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.
