Initially the government may look to merge two large banks say BBB Chairman

Banks Board Bureau chairman Vinod Rai said that the government is keen on bank consolidation, but not before building strong balance sheet by addressing the bad debt problem, and in that case merger may happen first between two large banks.

Vinod Rai was speaking at the Credit Suisse annual investors conference, of which the foreign brokerage made a note to clients. Business Standard has a copy of the report.

“The government is waiting for the resolution of the NPL (non-performing loans) issue and wants improvement in balance sheet strength before going ahead with the consolidation process. The strength of balance sheet is a hurdle as there are not too many large strong PSUs that can be merged. Therefore, initially the government may look to merge two large banks,” the report said.

It would be preferable to create “strong regional entities”, but the biggest challenge in any merger would continue to be how to reduce the redundancies in terms of branches and employees. 

“To address this, various options are being considered such as branch swapping, early VRS (voluntary retirement schemes) and going slow on fresh hiring,” Credit Suisse wrote, attributing to Rai.

The government has already started the bank consolidation process by merging five associate banks with parent State Bank of India, effective April 1. The associate banks have also rolled out VRS schemes for their employees.