Cabinet approves plans to merge PSU banks-The final scheme will be notified by the central government in consultation with the Reserve Bank.

 The Union Cabinet has reportedly given an in-principle approval for merger of PSU banks, paving the way for the government’s ambitious plan for consolidation among state-run lenders to help them gain efficiency and scale. Public sector bank shares surged on the news, with the Nifty PSU Bank index gaining as much as 1.8% to 3,290.4 points. Allahabad Bank was the top gainer, up 4.9%, while Bank of India shares jumped 3.8%; Punjab National Bank rose 3.44%; Bank of Baroda gained 1.6%; and India’s largest lender SBI was up 1.37%.

The government is pushing for consolidation among the state-run banks in order to help the lenders gain efficiency and scale, and operate without the support of repeated capital infusion to bolster their balance sheets. The government is reported to be mulling creating six large public sector banks of global scale, also with an aim to help the smaller banks with weaker balance sheets get support from the larger ones with strong finances.

The development comes close on the heels of State Bank of India’s move to merge its five associate banks and Bhartiya Mahila Bank with itself effective April 1. The merger will further expand the size of State Bank of India, which, with over 500 million customers now, would be counted among the top 50 banks in the world. The merged entity now has a deposit base of more than Rs 26 lakh crore and advances level of Rs 18.50 lakh crore.

TV news channels ET Now and CNBC TV18 reported citing unidentified sources that the Union Cabinet has given an in-principle approval for alternative mechanism for PSU banks merger. The reports further said that the public sector banks’ boards will themselves decide the final contours of the proposed amalgamation, and will then seek approval from the GoM (Group of Ministers).

CNBC TV18 report said that the names of the banks to be merged with each other would be considered on the basis of four major aspects: 1) Banks to be merged should cover same regions; 2) asset quality of the entities to merged should be comparable; 3) capital adequacy of the banks to be merged should be comparable; and 4) profits of the banks to be merged would also be considered.

Given that India’s PSU banks are reeling under the burden of massive stressed assets, it has now become imperative for the government to shore up these lenders finances and strengthen their balance sheets. The central government and the Reserve Bank of India are already working on a recapitalisation plan for public sectors banks. The proposed consolidation is also partly being seen in that direction.

he government today decided to set up an Alternative Mechanism to oversee the proposals for consolidation of public sector banks (PSBs) with a view to creating fewer but stronger lenders. 

The Alternative Mechanism will be decided by Prime Minister Narendra Modi, Finance Minister Arun Jaitley said after the Union Cabinet meeting. 

The Cabinet gave in-principle nod to the constitution of the mechanism which will clear proposals of banks for mergers and amalgamation, he said. 

The government aims to create strong and competitive banks in public sector space to meet the credit needs of the growing economy, absorb shocks and have the capacity to raise resources without depending on the state exchequer, he said. 

The decision regarding creating strong and competitive banks would be solely based on commercial considerations, he added. 

After the in-principle approval, Jaitley said, the banks will take steps in accordance with law and Sebi's requirements. 

The final scheme will be notified by the central government in consultation with the Reserve Bank.