FM removes legal hurdles for PSU bank mergers

Excerpts from Power Breakfast on CNBC-TV18 Watch the full show »

Ever since he took over as Finance Minister, P Chidambaram has been an evangelist for consolidation among banks. The private sector banks do not need such persuasion, there have been quite a few among them. For co-operative banks, it is a dire necessity. They have been falling short of capital adequacy, in many cases the networth has turned negative. So the Finance Minister has played mid-wife for their merger with nationalised banks in this year's finance bill.

"Amalgamation and demerger of banking companies is tax neutral and this benefit will be extended to co-operative banks," says Finance Minister, P Chidambaram.

The merger of one private bank with another, or a private bank with a nationalised bank is tax neutral. So the finance bill will add a third category. But the benefit of set-off for unabsorbed depreciation or accumulated losses is not available when two nationalised banks merge, except when approved by a scheme of merger approved by the Reserve Bank. That provision was inserted two years ago when the failed Global Trust Bank was forcibly merged with Oriental Bank of Commerce .

But it is unlikely that nationalised banks will need this benefit, because no government can allow a nationalised bank to fail. As things stand, voluntary mergers between nationalised banks are not tax neutral. Finance ministry sources say this inadequacy is inadvertent and will be cured through an amendment to the finance bill. This was also the demand of the Indian Banks Association.

Even with the tax benefit, mergers among nationalised banks may be a far cry. This channel has reported that Canara and Dena Bank have made very nascent moves in this direction. But despite the obvious strategic fit, issues that seem trivial, like where the headquarters of the merged bank would be located, could come in the way. But the Finance Ministry wants to make sure that the road is clear from a taxation point of view.