The RBI has been vocal about the transmission of repo rates. But bankers have expressed reservations about the impact of the move on balance sheets since deposit rates are not linked with the repo rate.
The problem is if you reduce the interest rate and there is a dip in the repo rate, there is an instantaneous impact on the balance sheet. One option is to apply the repo rate to the current account and savings account (CASA) deposits, but you run the risk of losing CASA. Fixed deposit accounts cannot be linked to a floating rate, like the repo rate, as interest rate must remain the same during the period of contract, say for five years. The RBI should permit a variable interest rate deposit scheme. If there is an external benchmark rather than a repo rate, we can link it to the Mumbai Interbank Offer Rate. There are other benchmarks, such as G-secs and treasury rates.
After amalgamation of PNB with OBC and United Bank of India, what will the structure of the organisation look like?
If you look at the integration exercise, there are three sides to it: Business, information technology, and employees. Employee integration further has two dimensions to it: Salary and perks, which will be equal; service conditions will remain the same, so there won’t be an issue. The second one is emotional integration and we will have to ensure this over a period of time that there is a feeling of positivity at the time of amalgamation.
Beyond these three factors, the biggest challenge would be to meet market-level expectations and modelling a proper risk control and compliance mechanism within the organisation. There should be a road map regarding risk appetite of the bank, depending upon the market conditions and how it is going to lay down its policy for assessment and appetite. Since the organisation is so huge, there will be some decentralisation through which there will be different departments for compliance and control.
How will that work out?
In public sector banks, both the functions of control and compliance are being done by business units, like zonal offices. When the organisation becomes outsized, it becomes somewhat tough to handle. The road map will be, after amalgamation, how control and compliance can be decentralised, with over 11,000 branches and more than 100,000 employees. We will segregate the compliance role, and at the zonal level, we will bring about a separate entity, which will ensure compliance at the circle and branch offices. We will go one layer down in the initial stage and see how it is being monitored and look at the future.
In a decentralised structure, what will be the impact on the headcount of the bank?
Initially, we will draw from the existing lot. Then we will look at efficiency parameters and assess the requirement of employees.
What happens to corporate loan accounts? Do the terms attached to it change after the merger?
If corporate accounts are under a consortium, covenants are harmonised already. But in a multiple banking arrangement, there are issues. We will try to harmonise multiple covenants arising out of borrowers who have taken loans through multiple banking arrangement from OBC, United Bank of India, and PNB. But such cases are fewer in number.
What about subsidiaries that the three banks have?
OBC and United Bank of India have no subsidiaries and only PNB has. OBC has a joint venture in Canara HSBC Oriental Bank of Commerce Life Insurance and we have one in PNB MetLife. We will look at the regulatory guidelines and accordingly, plan.
So can a bank have stake in one insurance company, according to regulatory requirements?
It can have stake in one insurance company and less than 10 per cent stake in the other.
It is understood that the complete merger of Bank of Baroda, Vijaya Bank, and Dena Bank will take place by December 2020. Is this how long amalgamation takes?
It depends on how long you take to integrate technology, as human resources and business integration can happen immediately. If you prepare pre-migration activity meticulously, integration time can be reduced. We will be holding talks with Infosys in the coming days and prepare a road map on the timeline.
What about branch overlap?
The overlap will only be between PNB and OBC and not with United Bank of India.
What will be the share of overlap?
That will be difficult to share right now. It will mostly be in Haryana, Punjab, and Delhi.
Will you offer voluntary retirement scheme (VRS) to employees?
There is no requirement of the VRS window. We need all employees.
How do you see policy rate action by the RBI and a sharp downgrade in gross domestic product estimate by the regulator?
Economic growth is not solely dependent on the repo rate. And the government has taken important steps to address it, especially the corporate tax cut, which will bring new investments in infrastructure projects. The stress in the non-banking financial sector has eased out, compared to the situation we had in October-November 2018. Bankers have since reached out to the NBFC for lending. The government has also cleared certain misgivings in the automobile sector. Policy rate has come down heavily in the past one year and from October 1, banks have introduced repo rate-linked products in retail and micro, small and medium enterprise (MSME) loans. Hence, transmission of rate is automatic. All this has created positive sentiment and we seek an uptick in retail and MSME credit.