Cabinet Sets Mergers of State-Run Banks in Motion

Hindustan Times (New Delhi, India), August 24, 2017 | Go to article overview

Cabinet Sets Mergers of State-Run Banks in Motion


NEW DELHI/MUMBAI, Aug. 24 -- The 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 mergers among the country's 21 state-run banks. The decision, which comes a day after bank employees' unions went on strike and at a time when state-owned banks are reeling under losses and stressed loans, has raised questions about the timing and purpose of such a large-scale consolidation.

Jaitley said that merger proposals have to come from bank boards and that decisions will be taken purely on commercial considerations. Such considerations include the desire of banks to reduce the concentration of their loan portfolio in certain geographies and to acquire a fresh footprint in certain other markets, said a government official on condition of anonymity.

"The objective is to create strong banks and the experience of bank mergers has so far been positive," said Jaitley.

Prime Minister Narendra Modi will decide who will be there in the ministerial panel, referred to as the alternative mechanism, said Jaitley. On Monday, Mint reported that the government will reduce the number of stateowned banks to 10-15, more than what was envisaged earlier, through a series of mergers and acquisitions so that none of the banks become too big to fail, citing Sanjeev Sanyal, principal economic adviser at the finance ministry.

The idea of bank mergers has been around since at least 1991, when former Reserve Bank of India governor M Narasimham recommended the government merge banks into a three-tiered structure with three large banks with an international presence at the top. In 2014, the PJ Nayak panel had suggested that the government either merge or privatize state-owned banks.

The government hopes that state-owned banks will achieve economies of scale and operational efficiency while managing risks in a better way after merging. Consolidation is also likely to help them deal better with their credit portfolio, including stressed assets.

Consolidation prevents multiplicity of resources being spent in the same area and strengthens banks to deal with shocks, the minister said.

"If banks operating in the same region are merged the synergies will be higher," said Udit Kariwala, senior analyst, India Ratings and Research. Ratings could also improve for the merged entity as it becomes larger "and will have more support from the government."

However, not all bankers agree that efficiency will be the outcome, at least in the shortterm, pointing to State Bank of India's merger with its five associate banks and Bharatiya Mahila Bank in April. …

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