The Finance Ministry of India, just days after the Union Cabinet approved a framework to oversee proposals for the merger of banks has written to the state-owned banks asking them to start looking at the possibility of consolidation, including discussions at the board level according to a report by The Indian Express. The news was confirmed by the senior bankers who said that most banks were yet to even start the process of identifying potential lenders with whom a merger could be considered based on geographical reach, branch network or franchise, loan portfolio, deposit spread, and other synergies.
This decision has come in the backdrop of rising bad loans that have underlined a growing need for huge capital infusion. In fact on Saturday, the bankers said that they are betting on the Insolvency and Bankruptcy Code and the process of National Company Law Tribunal for getting quick resolutions in order to solve the problems of bad loans, according to a report by IANS. “The Insolvency and Bankruptcy Code, 2016 is a game-changer,” State Bank of India’s Managing Director (National Banking Group), Rajnish Kumar said, adding that it will greatly increase the pace of resolution of stressed assets.
Meanwhile, Bank of India’s MD and CEO Dinabandhu Mohapatra said at an event organised by CII said, “With the guideline of earlier restructuring models (S4A, 5/25 and others), the lenders tried their best to solve the bad loans issues. Some of the stressed accounts were addressed but some bigger problems were not solved. The NCLT and IBC is an improved version. The response under the process is so far so good.”
Despite the latest communication by the Finance ministry, the top management of banks are reluctant, given their functioning as independent entities with different work cultures for decades, a banker told IE. However, Finance Minister Arun Jaitley believes that the experience with consolidation has been positive so far.
Earlier this year, even the RBI Governor Urjit Patel had said that the system would be better off with fewer but healthier bank. Patel had added that the banks should bear the burden of recapitalisation themselves, rather than relying on the government.