Consolidation of public sector banks put on back burner

Time not right for merger, bankers tell Fin Min; Call for empowerment of board

Bankers have ruled out merger of public sector banks (PSB) in the near future, citing their current health. The banks have been facing pressure on profits, thanks to higher provisioning. This view has been communicated to the government during the recent two-day bankers retreat at Pune last week.

The bankers say the government should first empower boards. The proposal for merger should come from the boards rather than the government.

“There is no point in merging a small and weaker bank to a large one because if the bigger banks are facing headwinds on the asset quality front, there are pressures on the capital too. This is not the right time for consolidation,” said a chief executive of a PSB adding that the views have been communicated to the finance ministry. Bankers cited the example of the Global Trust Bank (GTB) and Oriental Bank of Commerce (OBC) merger in 2004. The decision to merge GTB, which was in a bad shape, was taken by the Reserve Bank of India (RBI). OBC, which was doing well at that time, saw its capital adequacy ratio declining and gross non performing assets (NPA) shooting up as GTB’s gross NPA was a close to 26 per cent. It took OBC some years after the merger to restore its financial health.

“The going was good at that time, so OBC eventually recovered. Now, when all the banks are seeing rise in NPAs, no bank will like to burden itself further,” he added.

During the retreat, the finance ministry  formed six working groups to deliberate on various issues and suggest a blueprint for reforms in the public sector banks. One of the group’s mandate was to discuss consolidation and restructuring of public sector banks for better operational and capital efficiency and better governance. The group consisted of 11 bankers from PSBs, apart from RBI and finance ministry officials.

Hasmukh Adhia, secretary department of financial services, said while consolidation should be decided by banks, the government will sensitise banks about the need for such measures, as the country needs large banks to support infrastructure development. He added Prime Minister Narendra Modi also emphasised on the need for increasing the size and scale of Indian banks.

P Chidambaram, during his stint as finance minister in the United Progressive Alliance government, had pushed for consolidation of PSBs. While the previous government supported the idea, it was against forcing banks to merge.