Setting the stage for more mergers, the Union Cabinet on Wednesday approved an alternative mechanism to oversee proposals of amalgamation of public sector banks.
“The proposals received from banks for in-principle approval to formulate schemes of amalgamation shall be placed before the Alternative Mechanism (AM),” said Finance Minister Arun Jaitley, adding that the decision will be based only on commercial consideration by the boards of the banks involved.
After getting in-principle approval, the banks will take steps in accordance with the law and SEBI requirements. “The final scheme will be notified by the Central government in consultation with the Reserve Bank of India,” he told newspersons after the Cabinet meeting.
Jaitley said the decision will help “create strong and competitive banks that can absorb shocks and have the capacity to raise resources without depending on the state exchequer”.
The alternative mechanism will include a panel of ministers, whose members will be decided by the Prime Minister. But it is expected to include Jaitley and Minister of Road Transport and Highways Nitin Gadkari.
At present, there are 20 public sector banks, apart from State Bank of India, which recently merged with five of its subsidiaries and the Bharatiya Mahila Bank.
The proposal of fewer but stronger state-run lenders was originally mooted in 1991, but in recent years, the Finance Ministry has been hoping to bring down the number of public sector banks to about a dozen to create economies of scale and improve their functioning.
Jaitley, however, said the government is not targeting any fixed number of consolidations in the sector.
Will help NPA resolution While bank unions struck work on Tuesday protesting against privatisation and amalgamations, analysts have said that mergers and consolidation will help in faster resolution of bad loans of public sector banks.
“Public sector banks will benefit from operational and functional synergies, resulting in better efficiencies. Merger amongst similar performing banks can also result in effective resolution of non-performing assets across lenders,” said Krishnan Sitaraman, Senior Director, CRISIL Ratings.
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