Cabinet’s in-principle nod to merger of PSU banks

Sanjeev Sharma

Tribune News Service

New Delhi, August 23

Kicking off a major consolidation among 20 public sector banks, the Union Cabinet today gave an in-principle approval for an alternative mechanism to oversee amalgamations with a view to creating fewer and stronger entities which do not require as much government funds for recapitalisation.

The alternative mechanism would be a committee of ministers that will be set up to consider proposals which come from the boards of the banks. One of the stated objectives of the consolidation exercise is to create banks that have the capacity to raise resources without depending unduly on the state exchequer, which is likely to free up government resources.

While the caveat is that the proposal must start from the boards of banks, it is evident that the government being the majority shareholder in all the public sector banks would have a say in the matter. It is learnt that the process has been in the works for some time and some banks have already held discussions.

While a major consolidation in the PSU banking space has been advocated by the government functionaries on several occasions, it is the first time that the Union Cabinet has put its seal. PSU bank stocks went up in trade after the announcement helping the market to close up by 276 points. Punjab National Bank, Bank of Baroda, Allahabad Bank, Union Bank of India and Bank of India recorded moderate to sizeable gains.

An official statement said 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 by announcing amalgamation of six banks into State Bank of India.

Finance Minister Arun Jaitley said the decision regarding creating strong and competitive banks would be solely based on commercial considerations. Jaitley said the consolidation would add commercial strength to the banks, prevent multiplicity of resources and improve the ability of the banks to absorb shocks.

He said the experience of consolidation has been positive. The proposals received from banks for in-principle approval to formulate schemes of amalgamation will be placed before the Alternative Mechanism.

There are now 20 public sector banks other than SBI. The government said the banking scenario has changed since 1970 when banks were nationalised, with an increased banking presence from private sector banks, non-banking financial companies, regional rural banks, payment banks and small finance banks.

“The decision is expected to facilitate the creation of strong and competitive banks in public sector space 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 government said.