Merger of 10 public sector banks

Paper: III

For Prelims: Merger vs. Takeover.

For Mains: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Context of News:

  • Ten Public Sector Undertaking (PSU) banks will be amalgamated into four banks from 1 April. In the biggest consolidation exercise in the banking space, the government in August 2019 had announced the merger of 10 public sector lenders into four bigger and stronger banks.
  • With this merger the number of public sector banks in India will come down to 12 from 27 in 2017. It was widely speculated that the government may defer the consolidation exercise for some time due to the novel corona virus pandemic that has impacted our economy.

History of Bank Merger in India:

  • The history of bank merger dates back to the 1960s in order to bail out the weaker banks and protect the customer interests. All the mergers in all sectors are driven primarily due to business reasons. Banking mergers also happens due to growing ‘Non-Performing Assets’ and less lending that throws a bank into being the loss-making entity and burden on shoulders of government.
  • No matter how big the merger or what the stature of the participating banks, there can be no doubt that a merger is a big step, and sectors beyond the financial world are affected by such a move. Banking mergers comes with its own advantages and disadvantages to all the stakeholders that somehow get affected from this.

Merger vs. Takeover:

  • Merger:
  • A merger involves the mutual decision of two companies to combine and become one entity; it can be seen as a decision made by two “equals.” The combined business, through structural and operational advantages secured by the merger, can cut costs and increase profits, boosting shareholder values for both groups of shareholders.
  • A typical merger, in other words, involves two relatively equal companies that combine to become one legal entity with the goal of producing a company that is worth more than the sum of its parts.
  • Takeover:
  • A takeover, or acquisition, on the other hand, is characterized by the purchase of a smaller company by a much larger one. This combination of “unequals” can produce the same benefits as a merger, but it does not necessarily have to be a mutual decision.
  • A larger company can initiate a hostile takeover of a smaller firm, which essentially amounts to buying the company in the face of resistance from the smaller company’s management.

Details of Mega Merger:

  • Oriental Bank of Commerce (OBC) and United Bank of India will be merged into Punjab National Bank (PNB). After the merger, these together will form the second-largest public sector bank in the country, after State Bank of India (SBI).
  • Syndicate Bank will be merged into Canara Bank, which will make it the fourth-largest public sector lender.
  • Indian Bank will be merged with Allahabad Bank.
  • Union Bank of India will be merged with Andhra Bank and Corporation Bank
  • Customers, including depositors of merging banks will be treated as customers of the banks in which these banks have been merged with effect from 1 April 2020.
  • After the merger, there will be 12 PSUs – six merged banks and six independent public sector banks.
  • Six merged banks – SBI, Bank of Baroda, Punjab National Bank, Canara Bank, Union Bank of India, Indian Bank
  • -Six independent banks – Indian Overseas Bank, Uco Bank, Bank of Maharashtra, Punjab and Sind Bank, Bank of India, Central Bank of India.

Why Government is going for merger of Bank:

  • Larger and stronger:
  • The rationale is evident ,banks saddled with bad loans or weak operating metrics are to be integrated with stronger, more efficient banks. Besides, banks working on a similar technology platform (core banking solutions) are being merged to ensure smooth integration. To support this consolidation, the government will be infusing capital into the anchor banks so that transition does not translate to sacrificing growth.
  • Mergers will lead to higher scale of operations, resulting in improved efficiency and lower costs. The benefit can either be on the costs side where significant overlaps in specific states can be eliminated over time without any impact to business. Some of these banks could look to enter newer locations with a stronger understanding of the local market.

Benefits of merger of bank:

  • Merger helps to reduce the cost of operation and it helps to improve the professional standard
  • Provides better efficiency ratio for business operations as well as banking operations which is beneficial for the economy
  • Multiple posts get abolished, resulting in substantial financial savings
  • Banking mergers improve risk management .Merger also helps the geographically concentrated regionally present banks to expand their coverage.

Challenges associated with Merger of Banks:

  • Acquiring banks have to handle the burden of weaker banks and It is also difficult to manage the people and culture of different banks
  • Merger destroys the idea of decentralization as many banks have a regional audience to cater to and customers often respond very emotionally to a bank acquisition
  • Larger banks are more vulnerable to global economic crises and Coping with staffers’ disappointment could be another challenge for the governing board of the new bank which could lead to employment issues.

Way Forward:

  • Besides, the road ahead is likely to be long-winding. These mergers are likely to face many operational challenges initially, pushing up costs. After receiving board approval, the merged banks would probably take 18-24 months to synchronise all processes. Past examples of amalgamations in public sector and private banks show they are a time-consuming exercise. It is also possible that operating expenses could go up in the near to medium term. Banks would also face higher expenses related to VRS.
  • For the expected benefits from the mergers to materialise, greater emphasis on corporate governance is critical. The decision to merge banks is a good remedial measure, but continued focus on corporate governance and adherence would be of prime importance. Without removing administrative barriers, creating a larger bank may not necessarily lead to a stronger one.

Govt hikes WMA limit with RBI by 60%; frontloads borrowing

Paper: III

For Prelims:  Ways and Means Advance (WMA).

For Mains: Indian Economy and issues related to Planning and Mobilisation of Resources.

Context of News:

  • The government on March 31st increased the ceiling on its temporary loan facility with the Reserve Bank of India known as Ways and Means Advance (WMA) by 60 per cent to tide over the cash flow mismatch in FY21 expected from higher spending to combat the spread of COVID-19.

What Government said?

  • WMA limit is proposed to be revised to Rs 1.20 lakh crore and would be reviewed on a need basis (from Rs 75,000 crore last years).
  • The borrowing plan essentially takes care of the requirement of the cash flow of the government on account of the expenditure that had already been planned, and also anticipated, and some with certain level of probability, and therefore borrowing plan captures that certainly of fiscal situation ahead.

About Ways and Means Advance( WMA):

  • The WMA scheme for the Central Government was introduced on April 1, 1997. Before that (for around 45 years), there was the ad-hoc treasury bills which was used to finance short term borrowings of the Central Government.
  • The WMA facility enables the government to take a temporary short term loan from the central bank, mainly to address the mismatch between its inflow of revenues and outflow of expenditure. A higher limit provides the government flexibility to raise funds from RBI without borrowing them from the market.
  • The WMA is a loan facility form the RBI for 90 days which implies that the government has to vacate the facility after 90 days. Interest rate for WMA is currently charged at the repo rate. The limits for WMA are mutually decided by the RBI and the Government of India.
  • What is WMA limit?
  • The limits for Ways and Means Advances are decided by the government and RBI mutually and revised periodically. For the second half of the 2019-20 financial year, RBI set Rs 35,000 crore as limit for Ways and Means Advances.
  • Types of WMA:
  • There are two types of Ways and Means Advances normal and special.
  • Special WMA or Special Drawing Facility is provided against the collateral of the government securities held by the state. After the state has exhausted the limit of SDF, it gets normal WMA. The interest rate for SDF is one percentage point less than the repo rate.
  • The number of loans under normal WMA is based on a three-year average of actual revenue and capital expenditure of the state.

The WMA for the State Government:

  • Under the WMA scheme for the State Governments, there are two types of WMA – Special and Normal WMA.
  • Special WMA is extended against the collateral (mortgaging) of the government securities held by the State Government.
  • After the exhaustion of the special WMA limit, the State Government is provided a normal WMA. The normal WMA limits are based on three-year average of actual revenue and capital expenditure of the state. The withdrawal above the WMA limit is considered an overdraft.
  • A State Government account can be in overdraft for a maximum 14 consecutive working days with a limit of 36 days in a quarter. The rate of interest on WMA is linked to the Repo Rate. Surplus balances of State Governments are invested in Government of India 14-day Intermediate Treasury bills in accordance with the instructions of the State Governments.

RBI to reform WMA system for states:

  • Reserve Bank of India has proposed a rule-based approach in fixing new Ways and Means limits for the state governments, replacing the previous expenditure-based system.
  • It will set up a panel to recommend parameters of the new system which is aimed at preventing automatic monetisation of deficits.
  • RBI has several times warned state governments that debt waivers could deflect the state from its fiscal consolidation path, while state’s fiscal deficit-to-state gross domestic product ratio continued to be above the FRBM threshold due to shortfall in revenue receipts and higher revenue expenditure from implementation of farm loan waivers and the pay commission recommendations on salaries and pensions.

India’s February core sector growth at 11-month high of 5.5%

Paper: III

For Prelims: Core Industries.

For Mains: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Context of News

  • India’s eight infrastructure sectors grew at an 11-month high of 5.5% in February. During February, coal and electricity output grew in double digits, while crude, natural gas and steel output contracted.

Growth Comparison:

  • This was the fourth consecutive month when the index of eight core industries reported growth after three months of contraction.
  • The growth of eight core industries was driven by double-digits growth in coal and electricity sector. On the flip side, crude oil, natural gas, and steel saw a contraction in the output.
  • Sector wise Statics:
  1. Coal:
  • Coal production increased by 10.3 per cent in February 2020 over the same period last year. Its cumulative index declined by 1.2 per cent during April to February 2019-20 over the corresponding period of the previous year.
  1. Crude Oil:
  • Crude oil production declined 6.4 per cent year-on-year in February 2020. Its cumulative index declined 6 per cent during April to February 2019-20 over the year ago period.
  1. Natural Gas:
  • Natural Gas production fell 9.6 per cent y-o-y in February 2020. Its cumulative index declined by 4.8 per cent on annual basis during April to February 2019-20.
  1. Refinery Products:
  • Petroleum refinery output rose by 7.4 per cent year-on-year in February 2020 over the same period last year. Its cumulative index during April to February 2019-20 increased marginally by 0.3per cent.
  1. Fertilisers:
  • Production of fertilisers increased by 2.9 per cent in February 2020 over February 2019. Its cumulative index increased by 4.1 per cent during April to February 2019-20 over the corresponding period of previous year.
  1. Steel:
  • Steel output fell by 0.4 per cent in February 2020 over the year-ago period. Its cumulative index increased by 5 per cent during April to February 2019-20.
  1. Cement:
  • Cement production annually increased 8.6 per cent in February this year. Its cumulative index increased 1.8 per cent during April to February 2019-20 against the same period of previous year.
  1. Electricity:
  • Electricity generation surged 11 per cent in February 2020 against the same period last year. Its cumulative index increased by 1.8 per cent during April to February 2019-20 over the corresponding period of previous year.

Core Industries:

  • Core industry can be defined as the main industry which has a multiplier effect on the economy.
  • In most countries, there is particular industry that seems to be backbone of all other industries and it qualifies to be the core industry.
  • The Eight Core Industries comprise 40.27% of the weight of items included in the Index of Industrial Production (IIP).
  • Index of Industrial Production:
  • The Index of Industrial Production (IIP) is an index which details out the growth of various sectors in an economy such as mineral mining, electricity,manufacturing, etc.
  • It is compiled and published monthly by the Central Statistical Organisation (CSO), Ministry of Statistics and Programme Implementation six weeks after the reference month ends, i.e a lag of six weeks.
  • The Base Year of the Index of Eight Core Industries has been revised from the year 2004-05 to 2011-12 from April, 2017.
  • The eight Core Industries in decreasing order of their weightage: Refinery Products> Electricity> Steel> Coal> Crude Oil> Natural Gas> Cement> Fertilizers.
  • Petroleum Refinery production (weight: 28.04per cent), Electricity generation (weight: 19.85per cent), Steel production (weight: 17.92per cent), Coal production (weight: 10.33per cent),Crude Oil production (weight: 8.98per cent), The Natural Gas production (weight: 6.88per cent), Cement production (weight: 5.37per cent), Fertilizers production (weight: 2.63 per cent)

Government promulgates ordinance to extend deadline for filing Income Tax returns

Paper: II

For Prelims: Sabka Vishwas Legal Dispute Resolution Scheme.

For Mains: Government Policies and Interventions for Development in various sectors and Issues arising out of their Design and Implementation.

Context of News

  • The government issued an ordinance on March 31st to bring into effect compliance relief measures for taxpayers in the wake of Covid 19 that were announced by the finance ministry last week. The ordinance also allowed for 100% exemption of donations made to PM Cares fund, set up to aid containment and relief efforts against the virus outbreak.
  • In order to give effect to relief measures relating to statutory and regulatory compliance matters across sectors in view of COVID-19 outbreak, the government has brought in an Ordinance on March 31, which provides for extension of various time limits under the Taxation and Benami Acts.

Sabka Vishwas Legal Dispute Resolution Scheme:

  • The Sabka Vishwas Scheme, 2019 is a scheme proposed in the Union Budget, 2019, and introduced to resolve all disputes relating to the erstwhile Service Tax and Central Excise Acts, which are now subsumed under GST, as well as 26 other Indirect Tax enactments (as listed below). The scheme will be for taxpayers who wish to close their pending disputes, with a substantial relief provided by the government.
  • Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019 is to help taxpayers, including small taxpayers, in clearing the baggage of disputes under legacy taxes (Service Tax and Central Excise), which are subsumed in Goods and Service Tax.

Income tax new rules that was to be changed:

  • New lower tax slabs, as announced in Budget 2020 was to come into effect from April 1st but now this deadline has been extended in the wake of corona virus outbreak.
  • New Tax Slab:
  • New tax slabs, as announced in Budget 2020, will come into effect. However, the old tax slabs will also remain in effect, giving a choice to the individual to opt between the two.
  • Under the new tax rates announced in Budget, there is zero tax for income up to ₹2.5 lakh; 5% for income between ₹2.5 lakh and up to ₹5 lakh; 10% for income between ₹5 lakh and up to ₹7.5 lakh; 15% for income between ₹7.5 lakh and up to ₹10 lakh; 20% for income between ₹10 lakh and up to ₹12.5 lakh; 25% for income between ₹12.5 lakh and up to ₹15 lakh; 30% for income above ₹15 lakh.
  • Dividends received from mutual funds and domestic companies will be taxable:
  • Dividends received from mutual funds and domestic companies will be taxable at the recipients hands. For example, dividends the recipients will earn from their mutual fund investments will be taxed at their slab rates.
  • Earlier, the dividend was tax-free in the recipients hands but the mutual funds deducted a dividend distribution tax (DDT) at a rate of 11.2% for equity-oriented funds and 29.12% for debt-oriented funds.
  • Taxable bracket set for contribution towards NPS and EPF:
  • If the employer’s contribution exceeding ₹7.5 lakh in a year towards NPS, superannuation fund and EPF, it will taxable in the hands of the employee.
  • Relief to House Loan:
  • For those who are buying house for the first time and if the value is up to ₹45 lakh, the government has extended the date for availing additional tax benefit by a year to March 31,2021.
  • House owners who have taken loans to purchase homes up to ₹45 lakh will be eligible to claim an additional tax deduction of ₹1.5 lakh on interest in addition to the existing deduction of ₹2 lakh.

Benefits of New Tax Rules:

  • The alternative tax regime will benefit relatively the young taxpayers as they would not be committed much to expenditures like insurance, tuition fees of children, etc. The same could also be said for senior citizen taxpayers as well.
  • Availability of NPS deduction under both the options will continue to give it a boost. The relief to startups for deferment of tax on ESOPs will certainly help ease cash flow issues for their employees on receipt of ESOP.