Govt to back public sector banks' M&A proposals, says Pranab

Favouring consolidation among public sector banks, finance minister Pranab Mukherjee today reiterated that if bank managements put forward merger and acquisition (M&A) proposals, the government would support them as shareholder.

Addressing public sector bank chiefs, Mukherjee said, “The process of

consolidation of banks may be necessary to improve competitiveness of Indian banks globally and also to reduce the risk to financial stability.”

“As the main shareholder, the government has already announced that it wants to recapitalise public sector banks to enable them to achieve capital adequacy of 12 per cent. The government will ensure that credit growth of public sector banks does not suffer for want of capital,” he said.

State Bank of India (SBI) Chairman O P Bhatt said the largest lender of the country would go ahead with its plans to consolidate six associate banks upon getting the green light from the government. SBI has already merged State Bank of Saurashtra with itself last year.

Another public sector lender, IDBI Bank, is also scouting for M&A targets. “We have a growth map to be implemented by 2012 and the inorganic route (M&As) is an important part of our strategy,” said a senior IDBI Bank official.

Ashwin Parekh, partner and national leader for financial sector practice at Ernst & Young, said: “There is little contraction here. While the government expects proposals for consolidation to emanate from bank managements, it is also infusing capital into the banks to maintain a certain level of capital adequacy and support their credit growth.”

Parekh further said that the core issue of legal provisions on M&As in public sector banking was not being addressed. Under the present legal provisions, the government had to come up with a scheme (for M&As) in consultation with the Reserve Bank of India (RBI). Thus, there were limits on bank managements to put forward proposals on their own.

The legal environment under which public sector banks were governed needed a change. They were being governed by the Banking Companies (Acquisition and Transfer of Undertakings) Act. They had to be brought under the Companies Act to give them a corporate structure and ensure sound governance, he added.

In the early part of this decade, Union Bank of India and Bank of India had come close to a merger but opposition from employees kept them from pushing the proposal.

Questioning the very basis of M&As of public sector banks, C H Venkatachalam, convener, United Forum of Bank Unions (UFBU), said: “There is no need for it. It will only mean a reduction in the number of branches as some of them will be closed as part of rationalisation. This will be quite contrary to what we want now.”

The need was to open more branches to expand coverage and reach to the needy, especially in rural areas, he said, adding that if the government wanted state-owned banks to increase lending, it should infuse more capital into them.