Tackling bad loan stress: Govt may merge 27 PSU banks to improve efficiency

The government will consider merging some of its more than two dozen state-run banks (27 PSU banks), as it seeks to improve efficiency at the ailing lenders that dominate the nation's banking sector.

Bankers have "strongly supported" the idea of consolidation, suggesting the government form a panel of experts to devise a merger strategy, Arun Jaitley said after a two-day annual brainstorming event of industry leaders and officials from the central bank and finance ministry.

Finance Minister Arun Jaitley

Finance Minister Arun Jaitley

An expert committee, which will be soon set up to look into the issue, will closely work with the Banks Board Bureau (BBB) to identify the right matches for consolidation. The BBB, which will independently oversee consolidation and chalk out business plans for public sector banks, is set to be put in place by April 1, 2016, HT report said.

Since it is not feasible to bring down the government’s share in state-owned banks below 51%, consolidation to create strong banks is the only survival option, the sources said. Issues such as technology, asset base, regional strength and cultural match would be critical in chalking out strategies and identifying banks, the report added.

State-run lenders hold more than two-thirds of assets in India's banking industry.

But they also hold about 85 percent of non-performing loans after adding toxic assets at a faster pace than their private sector rivals, hurting profitability.

About 40 percent of Indians have little access to formal banking channels yet industry analysts question the need to have more than two dozen government-owned lenders.

"You need strong banks rather than numerically a larger number," Jaitley said.

"What is the best course for consolidation? Where do you start from? Which are the banks to be considered?," the minister said.

He added that the planned panel would consider options such as making some banks subsidiaries under a holding company, merging a weaker bank with a stronger bank, or allowing banks that are stronger in a particular region to merge.

Central bank governor Raghuram Rajan said in January it was "premature" to talk of bank mergers when bank managements were preoccupied with dealing with stressed assets.

Jaitley said on Saturday it was too early to say how many state-run banks would emerge at the end of a consolidation process and declined to give any timeline for the shake-up.

Among other measures, Jaitley said, the government was considering an employee stock option plan for state-run banks, where senior executives earn far less than their private sector counterparts.

He also said the government was considering amending some rules, including strengthening the debt recovery tribunals, to help banks recover bad loans more quickly.

With Agency inputs

Updated Date: Mar 07, 2016 11:00 AM

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