Centre plans to merge more PSU banks

A day after bank employees went on a nation-wide strike to protest against any bank mergers, the Union government on Wednesday approved a framework to accelerate consolidation of the fragmented banking sector.

The Union Cabinet chaired by the Prime Minister Narendra Modi gave an in-principle approval for public sector banks to amalgamate through an Alternative Mechanism (AM).

"Merger proposals have to come from the Board of directors of banks and that decisions on them will be taken purely on commercial considerations. The objective is to create strong banks and the experience of bank mergers has so far been positive," finance minister Arun Jaitley told reporters after the Cabinet decision.

According to a Cabinet note, the decision regarding creating strong and competitive banks would be solely based on commercial considerations. The proposals received from banks to formulate schemes of amalgamation will be placed before the AM.

After in-principle approval, banks will take steps in accordance with law and requirements of the stock market regulator. The final scheme will be notified by the central government in consultation with Reserve Bank of India.

Experts said India is following the China model, which has four or five big banks that figure in the first 30 largest banks in the world. In India government plans to have just 10 or 15 banks, considering that banking services are still out of reach for a vast majority in the hinterland.

India has 21 public sector banks including State Bank of India (SBI). Together with 52 regional rural banks, which are also government-owned, these banks constitute nearly 80% of the banking activity in the country.

The Chinese growth strategy for its banks, the government believes, if implemented in India would improve cost efficiencies and improve the capital position at banks, which so long have been cushioned by tax payers money that government used to recapitalise banks.

Bank chiefs of the larger PSU banks have already been sounded out to scout around for banks that they would like to gobble up while they expand their balance-sheet.

The alternate mechanism will whet the proposals that bank chiefs are likely to submit in the coming days.

"The government is looking at 10-15 banks, more than what was envisaged earlier, through a series of mergers and acquisitions so that none of the banks becomes too big to fail," Sanjeev Sanyal, principal economic adviser at the finance ministry, said in an interview to a financial newspaper.

Soumya Kanti Ghosh, chief economic advisor, SBI, said, "Unlike the last round of consolidation which was a compulsion where we saw the Global Trust Bank merge with the then UTI Bank, and the Bank of Rajasthan merge with ICICI Bank, this time it is more to do with cost efficiencies. Globally is it seen that mergers bring down the leverage ratios of banks. India is following the Chinese model of growth in the banking sector with just four or five banks."

Though India is the second-largest growth market for banking services after China, Indian banks fail to figure in the list of the first 50 large banks in the world rankings. State Bank of India (SBI) with a consolidated asset size of Rs 33 lakh crore has moved up to 54th position post the merger with its associations and the Bhartiya Mahila Bank. ICICI Bank, the largest private lender with a consolidated asset size of Rs 9.8 lakh crore, is at 148. In comparison, China's largest bank the Agricultural Bank of China has an asset base of $2.8 trillion.

Riding on the success of the just-concluded merger between State Bank of India and its five associates along with the fledgling Bharti Mahila Bank, the government believes that bigger banks would be the answer to for cleaner balance sheets. They believe that it would address the close to Rs 9 lakh crore bad loans that are crimping economic growth.

...& ANALYSIS

• The decision regarding creating strong and competitive banks would be solely based on commercial considerations
   
• The proposals received from banks to formulate schemes of amalgamation will be placed before the AM.
   
• After in-principle approval, banks will take steps in accordance with law and requirements of the stock market regulator