Govt approves framework for Merger of Public Sector Banks

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The Union Finance Minister Arun Jaitley today announced that the union cabinet has given approval to the framework for the Merger of Public Sector Banks. The decision was taken at the Cabinet meeting today's afternoon after State Bank of India chairman Arundhati Bhattacharya called for more consolidation among the public sector banks, saying this could reduce their dependence on government for capital.

“The cabinet approved the constitution of an alternate mechanism that will oversee proposals with regard to consolidation of banks, which will come from the PSBs (public sector banks),” Jaitley said in press conference after the cabinet meeting.

A group of ministers (GoM) will be formed on the basis of an alternative mechanism for the merger of public sector banks.

Explaining that such an alternative mechanism “enables quick facilitation of decisions”, Jaitley said the constitution of the committee would be made by the Prime Minister.

As of today, there are 20 Public Sector Banks and the State Bank of India (SBI). The SBI has recently 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 loans crisis. The merger has reduced the number of state-controlled banks to 21 from 26.

"Indian government is looking to reduce the number of state-run banks to 10 to 15, so that none of the banks become too big to fail", said Sanjeev Sanyal, principal economic adviser at the finance ministry.

The process of combining the struggling state-run banks, which have about a 70% market share and account for more than 80% of the bad loans in the Indian banking system, is aimed at building scale and bolstering their risk-taking ability. The government hopes that this, along with measures such as capital infusions in weak banks, will trigger a revival.

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