On September 16, 2018, Bank of Baroda MD and CEO P.S. Jayakumar was in Radisson Blu hotel in Goa for a two-day off-site business performance review meeting with the bank’s regional heads, zonal heads, and corporate financial services branch heads. He got a call from the Ministry of Finance about a meeting scheduled at the Department of Financial Services (DFS) the next day. He was not told the agenda.

Jayakumar took an early morning flight to attend that meeting. R.A. Sankara Narayanan, MD and CEO of Vijaya Bank, and Ramesh Singh, executive director of Dena Bank (the bank did not have an MD at that time), also attended the meeting.

All three were told that the Alternative Mechanism (AM) headed by finance minister Arun Jaitley had, after consultations with the RBI, decided that Bank of Baroda, Vijaya Bank, and Dena Bank should consider a merger. The AM had replaced the various GoMs or groups of ministers’ model of the Congress-led United Progressive Alliance government.

The three banks were told to convene board meetings and send the proposal for amalgamation to the government, along with their boards’ assessment and recommendations.

In the evening, Jaitley and Rajeev Kumar of DFS addressed the press, announcing the decision of the AM. Jayakumar returned to the off-site in Goa the next day. From there, he shot off a letter to 55,000 Bank of Baroda employees. Mayank K. Mehta and Papia Sengupta, two of the executive directors, also signed that letter.

“Dear Fellow Barodians,

You are aware about the announcement made by Government of India about the amalgamation of our bank, Vijaya Bank, and Dena Bank.

It is recognition of the Bank of Baroda’s stronger balance sheet which enables us to play a lead role in consolidation. (The) Board of Directors of the Bank would meet shortly to consider the amalgamation which will be subject to applicable approvals.

Each of the amalgamating bank has its strengths and niche relationships which can be pooled. We would leverage upon the same to build a stronger bank.

We would also like to state that Barodians should not have any apprehension on the amalgamation as the service conditions will remain unaffected. The combined entity will offer more and diverse opportunities to the employees since it would have a broader geographical footprint to operate.

We are sure that all Barodians would make the amalgamation a success and contribute to make the amalgamated entity a premier and modern bank which is competitive in market place.

With greetings to all … ”

Business plan in 48 hours

The work for a merger had started even before the announcement even though Vijaya Bank and Dena Bank were not aware of it. This is why the business plan of the combined entity could be finalised in 48 hours.

In the first week itself, there were 80 meetings across India and a team drawn from all three banks addressed the staff. At least 100 town hall meetings were held with the employees of three banks and a fifth of them were addressed by the chiefs.

Bank of Baroda convened a board meeting on September 29. The seven-hour meeting discussed each aspect of the merger threadbare before giving in-principle approval. After the boards of the three banks cleared the proposal, the government approved it on January 2, 2019.

For fair valuation, the three balance sheets were scrutinised to check the provisions made for the retirement benefits of 85,000 employees, bad assets (already identified and/or hidden) and the uniformity of accounting policies.

This was to take care of anomalies. For instance, the same asset could have been good on one bank’s book and bad on another; also, one bank could have made provision for non-fund based exposure while another had not. At least ₹6,000 crore extra capital was needed. The government stepped in first with ₹5,042 crore and followed it up with ₹7,000 crore.

There was a share swap. Dena shareholders received 110 shares of Bank of Baroda for every 1,000 shares they held; Vijaya shareholders received 402 shares for every 1,000 shares. Since the Bank of Baroda share had a face value of ₹2 and the other two, ₹10 each, the discount to face value was steep. But the swap ratios largely reflected the prices of the shares of the three banks in the stock market.

The first to bite the bullet

SBI was the first PSB to bite the bullet by merging five of its associate banks with itself. This list included the State Bank of Bikaner & Jaipur, State Bank of Mysore, State Bank of Travancore, State Bank of Patiala, and State Bank of Hyderabad. These were all banks set up by various princely states. SBI had already merged the State Bank of Indore with itself in 2010 and before that, in 2008, it had merged the State Bank of Saurashtra.

Two of the five associate banks—namely, State Bank of Patiala and State Bank of Hyderabad—were not listed. Among the listed associates, SBI held a 75% stake in State Bank of Bikaner & Jaipur, 90% in State Bank of Mysore, and 79% in State Bank of Travancore.

The last lap of the merger with five associate banks took effect in April 2017. In this round, the Bharatiya Mahila Bank—a ₹1,000-crore misadventure launched by the United Progressive Alliance government—was also merged with SBI. At its launch in Mumbai on 19 November 2013—the 96th birth anniversary of former prime minister Indira Gandhi—Finance Minister P. Chidambaram had said the Bharatiya Mahila Bank would break even in three to five years. However, nowhere in the world has a bank for women become successful and the Indian experiment was no exception. The SBI Chairman Arundhati Bhattacharya got a one-year extension, the first in the bank’s history, to oversee these mergers. Immediately after she took over in October 2013, Bhattacharya had suggested consolidation of the associate banks. The logic was fairly simple: While the parent was responsible for making sure that the associate banks are adequately capitalised, they were competing with each other, wasting resources.

Sometime in October 2016, after Jaitley checked with her whether this could be done at one go, Bhattacharya took up the challenge. Seven groups were formed, led by an executive from each bank (five associate banks, Bharatiya Mahila Bank and SBI) for different areas of work such as accounting, IT, HR, balance sheets, assets, communications, and customers’ service. A deputy managing director of SBI coordinated the exercise. The merger was notified by the government in May 2016 and took effect from April 2017.

The warriors of the government

A common theme for all the mergers is that the CEOs of the banks involved were not in the know, in most cases. For the set of four mergers to create NextGen banks, the DFS had been collecting data from all banks for over a year but none of the senior management at the banks had any clue what would be the combination and who the anchor banks would be.

On the day finance minister Nirmala Sitharaman announced the mergers, the MDs of the 10 banks and a few more were called to Delhi for a briefing just ahead of the finance minister’s press conference.

The CEOs of a few banks that were not due to be merged were also called in to create a smokescreen and thus, not let people know the exact contours of the mergers till the announcement. This is because the banks are listed and merger is price-sensitive information. Immediately after the announcement, the senior management had to face the media and they did so with aplomb, as warriors for the government.

The RBI and the government had been talking ‘consolidation’ for years. In fact, around the time then finance minister Pranab Mukherjee announced the opening up of the sector for more private banks in his 2010 budget, RBI Governor D. Subbarao was pushing for consolidation.

The ball starts rolling

The second edition of the bankers’ retreat, Gyan Sangam 2.0, was held in March 2016 at the State Bank Academy at Gurgaon. Jayakumar of Bank of Baroda, who headed a task force on restructuring and mergers in banking, made a presentation.

He described how most banking crises have been followed by a consolidation drive. Spain reduced the number of banks by 70%, from 50 to 15 between 2009 and 2013 and Malaysia went for an even sharper reduction—by 80%, from 54 to 10 in just two years, between 1998 and 2000 when bad loans rose to nearly 19%. Between 1997 and 2004, Indonesia also opted for large-scale rationalisation of private banks—from 144 to 74—and the Bank Mandiri was created by merging four state-owned banks.

The task force said the small banks had two choices. These could either merge with big banks or become niche banks; they couldn’t ape the large banks. The merger was actually imperative given limited differentiation in portfolios across PSBs, leading to price-competition. Besides, the small PSBs had not identified specific niche areas where they could develop expertise. This had also been discussed in the previous Gyan Sangam in 2015.

The MDs and executive directors of eight other banks; external experts such as Leo Puri, MD of UTI Mutual Fund, and Bahram N. Vakil, senior partner, AZB & Partners, were among members of the task force.

That started the ball rolling.

The task was completed on March 4, 2020 when the latest round of mergers got the Cabinet’s nod.

In this set of 10 banks, Union Bank has the most chequered history.

The Union Bank story

Arun Tiwari, MD of Union Bank of India, who headed a work group on risk management, at the Gyan Sangam 2.0, sent a presentation to NITI Aayog CEO Amitabh Kant suggesting a merger between two Mumbai-based banks—Union Bank of India and Bank of Baroda.

One of the key advantages was their uniform technology platform—both used Finacle 7. The work on the merger started with V.S. Narang, a general manager of Bank of Baroda, camping at his bank’s Ballad Estate, Fort, Mumbai office, coordinating the project, in which Union Bank was codenamed ‘Zen’.

Tiwari retired in June 2017. His last board meeting passed a resolution on exploring a merger with another bank, without naming Bank of Baroda.

When Rajkiran G. Rai, an executive director of Oriental Bank of Commerce, took over as MD of Union Bank in July 2017, he arrived with a mandate of merger from the finance ministry even though informally the work on the merger had already started in March.

Rai took over in July but his appointment was announced two months ahead of the end of Tiwari’s term. Rai used this time to sift through the P&L data of Union Bank at his Oriental Bank of Commerce office at Harsha Bhavan in Connaught Place, preparing himself for the next big job.

Unlike most other public sector banks, Union Bank has never posted a loss. It had always been in profit. It could do so only by being very miserly in making provisions for bad loans.

The bank needed to make hefty provisions to actually clean up its balance sheet but where would the money come from? Rai spent most of his first month in the new assignment to crunch the data and create a vision document for Union Bank. On July 29, he made a two-hour presentation to the top 100 executives of the bank at Delhi’s JW Marriot Hotel, holding a mirror to them.

The gist of the presentation was: Union Bank had not provided as much as it should have for bad loans. It would need around ₹25,000 crore for provisioning. From its operating profit, it could plough back about ₹15,000 crore but the rest would need to come in the form of capital infusions.

Until June 2017, Union Bank kept on posting net profit, quarter after quarter. But after Rai took over, its net losses over the next three quarters were ₹1,530.72 crore, ₹1,249.85 crore, and ₹2,583.38 crore, respectively, as Rai decided to clean up the balance sheet by setting aside money for bad loans.

After posting small profits for three quarters, again in March 2019 it announced a loss of ₹3,369.23 crore and followed up with another loss of ₹1,193.61 crore in September 2019. Its gross NPAs, which were 12.63% of loans in June 2017, rose to 16% over the next year, and net NPAs, from 7.47% to 8.7% during this period.

The merger idea cropped up when Tiwari was on his way out. Bank of Baroda’s Jayakumar, who was a new entrant in public sector banking, was keen to push it forward. A former Citibanker and CEO of VBHC Value Homes, Jayakumar took over as Bank of Baroda boss in October 2015. He was one of the first two recruits inducted from outside the public sector banking industry. (The second executive, Rakesh Sharma [who now heads IDBI Bank], was picked up from Lakshmi Vilas Bank Ltd to head Canara Bank but he was originally from SBI and had just an 18-month stint at the private bank.)

Rai took his executive director Atul Kumar Goyal (later MD of UCO Bank) and a general manager, Nitesh Rajan, into his confidence and tasked them to do the homework for the merger. Many rounds of discussions later, both Rai and Jayakumar understood the banks were not prepared for the merger.

In August 2017, Bank of Baroda wrote to Anjuly Chib Duggal, the financial services secretary, detailing the benefits and challenges of the merger. While the merged entity would become the second largest bank in the country by assets and have a large base of low-cost deposits, the challenges outweighed the benefits.

Stating that ‘research typically reveals that only 30% of mergers become successful and result in realisation of the estimated synergies and benefits,’ the note highlighted capital constraints as the biggest challenge.

It said that internal estimates of ‘Zen’ put the provision requirements for bad assets for fiscal year 2018 at ₹9,500 crore and asked for a capital infusion of at least ₹3,500 crore by the government. That may have put a spoke in the government’s wheel.

Merger always on Union Bank’s plate

A merger has all along been on the plate of Union Bank of India. The media was already talking about the possibility of its merger with Bank of India in 2005. If that had happened, it would have created India’s second largest commercial bank after the State Bank of India. It was to be consummated in April 2005 but the plan had started two years before.

Finance Minister P. Chidambaram had flagged off the issue of banking sector consolidation during the Indian Banks’ Association’s annual general meeting in August 2004.

Even before that, in 2003, Union Bank hit upon the idea of a possible merger. V. Leeladhar was its chairman then and M. Venugopalan was the executive director. Both were on the same page and once Venugopalan moved to head Bank of India, they started discussing it with all seriousness.

Janmejaya Sinha, then India managing director of global management consulting firm Boston Consulting Group (BCG), got involved and a committee was set up to look into all possible aspects of the merger. Again, the uniform technology platform was a big advantage. Both banks were operating on Finacle CBS of Infosys.

On July 22, 2004, Leeladhar even made a presentation to Chidambaram. He was carrying four slides to sum up the discussion—FM against it, FM has low interest in it, FM is interested but not engaged, and FM is interested and engaged.

Chidambaram picked the fourth one.

BCG was not officially engaged on the merger. It was supposedly working with Bank of India on its business process engineering, and its mandate with Union Bank was to make different products more profitable. Under the guise of these assignments, BCG was quietly working on the merger.

The merged entity would have an asset base of at least ₹1.43 lakh crore and emerge as the second largest commercial bank in the country, overtaking ICICI Bank. It would have a network of 4,582 branches and over 68,000 employees.

According to the plan, around 200 branches of the new entity were to be closed while 500 new ones to be opened to tap new businesses, taking the total number of branches to 4,882, while leading to an annual saving of ₹300 crore for the new entity.

Leeladhar left the bank reluctantly to become a deputy governor at the RBI in September 2004 because he thought pushing the merger through was a much bigger assignment than becoming a central banker. After that, executive director Ratnakar Hegde was running Union Bank. Venugopalan retried as Bank of India boss on March 31, 2005. (After this stint, he headed Federal Bank Ltd.)

The minutest details of the merger were overseen and finalised by Vinod Rai, then the additional secretary in the finance ministry’ banking division. Union Bank of India’s emblem, the sun, was to give away to Bank of India’s star.

All these were discussed at the board meetings of both banks. But the merger did not happen because of the fierce opposition put up by A.B. Bardhan, a trade union leader and former general secretary of the Communist Party of India, which supported the United Progressive Alliance-led government, running the country at the time.

Excerpted from ‘Pandemonium: The Great Indian Banking Tragedy’ by Tamal Bandyopadhyay, courtesy Roli Books. Releasing on November 9, 2020, Price ₹695. The author is a seasoned financial journalist and this is his sixth book.

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