PSU Banks Merger is likely to be finalized by December End this Year.

The Finance Ministry has decided to keep the concept paper ready for the PSU banks’ merger in a month or so and the proposed merger would be guided by bigger banks’ regional expansion plans. It is expected that the final merger is likely to happen by December end this year.

The SBI had merged with five associate banks to create a behemoth with over Rs 37 lakh crore in assets earlier this year. However, the Finance Ministry wants to merge State-run banks into mega-corporations so that they can stand up to competition from global banks which will eventually be allowed to enter India as part of a WTO deal on services or as part of bilateral or regional free trade pacts.

The Finance Ministry has been consistently working on the move since the smooth merger of the SBI with its associate banks. We hope the concept paper on the proposed PSU banks merger should be ready in a month or so and the merger will be guided by bigger banks’ regional expansion plans. We have already asked all bank chiefs in this regard, and also sought the expansion plans from all bigger banks such as Punjab National Bank (PNB), Bank of Baroda (BoB), Bank of India (BoI) and Canara Bank for the prospective merger,” a top official in Finance Ministry told The Pioneer. 

It is expected that the possible merger will create 4-5 big national banks in a global competitive format. “The merger may be in the form of regional consolidation so that a north India based-bank takes over a smaller bank from the north and similarly, a strong southern bank with a strong bank from the east” said the top official, adding that there may be some key factors like regional balance, geographical reach, financial burden and smooth human resource transition that have to be looked into while taking a merger decision.

According to sources close to the developments, the Finance Ministry officials have already held meetings with the top brass of 10 State-owned banks recently, and the bank bosses have been informed about the state of affairs in the PSBs and the possible tools they could use to help to consolidate the sector. “The merger proposals in such cases will also need clearance from the Competition Commission of India (CCI),” sources said.

Keeping several issues like bad loan or non-performing asset (NPA) of almost all PSBs, the Government is very much aware of its merger consequences. If it goes with the move by merging a weak bank with another bank in a whimsical manner, then the profitability of the larger bank may be hit to some extent.

When asked about the post-merger scenario and its profitability aspect, another senior official said, “The merger move is to keep our banks in good health and internationally sustainable and competitive. As our banks are mostly listed in the stock exchanges, we cannot burden their prime shareholders with such quirky decisions.”

On Tuesday, the Finance Ministry has also sought help of NITI Aayog and other global consultancy firms to examine the possibility of next round of consolidation of PSBs with an aim to create only a few lenders of global size and scale.

“We expect a detailed report from NITI Aayog on consolidation in about a month or so and some global consultancy firms are also examining the issue,” said a senior Government official, adding that the report of NITI Aayog will set tone and tenure of the roadmap for consolidation in the future.

With the merger, the Government expects there would be a likely improvement in the NPA situation over the next two quarters and some movement on this front should begin soon. Total bad loans of public sector banks rose by over Rs 1 lakh crore to Rs 6.06 lakh crore during April-December of 2016-17, the bulk of which came from power, steel, roads & infrastructure and textile sectors.

Finance Minister Arun Jaitley has always expressed at several occasions that India needs 4-5 big banks of global size and scale, and further consolidation in the banking sector will be done at appropriate time. During 2016-17, the Government had also pumped in Rs 25,000 crore to boost their capital in the State-run banks.

In April 1, 2017, five associates and Bharatiya Mahila Bank (BMB) became part of the SBI, catapulting the country’s largest lender to among the top 50 banks in the world. State Bank of Bikaner and Jaipur (SBBJ), State Bank of Hyderabad (SBH), State Bank of Mysore (SBM), State Bank of Patiala (SBP) and State Bank of Travancore (SBT), besides BMB, were merged with SBI.

The Government in February had approved the merger of these five associate banks with the SBI. Later in March, the Cabinet approved merger of BMB as well. The SBI first merged State Bank of Saurashtra with itself in 2008. Two years later, State Bank of Indore was merged with it.