for what will turn out to be the second wave of consolidation in the banking sector.
Country’s largest lender State Bank of India has completed the process of merging State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala and State Bank of Travancore and Bharatiya Mahila Bank with itself.
The government prefers mergers among strong banks while at same time shrinks the capital base and balance sheet of the weak banks.
The Centre has already started signing memorandum of understanding (MoU) with the PSBs linking capital infusion to performance. Non-performing banks are being asked to sell assets, close non-profitable branches and shrink their balance sheet, in an attempt to reduce the strain on budgetary resources, finance ministry sources told a financial daily.
“There are 3-4 PSU banks where we have scope for consolidation. The discussions on merger are yet to fructify but the preference is for a merger among relatively strong banks instead of consolidating a weak bank into a strong bank,” a finance ministry official said. Punjab National Bank, Bank of Baroda, Bank of India and Canara Bank are being seen as the lead bankers to merge other banks with themselves, the sources said. The government has already sounded out a couple of large banks for possible acquisitions in the PSU banking space.
“There have been a number of discussions on possible mergers but these are really at initial stages. Ultimately, it is the government which has to take a call on these and we can only look to implement it,” a senior executive at the Punjab National Bank said on condition of anonymity, without divulging any further details.
Last month, the RBI Governor Urjit Patel said in New York 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.
In the next leg of consolidation, while a merger among relatively strong banks is likely, weak banks are expected to shrink in their size. This is expected to reduce the pressure on the government of providing capital to the banks. In 2015, Centre launched the Indradhanush programme, to infuse Rs 70,000 crore into public banks. The government estimates that public banks would require about Rs 1.8 lakh crore of capital. This year Centre will put in Rs 10,000 crore into public banks.
Earlier, Finance Minister Arun Jaitley indicated that the weak banks will have to sell assets, reduce overheads or shut loss-making branches, among others.
“We are also planning the process that when the MoUs are signed, with the public sector banks which seek capitalisation, that there would be some specific provision in those MoUs also, which would be incorporated. This would relate to immediate cash release initiatives, such as sale of assets, closure of non-profitable branches, reduction of overheads, business turnaround initiatives, such as strengthening of the credit appraisal process under active NPA management and several others,” Jaitley had said.