Kick-starting Consolidation
- Government picks PNB, Bank of Baroda, Bank of India and Canara Bank as possible acquirers.
- These banks have made presentations to the government.
- Merger candidates may not be picked purely on the basis of size.
- Regional banks such as Canara Bank, Vijaya Bank and Syndicate Bank are already in talks for a proposed merger.
The finance ministry has asked four big lenders to explore the possibility of merging with smaller banks, as the government moves to consolidate public sector banks, a senior finance ministry official told BloombergQuint on the condition of anonymity.
The government has picked relatively stronger lenders including Punjab National Bank, Bank of Baroda, Bank of India and Canara Bank as possible acquirers in this process of consolidation, said the official. The banks have already made presentations to the government on whether they are in a position to merge with smaller banks and the synergies that various combinations may throw up.
Last year, the government approved the merger of State Bank of India with its remaining five associate banks. The consolidation process went smoothly with the merger taking effect from April 1. In an interview to Bloomberg News earlier this month, Finance Minister Arun Jaitley said that the government would be contemplating a few more bank mergers following the merger of SBI with its associates.
The process appears to have been kick-started already even though there is no clear timeline for such mergers.
Banks have been asked to explore issues such as overlap of branches, technical integration and whether there would be anti-competition concerns that could emerge, said the official quoted above. The objective would be to ensure that the exercise does not turn out to be counterproductive, the official said.
Some analysts have raised concerns about whether mergers will do much to help public sector banks strengthen. In an interview with BloombergQuint last week, Karthik Srinivasan, group head of financial sector ratings at ICRA Ltd., questioned the purpose behind such consolidation. “Merging two weak banks is not going to create a strong one. Similarly, merging one strong and one weak bank is a not going to create a stronger entity,” said Srinivasan.
It has also often been the case that the merged entity ends up with a bigger problem on its hand. SBI is a case in point. The merged entity reported a net loss of Rs 3,000 crore in contrast to the standalone net profit of Rs 2,815 crore reported by the parent bank.
A lot would depend on the banks picked for mergers. When asked whether banks like Dena Bank and Syndicate Bank would be the ones to get folded into larger lenders, the official quoted above said it is 'premature' to say what the exact combinations would be.
Creating Regional Powerhouses?
Merger candidates may not be picked purely on the basis of size. Some small but financially stable banks are also in dialogue to merge with their peers, said this official.
Some of the Bengaluru-based banks which share their headquarters, such as Canara Bank, Vijaya Bank and Syndicate Bank are already in talks for a proposed merger, the official said. Similarly, Kolkata-based Allahabad Bank and UCO Bank may also form a combined entity.
While the government has put the idea out there for banks to mull, it has now left the exercise to them.
Clean Up Before Merger?
The push for consolidation among public sector banks comes at a time when the Indian banking sector is facing a bad loan crisis. Stressed assets on the books of Indian banks have hit 17 percent of all loans, according to a estimate put out by rating agency Moody’s last week.
As an attempt to clean up bad loans, the Reserve Bank of India and the government are now intervening directly. On Monday, the RBI directed banks to resolve 12 large accounts through the Insolvency and Bankruptcy Code.
The official quoted above, however, said that the government may not wait until the bad loan clean-up is complete and may allow the two processes to run alongside.
The government may not necessarily wait for the Reserve Bank of India to complete its exercise of cleaning up bad loans and may simultaneously go ahead with the consolidation process once the modalities are finalised, said the official.
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