the same core banking technology platform, iFlex, this would ensure easy technology integration. Canara Bank announced that it has constituted more than 30 committees to oversee and expedite the amalgamation process. In September 2019, the Indian government injected Rs65bn into Canara as part of its bank recapitalisation plan.  

In the financial year 2018-19, although both Canara Bank and Syndicate Bank announced pre-tax losses, the numbers were a significant improvement from the previous financial year. Canara Bank’s pre-tax losses as of March 2019 stood at $305m, while Syndicate Bank’s were $439m. Since then, both banks have shown profits and reduced non-performing assets. Canara Bank’s GNPA ratio has reduced from 11.84% in March 2018 to 8.36% in December 2019. At Syndicate Bank, the GNPA ratio dropped from 12.54% in December 2018 to 11.33% in December 2019. 

5. Union Bank of India

Union Bank of India (UBI) is the anchor bank in the three-way merger between Union Bank, Andhra Bank and Corporation Bank. With UBI’s assets being nearly equal to the combined assets of the two smaller banks, the amalgamated entity is nearly double in size. With 9600 branches and more than 75,000 employees, the merged UBI becomes India’s fifth largest public sector bank. As of March 2019, the three banks’ total business, estimated by adding up loans and deposits, was Rs14,590bn. All the three banks have deployed the same Finacle core banking platform, thus smoothing the technology integration process.

For the financial year 2018-19, all three banks showed pre-tax losses. UBI's were $568m, Andhra Bank’s $348m and Corporation Bank’s a high $1162m. Asset quality at UBI and Corporation Bank has improved in the past financial year. The GNPA ratio at UBI declined to 14.86% in December 2019, against 15.24% in September 2019 and 16.21% in March 2019. For Corporation Bank, too, the GNPA ratio decreased from 17.36%  to 15.43% to 14.08% over the same time period. In Andhra Bank however, the GNPA ratio have increased to 17.26%. 

6. Bank of India

Bank of India is the only leading public sector bank in India that has not been party to the consolidations of the past three years. It has a presence in 19 countries and nearly 90 million customers. In last year’s list of the Top 1000 World Banks by The Banker, it was ranked the eighth largest bank in India by assets, and the third largest public sector bank in the country. 

Over the past couple of years, Bank of India has been gradually rationalising its physical presence, while simultaneously expanding its digital footprint. Between March 2018 and December 2019, it reduced its branches from 5127 to 5089, while the number of ATMs dropped from 7423 to 5750. In the same period, the number of internet banking users grew from 5.3 million to 6.5 million, while mobile banking users shot up from 187,000 in March 2018 to 2.3 million in December 2019. After consistently reporting losses in recent years, Bank of India showed profits in the first three quarters of the 2019-20 financial year. In the third quarter of 2019-20, the bank declared pre-tax profits of Rs9.15bn compared to a loss of Rs90.79bn in the third quarter of 2018-19. Bank of India's asset quality, however, showed a slight deterioration, with the GNPA ratio increasing from 15.84% in March 2019 to 16.3% in December 2019. 

7. Indian Bank 

The merger of Allahabad Bank with Indian Bank created a bank with a pan-Indian presence with around 6000 branches. While Indian Bank traditionally has had a strong presence in south India, Allahabad Bank’s network spreads across the north and east. The amalgamated entity is the seventh largest public sector bank with more than 40,000 employees. As of March 2019, the combined business of the two banks stood at Rs8080bn. In 2019, the government injected Rs25.3bn into Indian Bank and Rs21.5bn into Allahabad Bank. 

Indian Bank’s financial parameters are significantly stronger than Allahabad Bank’s. In the 2018-19 financial year, Indian Bank made a net profit of $41.09bn, while Allahabad reported a massive loss of $1.3bn. Indian Bank’s GNPA ratio in March 2019 was 7.11%, compared to 17.55% at Allahabad Bank. By the end of December 2019, Allahabad’s asset quality had deteriorated further. GNPAs for the bank rose to 18.93%, while Indian Bank’s GNPA ratio in December 2019 was 7.22%.

Private sector banks

1. HDFC Bank

HDFC Bank was incorporated in 1994. In the 25 years since, the bank has become the largest private sector bank in India and the second largest bank in the country with assets worth $209.7bn and a customer base of more than 49 million. As of March 31, 2020, the bank had 116,971 employees, 5416 banking outlets and 14,901 ATMs and cash machines. HDFC Bank has been a frontrunner in adopting technology and implementing digital strategies. More than 90% of customer transactions are done via the internet and mobile banking channels.

HDFC Bank reported pre-tax profits of $5.07bn for the 2019-20 financial year, a 2.11% increase on the previous year. The bank’s profits were lower than expected because it nearly doubled provisions in the March quarter, to prepare for the Covid-19 impact.  The bank had healthy credit growth of 21.3%, out of which retail loans, which account for 51% of total loans, grew by 14.6% while wholesale loans grew by 29.3%. The bank’s GNPA ratio increased slightly from 1.39% in 2018-19 to 1.43% in 2019-20. 

Leadership change remains a key challenge for the bank. Current CEO Aditya Puri, who has been at the helm since the bank’s inception and successfully steered it to its present leading position, is scheduled to leave office in October 2020. A successor is yet to be announced, although local media reports suggest the bank has identified three potential candidates. It will be a tough task for the new CEO to safely steer the bank in a challenging economic environment.  

2. ICICI Bank

ICICI Bank also chalked up 25 years in the 2019-20 financial year. India’s second largest private sector bank has assets worth $182.7bn, 5324 branches and 15,688 ATMs as at March 31, 2020. ICICI Bank is a digital evangelist in the Indian banking sector. It was the first bank to offer internet banking services. In 2019-20, more than 88% of savings account transactions took place through digital channels, and mobile transaction volumes experienced a 98% year-on-year growth. In March 2020, ICICI Bank launched a product to ensure uninterrupted online banking services to customers during the coronavirus pandemic. This product includes nearly 500 services that customers can access remotely and covers almost all banking requirements of customers, in one place. The list includes digital account opening, loan solutions, payment solutions, investments, insurance and care solutions.  

After the leadership-related turbulence in the recent years, when its erstwhile CEO was asked to leave because of financial dealings suggesting conflict-of-interest issues, ICICI Bank appears to have settled down under its new chief. Even as the bank increased provisions in the first quarter to prepare for the Covid-19 lockdown impact, the bank reported pre-tax profits of $2.5bn, a 130% growth from the previous financial year. Asset quality remains a challenge, however. Although the bank’s asset quality has marginally improved, its 5.53% GNPA ratio at the end of March 2020 was the highest among Indian private sector banks. Its domestic loan book grew by 13% in 2019-20, with a 16% year-on-year growth for retail, which accounts for 53.3% of the total domestic loan portfolio. 

3. Axis Bank

With assets of $123bn – a 16.38% increase from the previous financial year, 2018-19 – Axis Bank is India’s third largest private sector bank. It was established in 1993 and started operations in 1994, under the name UTI Bank. Today, it has a footprint of 4528 domestic branches, 12,044 ATMs and 5433 cash recyclers spread nationwide. Digital banking is a key focus at Axis Bank; its mobile banking transaction volumes in the fourth quarter of 2019-20 grew 79% year-on-year. Digital transactions account for 84% of all its banking transactions and the contribution of digital channels towards business growth continues to rise steadily. In 2019-20, mobile banking spend by customers grew 44% and in the fourth quarter, the share of digital channels in sourcing fixed deposits and personal loan disbursements stood at 66% and 48%, respectively. 

Axis Bank reported pre-tax profits of Rs700m for 2019-20. This unexpected 36.22% drop from the 2018-19 results is primarily down to a sharp rise in provisions the bank set aside for potential loan losses in light of the coronavirus pandemic. Its overall provision coverage ratio improved to 69% at the end of the fourth quarter 2019-20, compared with 60% for the third quarter and 62% for the fourth quarter the previous year. Although the bank’s GNPA ratio for 2019-20 has marginally decreased to 5.07% from 5.26% in 2018-19, it is high compared to other private sector banks. Its loan book, however, grew by 15% year-on-year, with retail loans up 24% on the previous year and corporate loans up by 11%. Retail loans accounted for 53% of total loans at Axis Bank. 

4. Kotak Mahindra Bank

With Tier 1 capital of $8.2bn and assets worth $58.8bn, Kotak Mahindra Bank is a mid-sized private sector bank in India. It was established in 2003 and is ranked as the fourth largest private lender after Axis Bank. As at March 31, 2020, the bank had a national network of 1600 branches and 2519 ATMs. Digital banking is a key aspect of the bank and it offers a variety of digital products for its customers.

In the 2019-20 financial year, it opened 4.4 million zero-balance digital bank accounts that can be instantly opened online. According to the bank, these accounts were opened even during the coronavirus-induced lockdown period. In May 2020, 14,000 such accounts were opened per day. In the fourth quarter of financial year 2019-20, 93% of recurring deposits and 80% of term deposits were sourced digitally. The bank saw a 61% growth in mobile banking transactions by volume in the fourth quarter of the 2019-20 financial year compared with the same quarter in the previous financial year. In line with steps taken by other private sector banks, Kotak Mahindra Bank also significantly increased its provisions in the fourth quarter in order to be adequately prepared for Covid-19. As a result, its pre-tax profits dipped slightly by 0.9% to $1.5bn in 2019-20, as against the previous financial year. The bank reported a 7% credit growth for financial year 2019-20. Although asset quality remained stable at the bank, there was slight growth in its GNPA ratio, which increased from 1.94% in financial year 2018-19 to 2.16% in 2019-20. Towards the end of May 2020, the bank bolstered up its capital position by raising Rs74.4bn through issuance of 65 million shares in a qualified institutional placement.

Since 2014, Kotak Mahindra Bank had locked horns with the Reserve Bank of India (RBI) with regards to its ownership structure. The regulator had asked the bank to pare down its promoter shareholding to ensure that voting power was not concentrated in one person or group. Early in 2020, the bank finally reached an agreement with RBI wherein the key promoter, Uday Kotak, reduced his stake in the bank to 26% from 30% previously. Another potential concern for the bank is a discussion paper on corporate governance floated by RBI, proposing a 10-year limit on bank founders remaining in the roles of CEO or full-time director. The paper states that the restricted tenure will ensure “separation of ownership from management but also reinforce a culture of professional management”. This would impact Kotak Mahindra Bank, given that founder Mr Kotak has remained as the CEO for 17 years since the bank was launched in 2003.  

This discussion paper was brought forward in light of the troubles faced by Yes Bank, whose founder and CEO Rana Kapoor was removed following accusations of financial misgovernance, leading the RBI to orchestrate a financial rescue plan for the bank. The discussion paper states: “Recent events in a dynamic and rapidly evolving financial landscape have led to increasing scrutiny of the role of promoter(s), major shareholder(s) and senior management vis-à-vis the role of a board. In the context where management plays the role of an agent of a board and the board in turn plays the role of an agent of shareholders, governance failures have brought to fore the impact of quality of governance on efficiency in allocation of resources, protection of depositors’ interest as well as maintaining financial stability.”

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