Why in news?
The union Cabinet, recently, approved a framework to speed up mergers of public sector banks.
How does it work?
- The framework will address mergers of state-owned banks, planned privatisation in state-owned companies, minority stake sales, and the Centre’s new exchange traded fund.
- Under this, the Cabinet approved an “alternative mechanism” by which an inter-ministerial panel will be set up to supervise merger proposals.
- Under this, any proposal to amalgamate banks must be initiated by the boards of state-owned lenders.
- After getting in-principle approval, the banks will take steps in accordance with the law and SEBI requirements.
- The final scheme of amalgamation will be notified by the Central government in consultation with the Reserve Bank of India.
- It also emphasizes that a merger must be based purely on commercial considerations.
What created the need for this?
- Gross bad loan ratio of PSU banks are already close to 10 per cent.
- The RBI’s latest Financial Stability Report shows that this could be as high as 14.2 per cent by March 2018 if there is no economic rebound.
- Also, the credit rating agency, Moody’s has cautioned that the government would require huge sums if capitalisation of banks are the only option.
- Additionally, the twin balance-sheet problem of over-leveraged corporate balance-sheets and banks weighed down by bad loans is a cause of concern.
- The Alternative Mechanism is seen as an attempt to avoid the options of infusing capital for banks or divesting some of these weak banks.
What lies before the government?
- The mechanism aims at creating strong and competitive banks that can absorb shocks and have the capacity to raise resources.
- Through consolidations, public sector banks will benefit from operational and functional synergies, resulting in better efficiencies.
- However, though significant, mergers of state-owned banks are not the whole solution.
- Over and above this, the balance-sheets must be strengthened and governance issues with banking must be addressed.
- Government should also take note of the experiences of the past mergers especially the recent SBI and its associates' merger.
Source: Indian Express
