Government likely to merge 27 PSU banks into 6 banks

With public sector banks reeling under tremendous pressure to tackle their dismal bad loan situation, consolidation is the way forward, and this could bring down the number of lenders to about 6 from the present 27, participants in the recently-held Gyan Sangam, a retreat for chiefs of public sector banks and financial institutions have been reported to say according to an article published in the Hindustan Times.

However, consolidations among banks will take some time so as to safeguard against disruptions in the functioning of the state-run lenders. As banks are already short-staffed, downsizing would not be required.

An expert committee, which will be soon set up to look into the issue, will closely work with the Banks Board Bureau (BBB) to identify the right matches for consolidation. The BBB, which will independently oversee consolidation and chalk out business plans for Public Sector Banks (PSBs), is set to be put in place by April 1, 2016. Ex- CAG head Vinod Rai would be the chairman of the body looking after the governance of PSBs.

Since it is not feasible to bring down the government’s share in state-owned banks below 51 per cent, consolidation to create strong banks is the only survival option. Issues such as technology, asset base, regional strength and cultural match would be critical in chalking out strategies and identifying banks. It would also be interesting to see how a weak bank affects the stronger ones as depleted balance sheets of small weak banks can have a negative effect on the overall bank.

The finance ministry is already looking to merge the newly-launched Bharatiya Mahila Bank. Until now, the government has maintained that it would not have any role to play in the merger exercise of public sector banks. The official said that in case certain banks show unwillingness, despite plans being chalked out by the BBB and the expert committee, then the government would intervene.

In the concluding press conference of Gyan Sangam 2.0, Finance Minister Arun Jaitley on Saturday, said the government will immediately set up an expert group to examine consolidation of public sector banks and consider allowing PSBs to issue Employee Stock Options (ESOPs). The idea of ESOPs was last year mooted by SBI. FM said banks will have to take all measures to clean up their books by effecting recoveries. The government, he said, is also working on strengthening the debt recovery mechanism to deal with Non-Performing Assets (NPAs).

Jaitley said the government is working to strengthen the bad loan recovery process at the banks. The Finance Ministry has estimated that the banking sector has Rs 8 lakh crore of stressed assets, out of the total outstanding loan book of Rs 69 lakh crore. Stressed assets include NPAs as well as loans that are written-off by banks.