Amalgamation of banks is part of the government’s efforts to create a few but strong state-run lenders with much larger balance sheet to support the increasing need for credit of the fast-growing economy.
Consolidation of PSU banks into mega state-run lenders may dominate the reform agenda next, with the government unlikely to pursue further recapitalisation of banks. Narendra Modi’s NDA government has already infused around Rs 1.06 lakh crore in FY19 into PSU banks, which disproportionately share the burden of non-performing assets in the banking sector.
The government is unlikely to provide more capital to the PSU banks in the first half of FY20, given they seem well capitalised at the moment, the Financial Express reported earlier on Thursday. Given that banks are well capitalised the government now wants to further use reforms to tackle the banking sector problems.
In the pursuit of de-stressing the PSU banks suffering from NPA problem, the government has been following a 4R strategy — Recognition, Resolution, Recapitalisation and Reforms. Amalgamation of banks is part of the government’s efforts to create a few but strong state-run lenders with much larger balance sheet to support the increasing need for credit of the fast-growing economy.
Interim Finance Minister Piyush Goyal, in his budget speech 2019, had said that the government is opting for amalgamation of banks to reap the benefits of economies of scale, improve access to credit and cover larger geographical area.
Earlier in February, Finance Minister Arun Jaitley also pitched for the need of fewer and mega banks to achieve economies of scale in the sector. “India needs fewer and mega banks which are strong because in every sense, from borrowing rates to optimum utilisation, the economies of scale as far as the banking sector is concerned are of great help,” he said. Moreover, there would be no loss of jobs due to merger of public sector banks, Jaitley had said in the Lok Sabha. The cost of credit could also become cheaper, he added.
The government has in the past merged SBI with its five associate and Bharatiya Mahila Bank. The move seems to have turned out to be successful. Last year three other PSU Banks namely Bank of Baroda, Vijaya Bank and Dena Bank were amalgamated.