Finance minister Nirmala Sitharaman at the unveiling of PSB reforms at a press conference in New Delhi on Friday (Photo: Pradeep Gaur/Mint)
Finance minister Nirmala Sitharaman at the unveiling of PSB reforms at a press conference in New Delhi on Friday (Photo: Pradeep Gaur/Mint)

FM Sitharaman unveils major overhaul of ailing state-run banks

  • PNB, Oriental Bank of Commerce and United Bank of India will be brought together to form the second-largest state-run bank in the country
  • The decision is in line with NDA govt’s push for consolidation of state-run banks, which it believes will not only lead to economies of scale

New Delhi: A week after announcing a raft of measures to boost economic growth and improve investor sentiment, finance minister Nirmala Sitharaman on Friday announced consolidation of 10 state-run lenders into four bigger banks.

Punjab National Bank (PNB), Oriental Bank of Commerce and United Bank of India will be brought together to form the second-largest state-run bank in the country, with a business of 17.95 trillion (loans plus deposits) and will be at least 1.5 times that of PNB, Sitharaman said at a press conference. State Bank of India (SBI) is the country’s largest lender.

The second merger will be between Canara Bank and Syndicate Bank, which will make it the fourth-largest public sector lender, with 15.2 trillion in business. In the third, Union Bank of India will be merged with Andhra Bank and Corporation Bank to build India’s fifth-largest public sector bank (PSB) with 14.59 trillion in business. Indian Bank will be merged with Allahabad Bank to make India’s seventh-largest PSB with a business of 8.08 trillion.

Currently, there are 18 public sector lenders, compared to 27 in 2017. There will be only 12 after the mergers.

“So, 12 solidly present, well-consolidated, energized, adequately capital-endowed banks will now operate to target $5 trillion economy and give the necessary support for banking facilities required by our customers," Sitharaman said, adding that the proposed mergers will not cause any disruption, similar to what had happened in the case of Bank of Baroda’s merger with Vijaya Bank and Dena Bank.

The decision is in line with the NDA government’s push for consolidation of state-run banks, which it believes will not only lead to economies of scale, but also make lenders stronger, more competitive and improve their risk-taking appetite. Bigger, fewer and healthier banks will be in a better position to finance new projects and support the government’s aim of making India a $5 trillion economy by 2024.

In April, Bank of Baroda became the country’s third-largest lender after its merger with Dena and Vijaya Bank. In 2017, five associate banks and Bharatiya Mahila Bank were merged with SBI.

“We made sure that the technology, which is used in the banks, is compatible and all banks can enable quick realizations of gains, without any disruption in service," she said.

The minister did not mention any timeline for the realization of the mergers. Finance secretary Rajiv Kumar said the decision will be taken by the banks’ boards in the near future. The respective boards would come back to the finance ministry, which will consult the banking regulator. After the consultation, the scheme of amalgamation will be made and then a date will be decided in consultation with banks as per their wish, he said.

Sitharaman said four banks—Indian Overseas Bank (in south), UCO Bank (in east), Bank of Maharashtra (in east) and Punjab and Sind Bank (in north, particularly in Punjab)—will continue to have a strong regional presence.

The government will also infuse as much as 55,250 crore this fiscal in 10 public sector lenders—PNB, Indian Overseas Bank, Canara Bank, Bank of Baroda, Indian Bank, Union Bank of India, Central Bank of India, UCO Bank, United Bank of India and Punjab and Sind Bank.

“Consolidation is not being enabled through them (infusion of capital), but it is growth-driven," she said.

Last Friday, Sitharaman said the government would front-load its 70,000 crore capital infusion into PSBs to nudge an additional lending of 5 trillion. In FY19, the government infused over 1 trillion in PSBs. The last tranche of 48,239 crore in February allowed six lenders to exit the Reserve Bank of India’s prompt corrective action (PCA) scheme. RBI uses the PCA framework to ring-fence lenders breaching regulatory thresholds.

Sitharaman said gross non-performing assets of PSBs declined to 7.9 trillion in the March quarter of the previous fiscal from 8.65 trillion in the preceding quarter. Out of 18 PSBs, 14 are making profits.

“It is expected that the merger will enable the banks to have a much larger capital base and will also enable them to scale up their operations and increase market penetration. However, such merger of financial institutions will also involve numerous procedural complexities," said Atul Pandey, partner at Khaitan and Co.

Gireesh Chandra Prasad contributed to this story.

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