The government is considering merging at least four state-run banks as part of a larger consolidation plan - triggered by rising bad loans. The banks that could face the merger are: Bank of Baroda, IDBI Bank Ltd, Oriental Bank of Commerce and Central Bank of India, according to a report in the Mint. These four banks are under pressure with combined loss of Rs 21,646.38 crore in the financial year 2017-18. The merger will allow the weak banks to sell assets, reduce overheads and shut money-losing branches, the report said.
This year on May 25, Bank of Baroda reported a net loss of Rs 3,102.34 crore in the Jan-March quarter due to a jump in provisions for bad loans. The bank's provisions for non-performing assets for the quarter rose by 190 per cent year-on-year to Rs 7,052.53 crore in the last quarter of FY 2017-18.
After BoB, IDBI was the next to report net loss due to bad loans. IDBI Bank posted a net loss of Rs 5,662.76 crore in Q4 with gross NPA rising to 27.95 per cent of its loans at March 2018.
Except Bank of Baroda, all three banks - IDBI Bank Ltd, Oriental Bank of Commerce and Central Bank of India - are under the RBI's Prompt Corrective Action (PCA) framework. The PCA framework is a mechanism to maintain sound financial health of the banks. It facilitates banks - in breach of risk thresholds for identified areas of monitoring such as capital and asset quality - to take corrective measures so that they are protected from going into financial crisis.
Once placed under PCA, the banks are barred from distributing dividends, remitting profits and disbursing fresh loans. Banks are also stopped from expanding their branch networks and need to maintain higher provisions. Recently, IDBI Bank created a special department for managing bad loans and monitoring credit after it was put under watch by the RBI.
According to the report today, the department of financial services is considering a 51 per cent stake sale in IDBI Bank to a strategic partner for Rs 9,000-10,000 crore. "Dilution of (government) stake in IDBI Bank could also be achieved through stake sale to private equity investors," the business daily reported, citing a source.
Last year in August, the Union Cabinet chaired by Prime Minister Modi gave in-principle approval for public sector banks to amalgamate through an alternative mechanism. The government in a statement said that the decision would facilitate consolidation among the nationalised banks to create strong and competitive banks.
Months later, the government constituted the mechanism under the chairmanship of Finance Minister Arun Jaitley. In a press statement issued then, the government said: "The decision is expected to facilitate the creation of strong and competitive banks in public sector space to meet the credit needs of a growing economy, absorb shocks and have the capacity to raise resources without depending unduly on the state exchequer."
The mechanism will oversee the proposals coming from boards of PSBs for consolidation.
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