The Indian government has approved a framework for consolidation among public sector banks, including a proposal to set up an Alternative Mechanism to create strong banks. The framework states that merger decisions should originate from the banks and these should be based on commercial decisions. “The decision would facilitate consolidation among the Nationalised Banks to create strong and competitive banks,” the government said.
India's Finance Minister Arun Jaitley said the AM will oversee proposals coming from boards of public banks for consolidation and such a mechanism will enable quick facilitation. He said, “You have large number of banks in the public sector. The object is to create strong banks. Our experience of consolidation has been positive so far.” Officials in the ministry had earlier said that the government sees a scope merging of another 3-4 banks, when the State Bank of India merged itself with five of its associate banks.
“The decision regarding creating strong and competitive banks would be solely based on commercial considerations. The proposals received from banks for in-principle approval to formulate schemes of amalgamation shall be placed before the Alternative Mechanism. After in-principle nod, the banks will take steps in accordance with law and Sebi's requirements,” the government said. It added that the final scheme will be notified by Central Government in consultation with the RBI.
Jaitley said consolidation will improve capacity of the banking system to absorb shocks. “The decision is expected to facilitate the creation of strong and competitive banks in public sector 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 statement said. The government said the idea of consolidation was first suggested in 1991 but gained pace in 2016.
“In 1991, it was suggested that India should have fewer but stronger public sector banks. However, it was only in May 2016 that effective action to consolidate public sector banks began to be taken by announcing amalgamation of six banks into the State Bank of India. The merger was completed in record time, unlike earlier mergers of State Banks of Indore and Saurashtra.” The Centre launched the Indradhanush programme in 2015, to infuse £7 billion into public banks. The government estimates that public banks would require about £18 billion of capital.
RBI Governor Urjit Patel had said that the banking system in India could be better off if some public sector banks are consolidated so as to have fewer but healthier entities. Patel had also said that consolidation of banks could also entail sale of real estate where branches are redundant as well as offering voluntary retirement schemes to manage headcount and adding younger, digital-savvy personnel.
