Finance Ministry weighs options for consolidation in banking sector

The Finance Ministry is dusting off merger proposals of public sector banks and have started weighing various options to create few more banks of the size of SBI, sources said. The country's largest lender State Bank of India (SBI) last month had made presentation twice before heads of other public sector lenders to share its experience of consolidation of five SBI associate banks and Bharatiya Mahila Bank with itself .

The presentation talked about advantages and challenges of merger but it also highlighted that fragmented approach of the banks is acting as an impediment in their growth. Various permutation and combinations are being examined, sources said, but added that no decision has been taken yet.

With regard to IDBI Bank stake reduction, sources said some positive development has already taken place. Last week, insurance regulator Irdai permitted LIC to pick up 51 per cent stake in IDBI Bank as part of transformation of the lender.

Last year, the Department of Financial Services had written to all heads of PSU lenders informing them the government's decision to set up a ministerial panel to facilitate consolidation in the public banking space. The government has been nudging the state-owned lenders to go for merger so that there can be fewer and stronger banks.

The ministry wants banks to undertake an internal exercise for the best match and come up with the merger idea for the alternative mechanism (AM) set up for the purpose.

The banks should analyse regional balance, geographical reach, IT compatibility, financial burden and human resource transition while firming up the merger proposal for the ministerial panel.

Last year, the Union Cabinet in August decided to set up the alternative mechanism to oversee proposals for expeditious consolidation of public sector banks (PSBs) so as to create larger and stronger lenders.

The proposals received from banks for in-principle approval to formulate schemes of amalgamation will be placed before the panel.

To fast-track consolidation, the government has exempted mergers of nationalised banks from seeking fair trade watchdog CCIs approval.

This exemption will be applicable for ten years and comes at a time when several experts and even policymakers have been talking about the need for consolidation in the banking sector, especially among state-owned banks.