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Finmin Seeks RBI View on Road Map for PSBs Merger

Lack of enthusiasm on the part of banks may prompt govt to push for mergers as it looks to create stronger and specialized public sector lenders

The consolidation of state-run banks is very much on the government's mind even though ministers have said it would be up to the public sector institutions to come up with merger proposals.

The finance ministry has sought the Reserve Bank of India's views on the matter, suggesting that lack of enthusiasm on the part of banks may prompt the government to push for mergers as it looks to create stronger and specialized public sector lenders.

“The idea is to ascertain the benefits of merger within PSBs (public sector banks) in the current scenario,“ a senior government official said. “A perspective from the RBI will help chalk out the strategy and road map for PSBs going forward.“ The query is a broad one and doesn't refer to any specific cases, the official said.

An RBI spokesperson said it had nothing more to add to the discussion on the matter.

“Suggestions on M&A among PSBs have been off and on emanating from various quarters,“ the spokesperson said. “Gyan Sangam at Pune in January 2015 had also discussed this and the consensus was to leave that to the commercial judgment of banks.We have no further updates.“

Gyan Sangam was a summit of ministers along with top staterun bank and RBI officials at which participants exchanged ideas about how to spruce up the system. India has 27 state-run banks, some of which are struggling with large non-performing loans. The finance ministry is of the opinion that PSBs need to differentiate themselves in order to emain profitable, given that the RBI has issued licences for two egular banks, 11 payment banks and 10 small banks, opening the ector to more competition.

“We had earlier asked SBI Capi al Markets to do a study on bank consolidation. They have suggested some options and we are reviewing it,“ said official cited above. The idea is to have a few large banks that can compete globally while the rest focus on niche areas in different geogra phies, he said. Consolidation could be on the basis of location, business focus or information technology systems.

The government has often talked of the need for consolidation among state-run banks but has said the process should be bottom-up with the banks themselves suggesting M&A options.

It has, however, asked the banks to look at areas of commonality before the proposed Bank Board Bureau (BBB) is set up in April 2016. The latest thinking suggests that the government may force the process as most banks may not be too keen at the prospect of being taken over by a larger rival.

“Merger alone cannot guarantee efficiency. An ideal mix will be a combined entity which has a good mix of retail and corporate portfolio,“ said an executive director at a state-run bank.

Last week, finance minister Arun Jaitley said that the government was trying to systemically address the problems facing state-run banks.

If this still leaves some weak lenders, the government may consider absorption by a stronger bank. The consolidation issue is also likely to be discussed at the next Gyan Sangam in January . In August, the gov ernment announced a sevenpronged revamp plan dubbed Indradhanush for state-run banks that included a programme to deal with bad debt and covering capital infusion to the tune of Rs.70,000 crore over four years, starting with Rs.25,000 crore in the current financial year. The last state-run bank merger was that of State Bank of Indore in 2010 with State Bank of India. In 2008, SBI absorbed its as sociate, State Bank of Saurashtra. The proposed absorption of Bharatiya Mahila Bank by SBI has been on hold for some time.

Consolidation is Welcome

Letting small banks merge with stronger, and larger, banks is a good idea. It will make their lending books big enough to fund large loans, especially in the infrastructure sector. However, since the financial crisis of 2008, regulators are careful that no bank gets too big to fail and, in the process, hurt the economy. Their concerns are not misplaced. But banks should also not be so small that they will unavoidably fail. State-owned banks willing to merge for well-founded commercial reasons should be allowed to do so. The point is for the government not to force mergers.

The Economic Times, New Delhi, 21st Sept. 2015