New Delhi: The government has asked the Reserve Bank of India (RBI) to prepare a list of candidates for merger among 21 government banks as it seeks to strengthen a banking system laden with bad debt, people familiar with the matter said. In a meeting this month, finance ministry officials also asked RBI to suggest a time frame for the consolidation, the people said, asking not be named as the information isn’t public.

The government bank merger move is aimed at creating fewer, better-capitalized lenders and improving regulatory oversight, they said.

The government has been battling for years to clean up its banks, which have the highest bad-loan ratio after Italy among the world’s 10 largest economies. Public sector banks are estimated to hold 90% of non-performing loans, and 11 of the 21 are operating under an emergency programme, supervised by the RBI, which restricts new lending.

A phone call to a finance ministry spokesman and an email to the RBI seeking comment weren’t immediately answered.

State-backed lenders need to consolidate to avoid losing more market share to peers in the private sector, the outgoing chairman of Bank of Baroda Ravi Venkatesan said last month.

Almost 70% of new deposits went to private banks in the latest fiscal year and they’re estimated to have cornered nearly 80% of incremental loans through 2020 as mounting bad debt erodes capital and constrains lending at state banks. Weak balance sheets and laws that require the state to hold at least 51% of their shares have left public lenders dependent on the government for new capital.

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