Cabinet agrees to merge PSU banks after SBI consolidation, appoints panel to supervise

The Union Cabinet has approved the framework for merging state-owned banks. Plans are to consolidate a total of 21 public sector banks, with the details of these banks still awaited. The mergers will be to bring the number of public sector banks from 21 down to somewhere between 10 and 15.

An alternative mechanism will be brought up to give in-principle approval to the proposals of banks to prepare schemes of amalgamation, statement Ministry of Finance. A panel of ministers will look after the entire process of merger of PSU banks, said Finance Minister Arun Jaitley.

Following this, banks will prepare their merger schemes in accordance to legal boundaries and SEBI regulations. The final scheme will be notified by the Central Government as consulted with Reserve Bankk of India.

The motive behind the decision is to modify public sector banks according to suit the credit needs of the growing economy that is India, Also, the entities formed after merging PSU banks will be able to absorb shocks and can generate capital without depending on the state exchequer.

#CabinetDecision: #Cabinet approves framework for consolidation of public sector banks https://t.co/Al8tcmICfn pic.twitter.com/dQHrfb4qaF

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The Cabinet decision comes shortly after State Bank of India merged with five of its other associate banks and Bharatiya Mahila Bank to form the 45th largest bank in the world. While the consolidation faced minor hiccups, if any, it did led to SBI's gross non-performing assets climbing to 10 per cent, the report said.

SBI is also rationalising branches and re-deploying staff to cut costs. This, however, has seen little resistance from the SBI employees or those from the banks that were merged with it.

Meanwhile, State Bank of India chairperson Arundhati Bhattacharya too called for more consolidation among the public sector banks, saying this could reduce their dependence on government for capital.

The merger of the state-run banks should open up more capital generation avenues, both internally and from market, for the merged entity, she said while in an interview with the news agency PTI.

The merger, however, has also led to a massive spike in SBI's provisions and its gross non-performing assests that reportedly came close to 10 per cent in the first consolidated results announced earlier this month. These problems are expected to be seen when government goes on with merging other public sector banks in the country too.

"From a government point of view, besides an increased stream of dividends, which forms a part of their non-tax revenue, mergers of state-run banks can also reduce dependence of the merged bank on government for the future capital infusion," Bhattacharya said while delivering the 14th Nani A Palkhivala memorial lecture here this evening.  

Merger of public sector banks must increase the role of internal and market resources and thus reduce government's dependency, she explained.

From an institutional and investors point of view, the available market float of a merged bank's shares must appreciate, she said, adding that these considerations have at least guided the merger decision of SBI. As of today, shares of SBI, Punjab National Bank, bank of Baroda rose after Cabinet's nod to merger of PSU banks.

Bhattacharya also pointed out that mergers in the banking sector will lead to greater concentration of payment and settlement flows as there will be fewer parties in the financial sector.

"Now, is this also a hindrance or is this going to be beneficial, but given the cyber security risks that we currently run, probably this could also be beneficial," Ms Bhattacharya said.

However, operational risks could increase post-merger as the size of operations grows and since the distance between management and operational personnel is greater, the administrative systems become more complex, she warned.

(With PTI inputs)

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