Cabinet sets bank mergers in motion, panel to oversee move

CONSOLIDATION IS KEY Banks need to first get inprinciple approval from the panel, says Jaitley

The Narendra Modi government on Wednesday decided to take consolidation in the banking sector to the next level by setting up a ministerial panel led by finance minister Arun Jaitley to consider and oversee merger of 21 state-run banks.

Jaitley, who briefed reporters after the Cabinet took the decision, said that merger proposals have to come from the board 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,” said Jaitley.

“You have large number of banks in the public sector. The object is to create strong banks. Our experience of consolidation has been positive so far,” he said, adding that an AM “enables a quick facilitation”.

With the mergers, the government hopes state-owned banks will achieve economies of scale and operational efficiency while managing risks in a better way. Consolidation is also likely to help them better deal with their credit portfolio including stressed assets. The move follows the merger of State Bank of India with its five associate banks and Bharatiya Mahila Bank in April.

Jaitley did not rule out SBI taking part in the merger exercise. Consolidation prevents multiplicity of resources being spent in the same area and strengthens banks to deal with shocks, the minister said.

Prime Minister Narendra Modi will decide who will be there in the ministerial panel, referred to as the alternative mechanism. After the banks that are interested in getting merged secure in-principle approval from the ministerial panel, they will take steps as per regulatory requirements.

To a question if banks should be nudged to come up with proposals for consolidation, Jaitley quipped, “what do you think I am doing”.

According to an official release, in 1991, it was suggested that India should have fewer but stronger PSBs. “However, it was only in May 2016 that effective action to consolidate public sector banks began to be taken by announcing amalgamation of six banks into the State bank of India,” it said.

“The merger was completed in record time, unlike earlier mergers of State Banks of Indore and Saurashtra,” it added.

There are now 20 PSBs other than SBI.

The banking scenario has changed since 1970/80 when banks were nationalised, with more private banks, non-banking financial companies (NBFCs), Regional Rural Banks, payment banks and small finance banks.

“The decision is expected to facilitate the creation of strong banks in the public sector space to meet the credit needs of a growing economy, absorb shocks and have the capacity to raise resources without depending on the exchequer,” the release added.

Experts welcomed the move. “Merger of PSBs is a good idea as it will bring more efficiency. The consolidated entity under a single management will be able to capitalise on the synergy among its various constituents,” said Kalpesh Mehta, partner at Deloitte in India. Bank