The government has plans to merge some state-run banks to cut their losses and improve their capital adequacy ratios. During two meetings with interim finance minister Piyush Goyal, top bankers discussed such a possibility.
The State Bank of India, which has itself gone through a process of merging the associate banks with itself, is believed to have prepared a presentation on the benefits of such a move.Officials said Calcutta-based Allahabad Bank and Delhi-based Punjab National Bank are a candidate for merger.
The other plan being talked about in North Block is a mega consolidation of three state-run banks - Bank of Baroda with the Oriental Bank of Commerce and the Central Bank of India. Officials said instead of selling off IDBI as planned earlier, the sick bank could be tagged on to this mega merger.
"A selloff of IDBI is justified, but this being a pre-election year, the government may decide not to sell it. However, there is resistance from other PSU banks to take IDBI in any planned merger," said officials.
PNB has bad loans worth Rs 86,620 crore, while Allahabad Bank has bad loans of Rs 10, 326 crore. While the former is strong in north India, the latter is strong in the east. "Synergies could result from the merger," the officials said.
Similar benefits could be gained from the BoB-Oriental Bank-Central Bank merger. The merged entity would have assets worth Rs 11.68 lakh crore. However, except BoB, the other two are under the RBI's prompt corrective action (PCA), which imposes limits on their lending.
Once a bank is placed under PCA, it is barred from distributing dividends, remitting profits and disbursing fresh loans. Banks are also stopped from expanding their branch networks and need to maintain higher provisions. The mergers are expected to allow weak banks to sell assets, reduce overheads and shut loss-making branches.
In August last year, the Union cabinet gave in-principle approval for the merger of more state-run banks, but since then the plans have been drawn up and redrawn without actual action on the ground. Last year, the government merged the State Bank of India's five subsidiaries with the country's largest lender, creating a behemoth with assets of around $37 trillion.
"The objective is to create strong banks and the experience of mergers has so far been that they do help strengthen banks, cut down flabs and create positive synergies," said officials.
The finance ministry feels consolidation will prevent multiplicity of resources being spent in the same area and strengthen banks to deal with shocks. Studies are being conducted on which bank is to be merged with which other PSU lender. "There are studies on manpower, technology merger of various banks... we have to take them forward," said officials.
The government hopes the proposed mergers will help state-run banks to reduce their bad loans and achieve economies of scale and operational efficiency. However, experts differed on the possible benefits of the move. Former Punjab National Bank chairman K. C. Chakravorty has cautioned "merging inefficient banks would not necessarily help create efficiency".
The idea to merge state-run banks has been around for some time, but gained momentum after a 2014 report by the PJ Nayak Committee which said the government has to work towards reducing its liability to recapitalise banks. It recommended either privatisation or consolidation.
Source- Telegraph India
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