Large public sector banks may kick off mergers

The process may begin with banks where govt holds around 51%

Consolidation in the public sector banking space might begin with large banks in which the government holding is close to 51 per cent.

Government officials said the move would enable these banks to expand their business, which could otherwise be hampered by constraints on raising capital.

At present, the law bars government holding in public sector banks from falling below 51 per cent. The government’s move to provide additional capital to these banks will help them meet their fund requirements up to 2012. After the capital infusion, some of them will see an increase in government holding.

An official said the government could start with banks in which its holding was close to the 51 per cent floor. The government holds less than 55 per cent in six banks — Oriental Bank of Commerce (OBC), Dena Bank, Andhra Bank, Bank of Baroda (BoB), IDBI Bank and Vijaya Bank. There are four banks — Allahabad Bank, Union Bank of India, Corporation Bank and Punjab National Bank (PNB) — in which the government holds between 55 and 60 per cent.

However, it is unlikely that the government will allow Dena Bank or Andhra Bank to acquire other banks. So, PNB, BoB or Union Bank would be allowed to merge smaller players with themselves, analysts said. In case of IDBI Bank, the government, at the time of the repeal of the law governing the erstwhile development financial institution, had told Parliament that the bank would not be merged with another entity.

Sources said the government was in the process of identifying potential merger targets, following which a framework would be laid down.

“In the international market, size counts. If you want to be an effective player, you have to have size. Public sector banks are now feeling the crunch. Moreover, organically, a bank may take years to achieve that size, but inorganically it can be done in a much lesser time. It will also be easier for us to give money to a merged entity,” said a government official.

The country’s largest public sector bank, State Bank of India (SBI), was ranked 64th in the list of the world’s top 1,000 banks in 2009. PNB and Bank of India were placed at 239 and 263, respectively. SBI has almost 18 per cent share of the domestic market, whereas the second-largest government bank, PNB, has only 5 per cent market share.

A high-level committee on financial sector assessment headed by former Reserve Bank of India Deputy Governor Rakesh Mohan had said that some public sector banks did not have the leeway to raise fresh capital and “one option would be to consider merging banks that are on the borderline of 51 per cent state-ownership with banks where the government holding is significantly higher”.

Finance Minister Pranab Mukherjee had earlier said that public sector banks should look at consolidation as a serious option in order to reduce the risk of financial instability and to face competition.