After advocating consolidation for over five years without any voluntary response from state-owned banks, the government has finally stepped in give the process momentum. It has called chairpersons of five large public sector banks–Punjab National Bank, Bank of Baroda, Union Bank, Bank of India, IDBI Bank and Central Bank of India–next week to kick-start discussions on possible mergers & acquisitions.
?We reckon it will be a long-drawn process. For now, we are inviting six big banks to understand their views. After this, we will invite mid- and small-sized banks to hear their apprehensions, if any,? a government official said. Another senior official said that instead of forming a committee, it was felt that an informal dialogue with banks would be a more practical approach.
While finer details will emerge slowly, the government is calibrating ways to merge small- and mid-sized banks with larger ones. Besides cultural and other similarities, a bank?s geographical presence will play a key role. For instance, if a bank has a substantial presence in north India, ideally a small- or a mid-sized bank will be chosen that has a greater presence elsewhere, he said.
The chairman of a state-owned bank, who did not wish to be named, said, ?Unless the government steps in, consolidation will never happen.? Bank consolidation is a sensitive issue. One the one hand, small banks are apprehensive about losing their identity and, on the other, bigger banks want a clear plan before the exercise starts in earnest.
?We want to know what banks will gain from consolidation. What should be the model for M&As? Should strong banks be merged with stronger ones or be allowed to acquire weaker ones? Will geographical presence be a deciding factor?? asked the chief of another public sector bank.
?China has five big banks that have a world presence. But our largest bank, State Bank of India, doesn?t even figure in the top 20. We need bigger banks with a greater presence in the world,? added the official.
Public sector banks account for almost three-quarters of the country?s total banking assets.
Consolidation of banks has been on the government?s agenda for more than five years. Finance minister Pranab Mukherjee has emphasised the significance of bigger banks on various occasions. In a performance review with PSB chiefs in June, he had urged banks to look at consolidation as a ?serious option? to reduce risk to financial stability and help prepare for competition.
?Any consolidation initiative in the banking sector would be viewed positively and the government, as a majority shareholder, would continue to play a supportive role in the process,? Mukherjee had said. Besides, finance secretary Ashok Chawla and RBI governor D Subbarao have also supported the idea and urged banks to explore opportunities to add muscle by merging with other banks.