Govt grants in-principle approval to public sector bank mergers

Public sector banks’ merger process may see a ray of hope yet again as the Cabinet has given “in-principle approval” to set up an alternative mechanism to go ahead with the consolidation process.

A group of ministers (GoM) will be formed on the basis of an alternative mechanism for the merger of public sector banks, according to CNBC Awaaz sources.

The sources add that while the in-principle approval for the next level of PSU (public sector undertaking) bank mergers has been given, the names of the banks for the merger will be submitted to the GoM.

The names of the banks to be merged will be decided on four major points -- profit of the banks chosen, similar geographical coverage, comparable asset quality and capital adequacy ratios.

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The merger of the government banks will be initiated under Sec 9(2)(c) & 9(6) of Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970. All banks except State Bank of India and IDBI Bank come under this section.

In April, State Bank of India completed one of the biggest mergers in banking history absorbing six banks - five associates and Bharatiya Mahila Bank in April, creating one of the top 50 global banks, accounting for a quarter of all outstanding loans in the country.

On Tuesday, SBI Chairman Arundhati Bhattacharya said the economy needs bigger banks to meet its growing needs, but they should be nimble in their response.

Joining finance minister Arun Jaitley and Reserve Bank of India governor Urjit Patel in their campaign for consolidation of state-run banks, Bhattacharya said, "Mergers should be such that it should benefit the customers and should also result in adding value to shareholders...Mergers should reduce dependent of capital resources from the government."

On Saturday, Patel said that the central bank is in dialogue with the government to prepare a package of measures including mergers to enable PSBs to shore up requisite capital in a time-bound manner.

"The measures could include a combination of capital-raising from the market, dilution of government holdings, additional capital infusion by the government, mergers based on strategic fit, sale of non-core assets, etc.," he said.