The Cabinet decision comes at a time when when non-food credit data showed growth crashed to just 6.3% year-on-year in the fortnight through February 14, the lowest since May 2017.
Finance minister Nirmala Sitharaman on Wednesday said the proposed amalgamation of 10 state-run banks to create four larger lenders will come into effect from the intended date of April 1, 2020. Earlier in the day, the Cabinet committee on economic affairs (CCEA) cleared the amalgamation proposal, ending any uncertainty over the timing of the biggest consolidation exercise in banking and likely pushing the entities to reverse the slide in the pace of lending.
“The banks’ merger is on course and decisions have already been taken by the respective bank boards,” she said. The Cabinet decision may have come on Wednesday but the public-sector banks (PSBs) were already doing everything they were required to do to facilitate this exercise since last year’s announcement, she said, seeking to refute perceptions that the banks weren’t given much time to prepare for implementation.
There is no regulatory hurdle to amalgamation as well, and the exercise won’t hit the pace of core banking of any of these lenders, she said.
The government had in August last year announced that Oriental Bank of Commerce and United Bank would be merged into Punjab National Bank (PNB) to create the country’s largest state-run bank after SBI, with a total business of close to Rs 18 lakh crore. Similarly, Syndicate Bank is to be amalgamated with Canara Bank, and Andhra Bank and Corporation Bank will be merged into Union Bank. Also, Allahabad Bank will be amalgamated with Indian Bank. Subsequently, the boards of these banks had endorsed the plan and firmed up amalgamation schemes.
The Cabinet decision comes at a time when when non-food credit data showed growth crashed to just 6.3% year-on-year in the fortnight through February 14, the lowest since May 2017. In the December quarter, the outstanding advances of the 10 amalgamation candidates dropped to just 3.9% year-on-year, against 6.8% of SBI and about 7% for scheduled commercial banks, with some bankers blaming the uncertainty over the merger deadline for the decline in credit push at the branch level.
The consolidation exercise is aimed at creating only a few but strong banks to support the rising credit appetite of the economy, help reverse a slide in economic growth and cut costs through greater synergy. Coupled with the two sets of consolidations done in 2018, the latest merger decision will reduce the number of public sector banks to 12 from 27 in 2017. Each of the amalgamated entity will have a business of over Rs eight lakh crore, according to an official statement.
Sitharaman also highlighted “considerable gains” of the amalgamation of Vijaya Bank and Dena Bank with Bank of Baroda in the first year itself, with over 13 crore customers of the bank getting access to a pan-India network of about 9,400 branches, 13,000 ATMs and 85,000 employees. The bank has posted strong financial performance in the first three quarters post the amalgamation, vis-à-vis the performance of the three standalone banks a year ago, with operating profit rising by 11.4% (Rs 1,487 crore), deposits increasing by 8.8%, capital ratio soaring by 171 basis points, and retail lending growing by 15.3%. Bank of Baroda has also reduced the average retail loan sanctioning time from 23 days earlier to 11 days.
The successful experience of merging SBI with five of its subsidiaries and Bharatiya Mahila Bank in 2017 had first given the government the confidence that more rounds of consolidation could be handled without hiccups.