Big bank mergers: Government turns ten PSBs into four

NEW DELHI: India announced an extensive consolidation of state-owned banks that will see 10 of them being merged to form four bigger lenders to strengthen a sector struggling with a bad-loan cleanup and aimed at creating lenders of global scale that can support the economy’s surge to $5 trillion by 2024. The government also announced governance reforms to improve their health. 
“We want to create next-generation banks,” finance minister Nirmala Sitharaman told reporters on Friday. “You need big banks with enhanced capacity to increase credit… You need banks with strong national presence and global reach.” 

Bank unions, however, opposed the mega merger move saying it lacks any rationale. 

This was the latest in a series of announcements by the government since last

week as it seeks to stimulate demand and revive the economy. In a separate announcement, the government said growth had slumped to a six-year low in the quarter to June. 

The latest consolidation move will slash the number of state-owned lenders to 12 from 27 in 2017, Sitharaman said, highlighting the banking reforms undertaken by the Narenda Modi government that have also included significant tidying-up of balance sheets. 

“Today’s announcements on bank mergers is a cohesive and a clear recognition that bigger banks have that much more ability to absorb shocks, reap economies of scale as well as the capacity to raise resources without depending unduly on the exchequer,” said State Bank of India chairman Rajnish Kumar. 

Among the governance changes, the move to have a separate mechanism for sanctioning and monitoring of big loans will ring-fence the banks against potential frauds. Further, the decision to empower bank boards and operational flexibility in hiring from the market will prioritise robust risk-management practices in decision making. 

‘No Disruption for Customers’

Punjab National BankNSE -0.23 % will absorb Oriental Bank of Commerce and United Bank of India to form the nation's second-largest state-owned lender with combined business of Rs 17.94 lakh crore, overtaking Bank of Baroda with Rs 16.13 lakh crore. SBI leads state-owned banks with business of Rs 52.05 lakh crore. 

 

Canara Bank will absorb Syndicate Bank, giving it a combined business of Rs 15.2 lakh crore and ranking it at fourth, while Union Bank of India will amalgamate with Andhra BankNSE 7.65 % and Corporation Bank (Rs 14.59 lakh crore, fifth). Indian Bank will absorb Allahabad BankNSE 4.44 % (Rs 8.08 lakh crore). This will make balance sheets stronger, giving them greater capacity to lend, according to the government. 

Managing directors of these banks were informed about the merger decision earlier in the day by the department of financial services (DFS) even though discussions had been going on for some time, said a senior banking industry official. 

SBI took over its associate banks in 2017 and Bank of Baroda absorbed Vijaya Bank and Dena Bank this year. The top six will now have 82% of the lending business in public sector banking and 52% in commercial sector lending. Finance secretary Kumar said the consolidation will be smooth. 

Bank unions opposed the mega merger of 10 state-run banks into four saying the move is bereft of logic and lacks any rationale. "The proposals which the government has moved are unmindful since it has no logic or rationale. Neither, it is the case that a weak bank is merged with a strong one nor geographically compatible banks are being merged," All India Bank Employees Association said in a statement. 
 

Recapitalisation and Governance Reforms The consolidation exercise will be accompanied by a Rs 55,250 crore capital infusion in public sector lenders as also governance reforms. Punjab and Sind Bank will get Rs 7,050 crore; Central Bank of India will get Rs 3,300 crore; UCO BankNSE 7.09 % will get Rs 2,100 crore, PNB will get Rs 1,600 crore, and Bank of Baroda will get Rs 600 crore. Kumar said bank boards will apprise the government of capital requirements and numbers finalised. 

As part of the governance reforms, Sitharaman said non-official directors at state-run lenders will have to function like independent directors on company boards. Boards will be peer reviewed. The number of executive directors has been raised to four and boards have been given the mandate to reduce and rationalise board committees. Public sector banks will also be able to appoint a chief risk offer at market rates. 

The finance minister also gave a report card on the steps announced earlier by the government, with recoveries rising to Rs 1.21 lakh crore in FY19 from Rs 61,930 crore in FY17 and provision coverage ratio being at the highest in seven years. She said profitable state-run lenders had gone up to 14 as against two in FY18.

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