After a gap of six years, the process of consolidation of public sector banks (PSBs) may restart by the end of the current financial year.
What is being considered is the merger of 3-4 smaller PSBs with larger ones in the first phase. In the subsequent phase, which will be implemented over the medium term, some of the resultant combined entities may be merged among themselves, official sources told FE.
Phased approach to consolidate smaller banks
The move will reflect a plan to create two PSBs large enough to be among the top 20 global banks, in consonance with India’s rising stature in the global economic landscape.
The PSB consolidation plan is also in line with the new public sector enterprises (PSE) policy unveiled in 2021 that aims to minimise the government’s presence in strategic sectors, including banking.
“Some action will be visible in the current financial year on the PSB consolidation front,” an official said on condition of anonymity.
Mega mergers aligned with global ambitions
The officials reckon that smaller PSBs, including Punjab & Sind Bank, Uco Bank and Bank of Maharashtra, won’t be able to match bigger banks when it comes to supporting larger ticket-size lending, efficiency and risk management. Such banks could therefore be among the candidates for mergers with their larger counterparts in the first phase.
During ‘Manthan’ last month, the finance ministry and top management of PSBs also agreed on the need to have two large PSBs among the top 20 banks globally.
The merger of five associate banks of the State Bank of India (SBI) with itself in April 2017 was a path-breaking act heralding large-scale bank mergers in subsequent years. The last major consolidation happened in 2019-2020 with the consolidation of 13 PSBs into five, bringing down the number of PSBs to 12 from 27 in March 2017.
The mergers have strengthened the public sector banks, with SBI now ranked at 43rd in terms of assets. Besides SBI, HDFC Bank in the private space also features in the top 100 global banks by total assets. China already has banks among the top 10.
Mergers of some of the existing PSBs will help create a financial system that can encourage risk-taking ability to support the pace of growth in a country that is slated to be the third-largest economy by 2027-28. As per the Viksit Bharat vision 2047, India has to create champions in each sector, with banking identified as a key sector.
In the evolving geopolitical scenarios, consolidation would provide impetus to amalgamated entities to support larger ticket-size lending, competitive operations by virtue of greater financial capacity and better resource mobilisation ability. The adoption of best practices across amalgamating entities would enable the banks to improve their cost efficiency and risk management, and also boost the goal of financial inclusion through wider reach.