Public Sector Bank Mergers

Why is it decided to merge banks?

Government promised a capital of Rs. 70,000 Cr. to the banks. Instead of making thin payments to multiple entities, it can disburse relatively large money to only few, but strong entities. That way they can start lending and reap the benefits in long run.


Why this combination?

It was the core banking technology that made the combination for mergers. Canara and Syndicate Banks run on iFlex Core banking while Indian Bank and Allahabad Banks run on BaCNS making the transitions smoother. The remaining 6 banks runs on Finnacle CBS platform, but Government opted not to merge all 6 of them into one, as it would be really tough to manage such a large entity. So it opted to merge three entities each into two.

Why Now?

One can only assume that banks like Bank of Maharashtra are not touched for now with state elections around. In fact, the proposal for mergers by finance minister was announced exactly before the GDP numbers were made public. GDP growth numbers for Q1 showed a six year low. It is indeed a tricky time with growth declining in few of key sectors in turn rising unemployment numbers. However government was working on this for past 6 months. It seems it was Narasimha  committee in late 1990’s who proposed merging strong banks and dissolve weaker banks. Of course, it would be a risky step for any government to shutdown banks with lot of opposition.

Areas to watch

Bank employees’ associations are protesting saying the timing is not right to proceed with merging and are implying merging as closure of banks that deflects the interests of many bankers. While this may not be completely right, there are two areas to watch out.

  • The recapitalisation of Rs 70K Cr should make a difference at ground level. Nationalised banks are loosing their market share in incremental business, incremental deposits, credit market.
  • A strong governance in the nationalised banks. Many times, certain personnel are appointed at board level with government nominations. There should be minimal influence of pushing political agenda during key reforms at board level.

In summary, with an intend to strengthen banking sector, yet another aggressive step by government, let’s hope this move transforms our banks to a global level.


GST – What Next?

Much awaited “one nation, one tax, one market” came to reality with RS passing the GST bill last week. The next steps include

  • Get the CAB (constitution amendment bill) approved by at least 50% states
  • Create a GST council
  • Concluding the Center GST and State GST rates with cabinet approval
  • Training, documentation, digital (IT) readiness


While implementing GST is noted as a historic economic reform like the one in 1991, let us see the challenges with each of the phases mentioned above:

  • Get the CAB (constitution amendment bill) approved by at least 50% states, generally called as ratification. GST being a revenue loss on certain items in some states for a brief time, they would like to have an assurance from centre on the compensation. 16 out of 31 states should approve the CAB to proceed to next phase. 11 states including BJP ruling will approve without any problem. Other states like Andhra Pradesh, Telangana, Kerala, WB, Tripura would support the ratification. The whole process looks to be completed by September 2016 with all the support.
  • Creating CST council: GST council is very much needed that will decide the GST rates. Here comes the crucial part. Many states where they see the rates will hamper their revenue as compared to pre-GST era would raise concerns and this may delay the GST rollout. The council once formed will resolve these disputes. The rates would be as low as 12% for essentials, and as high as 40% for luxury items. The council will exclude both petroleum and alcohol items from GST for now (it is simple – the tax revenue from alcohol for some states is high. Including that in GST will benefit the alcohol prohibited states or states with low revenue from alcohol. It is wiser not to include in GST. Also similarly electricity and petroleum are also been considered not to be included).
  • Rolling out the GST: it is expected to be rolled out from 1st April 2017. If the challenges expected are resolved in time, we are good by next year.
  • Training, documentation, digital (IT) readiness: Infosys is working on the IT infra for GST. Tax officials may have to now deal with simpler tax calculations, but transition from older to new one can be tricky and government is creating a strong transition mechanism.


How will GST work in India

Let us begin with the understanding of how taxes are applied before VAT came into picture.

Consider this flow of a product: Manufacturer -> Retailer -> Consumer
Say the initial price is 100 and sales tax is 10%. Then

  • Manufacturer sets the price at 100 +10% =110. (Tax is 10)
  • Say Retailer adds 390 as his costs and profit making the product value 500. He then sets the price at 500+10%=550 (Tax is 50)
    The consumer buys at 550 where in he payed 50 as tax.


From the year 2005, the above sales taxes are replaced with Value added Tax (VAT). With VAT, the consumer actually pays 40 as tax instead of 50. VAT=output tax-input tax i.e. 40. (50-10).
VAT is imposed by state governments and vary from state to state.

Service Tax

In addition to VAT most of us are aware that a service tax is applicable in many service industries like restaurants, travel, insurance, phone bills payments etc. This is imposed by central government.

GST (Goods and Services Tax)

GST is uniform tax imposed on any sales, manufacturing or goods & services at national level. This tax will substitute all other taxs imposed by state and central government. (Exports and direct tax like income tax, corporate tax and capital gain tax will not come under GST).

Why GST is better than VAT

  • VAT is imposed on only goods whereas GST on both goods & services
  • GST is a uniform rate in all the states and is imposed by center where as VAT varies from state to state.
  • In case of VAT, input tax credit (i.e. calculation of output tax – input tax , 40 in the above example) is applicable on only goods sold within the state whereas incase the of GST this is applicable across country and also applicable on the services too apart from goods.

GST will overcome the above three limitations of VAT.
GST will create a common market across states. It eliminates complexity of different taxes. It is beneficial to consumer. It will ensure a transparent and neutral way to raise revenue.

Why is GST opposed in Parliament?

However, GST has it own negative aspects. As GST imposed by center eliminates all the other taxes imposed by states, It is like parent asking a child to stop earning and instead giving him pocket money. Child looses his financial independence here.

Hence to have some financial independence, the current GST bill proposed by BJP excludes Petroleum and Alcohol – revenue generating sources for states. Also a 1% inter state tax (for manufacturing states like Maharastra, TN, Gujarat that fear loosing more if GST is imposed)

Currently, the GST is been opposed by Congress on three grounds.

  • A 18% cap should be made a part of constitution, ensuring consumers does not end up paying based on mood of central government. But, BJP feels that this could flaw the syatem as goods like Luxury products are supposed to attract higher taxes.
  • 1% additional inter state tax to be removed to provide an equal advantage to all states
  • Formation of a GST council that will decide on any GST issues based on majority. Congress says to have 1/4th vote weightage to Center and remaining 3/4th to State. However, BJP wants it to be 1/3rd and 2/3rd


In summary, GST bill is designed to replace more than dozen state taxes to a single uniform central tax proving a single market. Removing complexities, to raise revenue in a nuetral way


Global Slow Down – Silver Lining for India!!

While most of the articles in the news from the last week are on global slow down of economies including India, many say there is a sliver lining, as far as Indian economy is considered.

Some facts before we proceed: India has lost only 3.7% of total loss of $12 Trillion as compared to 41% China’s 21% US’s and 14% Hong Kong’s. While most of us know the root of this crisis is China, looking this from another angle many say it is an opportunity for India to benefit from the China crisis.

Global meltdown

How is India better than China?

  • Cost of doing business in China is going up as compared to in India
  • GDP growth trends for India shows an increment and a decrement for China.
  • There is little room for China to absorb money from public investments, where as India can absorb trillions just through infra
  • China’s working population is aging, where as India youth population is increasing
  • Domestic products and services consumption % in India is much higher than compared to China. This acts as a cushion for India’s economy during global crisis.
  • China’s debt has gone to alarming levels of 101% (from 2007-14) as compared to 5% of India’s. This gives India a better chance to take more debt for growth and development

Silver lining:

With the above scenarios foreign investors are looking up for India. They want to invest and produce in India. For years, India is fuelled by its domestic demand (except the IT sector), unlike where China sells its products abroad. India has good scope for attracting global investors during this time.

Factors favoring India:

Another key point to note here as compared to our counter parts – Brazil, Russia and South Africa, India has ample international reserves and is not highly dependent on foreign capital to fund imports.

India is also currently benefiting from lower oil prices, as 75% of its consumption is imported. Foreign exchange reserves are increased by 13% and inflation is halved from last year and commodity prices are declining. Current account deficit is narrowed to very large extent.

While there are negative areas like rupee depreciation that impacts FII inflow, Falling exports, high bank NPA’s (Non performing Asset: Once the borrower has failed to make interest 90 days the loan he took, it is considered to be a non-performing asset. This impacts banks because their major income is loan)

So what should India do?

Undertake the important structural reforms and ease the domestic bottlenecks.

Simultaneously US investors are looking at reforms in Patent laws, retro taxes etc. and India in total taxation etc.

  • Patent laws:
    • India has right to revoke a patent of any multinational company if it proves it’s only a minor modification of existing drug. Many multinational organizations claim that the new version though minor should be patented.
    • India currently has law that can grant a ‘compulsory license’ to any drug organization to produce a third party patented drug in order to make it affordable to 1.2 billion populations. Many multi nationals are not encouraging this as they loose profits.
  • Retro taxes: Amendment in the Income tax and made effective from a back date, especially for foreign transitions. This might be fatal for some multinational organizations that did not pay tax earlier as per the law that time, but will have to pay the tax now.
  • Totalization agreement: Indian professional working in US, pay their Social security taxes but they will not be able to reap that benefit as many of them don’t work for 10 years or retire in US. India is working with US in getting these taxes directly paid to PF fund in India so that Indians get the benefit once they return India.

In conclusion:

In summary it is right time for India to make right reforms and get the benefit out of global slow that that helps India economically dominate the next two decades in the way China dominated the last two.

-Data analysed from ET, NDTV, The Wall Street Journal, the guardian, and

When oil price falls

Currently the oil price is around $80 per barrel.

In the past, whenever there is a fall in crude oil prices, Organization of Petroleum Exporting Countries (OPEC) led by Saudi Arabia used to cut production to ensure that supply fell and the respective prices were maintained. This time it did not happen. For some reason Saudi says “ We do not seek to politicize oil…for us, it’s a question of supply and demand, it’s purely business.” But one can easily see that the actual reason being that US and Canada has seen an increase in Shale oil production in their countries. (Shale oil – A substitute for traditional crude oil, one can comfortably use for power generation etc. ) This boom has led to the United States and Canada producing much more oil than they were a few years back. However, the production of Shale oil is very expensive and it is economically reasonable for US and Canadian oil companies to produce Shale oil only if the crude oil price is between $50 and $75 per barrel. Hence, by ensuring low oil prices the Saudis wants to ‘kill’ the shale oil producing companies in Canada and United States.

Oil picture Kalyan

The Saudi’s strategy is already working. It seems The International Energy Agency (IEA) has said that the investment in shale oil fields will fall by 10% next year, if oil prices continue to remain at $80 per barrel.

On a positive side, for countries like India, it is evident that fall in oil prices it is beneficial. Calculations say that, a $20-per-barrel drop in oil prices transfers $6-700 billion from oil producing nations to consumers worldwide or nearly 1% of world GDP. Falling oil prices are also benefiting the airline and shipping industries, where fuel is their biggest expense.

On the other side of the world, the countries that may get into trouble if the prices continue to stay low are mainly Russia and Iran. Russia and Iran relies heavily on exports of oil and gas. Saudi is giving a tough competition. Again the stats show that Russia and Iran compete with Saudi Arabia in the international oil market, and both need oil prices to be roughly $110 a barrel in order to balance their budgets.

– Analyzed from articles in firstbiz website, IndianExpress and The Economic Times


So what is FDI all about?

FDI – Foreign Direct Investment.

FDI in simple terms is a company from a country investing into the business of another country.

Example, Wal-Mart trying to invest into the retail markets in India. FDI can be done as investing into production, joint ventures, acquisitions or expanding the existing operations into another country.


Why India seeks FDI?

  • Capital need – as the money in India is inadequate for a good economic growth
  • Especially country like India when transforming from developing to developed nation!!
  • FDI bring Technology, skills and business expertise
  • Employment increase
  • Indirectly helps increasing exports


Why the opposition?

  • Domestic companies loose the markets
  • Small enterprise face tough competition in terms of quality, knowledge, skill and technical expertise.
  • Eventually, domestic companies may surrender their ownership to these companies.

Automatic route and Government route

In FDI policies, a company interested for FDI has to take prior Government approval if legislated as Government route. And no prior approval is required is automatic route.

There will be a percentage of FDI that a company can invest on –

Some of them for example are:

  • FDI cap in telecom – 100% (automatic route upto 49% and beyond via govt. route)
  • Insurance sector – 49% – Automatic route
  • Single brand retail – 100% 49% through automatic, 49-100% through government
  • Petroleum 49% in – automatic route, from earlier approval route

RBI – What is repo rate?

Recently, we see the headlines in Economic times that RBI may increase the repo rate by 25bps. So what is it?

bps stands for ‘base points’. 1 bps= 0.01 %

So an increase in 25bps means at increase of 0.25%


What is a Repo Rate?

The rate at which the RBI lends money to commercial banks is called repo rate. It is an instrument of monetary policy. Whenever banks have any shortage of funds they can borrow from the RBI.  A reduction in the repo rate helps banks get money at a cheaper rate and vice versa.

In the event of inflation, RBI increases repo rate as this acts as a hindrance for banks to borrow from the RBI. This ultimately reduces the money supply in the economy and thus helps in arresting inflation.

Percent growth

What is Reverse Repo rate?

Reverse Repo rate is the rate at which the RBI borrows money from commercial banks. Banks are always happy to lend money to the RBI since their money are in safe hands with a good interest. An increase in reverse repo rate can prompt banks to secure more funds with the RBI to earn higher returns on idle cash. It is also a tool which can be used by the RBI to drain excess money out of the banking system.

What is Cash reserve Ratio (CRR)?

CRR is the amount of funds that the banks have to keep with the RBI. If RBI decides to increase the CRR, the available amount with the banks comes down. The RBI uses the CRR to drain out excessive money from the system. Scheduled banks are required to maintain with the RBI an average cash balance, the amount of which shall not be less than 4% of the total of the Net Demand and Time Liabilities (NDTL), on a fortnightly basis.

Impact of Recession in India


There are 3 companies that did very well in US, while others went down, in spite of recession during 2008 melt down. Walmart, Dunkin, Best Buy. Whatever their strategy is, it is evident that they could sail through and still make good profits because of their focus, and anchoring to their values. Their technology and innovation has helped them.

Now that India is going through the similar phase, the companies should focus on certain things:

  • Consumerization:
    • Evolving an enterprise technology from consumer products to professional areas. Ex: Smart phone that is a consumer product can be innovated, specialized to Doctors, military etc.
    • Axis bank launched services for elderly, it is more than just opening accounts for them, but it is also paying bills for them, managing emergency services at hospitals.

The four sectors that majorly hit as of now :

  • Automobile: Cars being luxury products, they are hit first.
  • This has impact on loans, credit cards, thus Financial institutes.
  • Holiday sector
  • Consumer durables


  •  Rural India is still not much impacted by recession, as there are no conversations about job loss yet. Rural India mainly depends on monsoon and the impact of bad market condition is relatively low. A good monsoon means good purchasing power. As major part of GDP is still based on rural India, it is still not worst and we have time to cope up soon.
  • No recession holds more than 11 months as per the statistics of past 10 recessions in the world. Putting aside the logic behind, how is it, we have hope that it is getting over soon.