In another significant move to revive PSU banks weighed down by bad loans, the government on Monday set up a ministerial panel, led by finance minister Arun Jaitley, to consider and oversee mergers among the country’s 21 state-run banks.
Members of the panel on PSU bank consolidation include railway and coal minister Piyush Goyal, and defence minister Nirmala Sitharaman, PTI reported.
The decision comes less than a week after the government announced a Rs2.11 trillion bank recapitalisation plan for public sector banks weighed down by bad loans, seeking to stimulate the flow of credit to spur private investment.
The constitution of an Alternative Mechanism is a move in that direction. The Union cabinet in August had decided to set up an Alternative Mechanism to fast-track PSU bank consolidation.
The consolidation of struggling state-run banks, which have a market share of about 70% and account for over 80% of bad loans in the Indian banking system, is aimed at building scale and bolstering their risk-taking ability.
The idea of bank mergers has been around since at least 1991, when former Reserve Bank of India (RBI) 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 P. J. Nayak panel 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, Jaitley had said in August. According to experts, the consolidation plan along with measures such as capital infusions in weak banks will trigger a revival.
The State Bank of India merged operations of five of its associate banks and Bharatiya Mahila Bank with itself earlier this year, marking the first consolidation move in the sector following the bad loan crisis. The merger has reduced the number of state-controlled banks to 21 from 26.