New Delhi: A three-member ministerial panel on PSU bank consolidation led by finance minister Arun Jaitley will consider merger proposals from banks and also nudge some of them to combine with each other, according to the panel’s mandate.
The proposals received from banks for in-principle approval for mergers will be placed before the ministerial panel, referred to as alternative mechanism (AM). A report on the proposals cleared by AM will be sent to the cabinet every three months, said a statement from the finance ministry on Wednesday.
The other members of the panel are railway and coal minister Piyush Goyal and defence minister Nirmala Sitharaman.
“Govt walks the talk on banking reforms; constitutes Alternative Mechanism for PSBs consolidation; Finance Minister to head,” financial services secretary Rajiv Kumar said in a post on Twitter on Monday.
According to the government statement, the panel may direct banks to examine proposals for amalgamation. The panel will also receive inputs from the Reserve Bank of India (RBI) before according an in-principle approval.
Last week, the government had announced a Rs2.11 trillion recapitalization plan for public sector banks weighed down by bad loans, seeking to stimulate the flow of credit and spur private investment.
While announcing the capital infusion roadmap for public sector banks, Jaitley had said the move will be accompanied by a series of banking reforms over the next few months. The constitution of the panel is a move in that direction. The Union cabinet in August had decided to set up the AM to fast-track public sector banks’ consolidation.
“AM shall devise its own procedure for appraisal of amalgamation proposals by banks, and be guided overall by the objectives of the Nationalisation Acts {Banking Companies (Acquisition and Transfer of Undertakings) Acts, 1970 and 1980},” the statement said.
The final schemes formulated will be approved by the central government, and laid in both houses of Parliament, it added.
The consolidation of struggling state-run banks, which have a market share of about 70% and account for over 80% of bad loans in the Indian banking system, is aimed at building scale and bolstering their risk-taking ability.
Consolidation is also likely to help banks deal better with their credit portfolios, including stressed assets. It prevents multiplicity of resources being spent in the same area and strengthens banks to deal with shocks, Jaitley had said in August. Experts say the consolidation plan along with measures such as capital infusions in weak banks will trigger a revival.
The idea of bank mergers has been around since at least 1991, when former RBI governor M. Narasimham recommended the government merge banks into a three-tiered structure.
The State Bank of India merged operations of five of its associate banks and Bharatiya Mahila Bank with itself earlier this year, marking the first consolidation move in the sector following the bad loan crisis. The merger has reduced the number of state-controlled banks to 21 from 26.