The government has put on hold all proposals to merge state-owned banks. The Prime Minister's Office is believed to be unwilling to give its nod to mergers at this point of time, keeping in mind political ramifications.
The Left parties have been opposing bank mergers. The PMO's decision, in effect, deals a blow to consolidation in the banking industry.
Among other things, the government had proposed to merge the Mumbai-based Union Bank of India and Bank of India, to create India's second largest commercial bank after the State Bank of India. The new entity, to be christened Union & Bank of India, was expected to be launched on April 1.
While a formal proposal for a Union Bank-BoI merger has not been received, progress has been made by the managements of the two banks. The proposal has also been discussed with the government.
The finance ministry was also contemplating two other mergers (officials refused to disclose the names) but except for the IDBI-IDBI Bank merger, no other matter is under consideration. A merger of IDBI and IIBI is, however, in the works.
"The finance ministry is in favour of consolidation for which the banks have to come forward, but we have to contend with the political reality," said a senior official.
A merger of Dena Bank and Bank of Baroda to create a regional giant was also been on the cards, after the Union Bank-BoI merger went through. However, with the first merger plan being shelved, the question of going ahead with the Dena-BoB plan did not arise, sources said.
Finance Minister P Chidambaram had flagged off the issue of banking consolidation during the Indian Banks' Association (IBA) annual general meeting last August. He reiterated the point while delivering his Budget speech last month.
The finance ministry had agreed to the merger of BoI and Union Bank which had been proposed last year and received the green signal from the previous government.
Had the old government come back to power, the merger would have taken place by this time.
The BoI-Union Bank merger would have created a bank with an asset base of over Rs 1,43,000 crore, making it the second largest commercial bank in the country, bigger than ICICI Bank.
It would have had a network of 4,582 branches and over 68,000 employees. The plan was finalised up to the last detail, including the name of the merged entity and its logo.
The chairman of a large public sector bank said the consolidation of state-owned banks should be encouraged as "we need big banks to compete with foreign banks when they will be allowed to take over local private banks a few years down the line."
Another bank CEO said that political compulsions may not allow the government to push for consolidation aggressively.
