» Business » Cabinet fast-tracks merger of public sector banks

Cabinet fast-tracks merger of public sector banks

By Arup Roychoudhury & Indivjal Dhasmana
August 24, 2017 15:24 IST
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The mergers will not involve any cash but only share swaps

The Cabinet on Wednesday approved a framework to speed up mergers of public sector banks, the first of which could take place by March.

The mergers will not involve any cash but only share swaps. The government also said there would be no job losses after any of the mergers. PSU bank unions had gone on a strike on Tuesday.

The decision lifted banking stocks, but bankers said the decision should not be forced on them. Finance Minister Arun Jaitley made it clear the process would be initiated by the boards of the banks.


An official said a number of banks were discussing merger possibilities among themselves.

“The government is saying it will not force (mergers). They will leave it to the banks. If the players find it reasonable and profitable, they will work on it," said State Bank of India chairperson Arundhati Bhattacharya.

Business Standard had reported in June that Bank of Baroda and Canara Bank could acquire smaller banks like Dena Bank, Vijaya Bank, UCO Bank, Union Bank of India and United Bank of India.

"You have a large number of banks in the public sector. The object is to create strong banks. Our experience of consolidation has been positive so far,” Jaitley said at a media briefing after the Cabinet meeting.

He added the decision to merge would be “solely based on commercial considerations”.

The official said once banks had decided to merge and had worked out issues like share valuation and swap ratio, the exchanges would be notified.

Simultaneously, the Reserve Bank of India and the government would study and approve the proposal, the person said. The final approval will be given by the Cabinet.

The alternative mechanism, similar to structures put in place to approve disinvestment proposals, would be decided by Prime Minister Narendra Modi and overseen by Jaitley, sources said.

After approval in principle from the RBI and the government, the banks would take steps to merge in accordance with the law and the requirements of the Securities and the Exchange Board of India, an official statement said.

“The final scheme (of each merger) will be notified by the central government in consultation with the RBI,” it added.

The mergers will take place under the Banking Companies (Acquisition and Transfer of Undertakings) Act.

The official said the law allowed mergers. Bids for financial and legal advisers will be issued by the banks. A strategy to revive public sector banks has pegged their recapitalisation by the government at Rs 70,000 crore (Rs 700 billion) by 2018-19.

The government has allocated Rs 25,000 crore each in 2015-16 and 2016-17 and proposes to infuse another Rs 10,000 crore (Rs 100 billion) this year.

The official said mergers would reduce dependence on the exchequer for capitalisation.

Talks of bank mergers gathered momentum after five of State Bank of India’s associate banks and Bharatiya Mahila Bank merged with the parent entity.

“Consolidation among public sector banks is structurally positive as they will benefit from operational and functional synergies.

Mergers among similar banks can also result in effective implementation of non-performing asset resolution strategies,” said Krishnan Sitaraman, senior director, CRISIL Ratings.

The gross NPAs of public sector banks rose from Rs 2,80,637 crore in June 2015 to Rs 5,60,841 crore a year later and to Rs 7,38,776 crore in June 2017.

The real picture about NPAs started  emerging after an asset quality review of banks initiated by the Reserve Bank of India under then governor Raghuram Rajan.

Additional inputs by Abhijit Lele

Photograph: Danish Siddiqui/Reuters

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Arup Roychoudhury & Indivjal Dhasmana
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