In a bid to see Public Sector Banks (PSBs) in good health, the Cabinet on Wednesday gave in-principle approval to set up an alternative mechanism to expedite the consolidation process of PSBs to create three to four big global competitive banks in the country.
Sources privy to the development told The Pioneer, “A Group of Ministers (GoMs) will be set up on the basis of an alternative mechanism for the merger of PSBs, while the Government’s in-principle approval will speed up the banks’ mergers process to the next level.”
“The names of the banks for the merger will be submitted to the GoMs and the names of the banks to be merged will be decided on four major factors, namely, profit of the banks chosen for the merger, geographical coverage of the bank(s), capital adequacy ratios, and comparable asset quality,” the source added.
The Government, however, said, “The move aims at meeting the credit needs of the growing Indian economy and building capacity in the PSB space to raise resources without dependence on the State exchequer.”
Elaborating on the decision, Finance Minister Arun Jaitley said that the alternative mechanism would oversee the proposals coming from Boards of PSBs for consolidation.
“You have a large number of banks in the public sector space. The object is to create strong banks. Our experience of consolidation has been positive so far,” he said, adding that an alternative mechanism enables quick facilitation.
Jaitley added, “After in-principle approval for consolidation, the banks would take steps in accordance with the law and SEBI requirements. The final scheme will be notified by the Central Government in consultation with the RBI.”
Stocks of State-run banks surged by 4 per cent after the Cabinet decided to set up an alternative mechanism to oversee the proposals for consolidation of public sector lenders.
The shares of some key public sector lenders such as Punjab National Bank, Bank of Baroda, Allahabad Bank, Union Bank of India and Bank of India were at the centre of the investors’ attention, which recorded moderate to sizeable gains on the bourses.
The alternative management decision came after the State Bank of India (SBI) merged five of its associate banks and also the Bharatiya Mahila Bank with itself in April this year.
“The decision regarding creating strong and competitive banks will be solely based on commercial considerations. The process to facilitate consolidation amongst nationalised banks must come from the Boards of the banks,” said Jaitley.
When asked about the rationale behind the consolidation, Jaitley said that it would add commercial strength and prevent multiplicity of resources being spent in the same area. “Consolidation of public sector lenders would also improve the capacity of the banking system to absorb shocks that the markets may cause to it,” he added.
When asked if there could be some consolidations among banks in the current fiscal, Jaitley did not divulge any details.
However, the release said, “In 1991 it was suggested that India should have fewer but stronger PSBs. It was only in May 2016 that effective action to consolidate PSBs began to be taken by announcing amalgamation of six banks into the SBI.”
“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 the SBI. The banking scenario has changed since 1970/80 when banks were nationalised, with more private banks, Non Banking Financial Companies, Regional Rural Banks, payment banks and small finance banks.
“The decision is expected to facilitate the creation of strong and competitive banks in public sector space to meet the credit needs of a growing economy, absorb shocks and have the capacity to raise resources without depending unduly on the State exchequer,” the release added.