Consolidation in the banking sector to have fewer and larger banks has gathered momentum as the government asks public sector banks to present merger proposals based on their commercial strengths.
The merger proposals would largely constitute factors such as capital strengths, geographical presence, asset quality, IT compatibility and human resource transition of the banks.
A large public sector bank chief said, "We were officially communicated by the Department of Financial Services last week. But there is no deadline for submission. Our bank’s board is yet to submit our proposal."
The government has been in touch with a few banks’ chief executives, who would steer the process of mergers. In the last few months, the finance ministry and top bankers have been in discussion to seriously consider the merger process. Post the discussions, an official communication was sent to the banks last week.
According to reports, four state-run lenders — Dena Bank, Syndicate Bank, Vijaya Bank and Canara Bank — have already made presentations to the government.
The bank chief quoted above said the issue is mainly about the synergies and the capital requirement. “Most public sector banks face capital constraints and asset quality problems. Hence with a merger, the pressure on provisions will be very high and most public sector banks are dealing huge non-performing assets (NPAs). Nothing has been crystallised so far.”
Last month, Cabinet gave its in-principle approval to the government to set up an ‘Alternative Mechanism’, which would comprise a Group of Ministers to oversee proposals for mergers among banks. While announcing the mechanism, Finance Minister Arun Jaitley stressed that the decision to create strong and competitive banks will be solely based on commercial considerations and such decisions must start from the boards of the banks.
The government said it will notify the final scheme on Alternative Mechanism in consultation with the Reserve Bank of India.
A framework had been conceived in which a bank’s board would first clear the decision to merge and then send the proposal to the ‘Alternative Mechanism’ for its in-principle approval. After the in-principle approval comes through, the bank will take steps in accordance with law and SEBI’s requirements.
The mechanism is meant to expedite the process overcoming some hurdles such as approval of the Competition Commission of India and fast-tracking the consolidation in the banking industry.
Another public sector bank head said, “I think it is a better idea to merge during this period and more efficiencies can be brought in with mergers. Also, during good times the merger could hamper the growth prospects. Hence, it is better to merge banks now and the entire pain can be borne in one go.”
After the merger of the country's largest bank State Bank of India with its five associates and Bharatiya Mahila Bank, the banking system has seen a huge precedent but it remains to be seen if banks would be better or worse off post the merger in terms of the asset quality and capital positions.
In the little indication given by bankers, it may take a few months before any concrete proposal crystallises into action to kick-start the consolidation in the banking sector.
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