The Indian government wants to merge more public-sector banks


  • The government has reportedly asked the RBI to draw up a list of banks that can be merged as well as a possible timeframe for their consolidation.
  • The move is a response to the deteriorating asset quality of smaller, weaker banks and follows the successful absorption of five associate banks by the SBI last year.
  • Currently, government-owned banks account for 90% of bad loans despite owning less than 70% of the banking system’s assets.
In its annual report yesterday, the Reserve Bank of India (RBI) cautioned that the bad loan crisis could continue in the coming years. The central bank expects the non-performing loan ratio, which is currently 12.1% of all loans, to rise this fiscal year. This is mostly owing to unfavourable economic conditions such as sluggish credit growth and a less-than-expected pickup in industrial activity.

Amid talk of an asset management company and the launch of Project Sashakt, the Indian government is also focused on what it thinks is a tried-and-tested solution to mitigate the crisis and improve governance: bank mergers.

The Indian government has reportedly asked the RBI to draw up a list of banks that can be merged as well as a possible timeframe for the consolidation. All 21 public-sector banks will be under consideration. Currently, government-owned banks account for 90% of bad loans despite owning less than 70% of the banking system’s assets.

In June 2018, reports emerged that the government was mulling a merger between four heavy lossmakers - Oriental Bank, Central Bank, Bank of Baroda and IDBI Bank. The state-owned insurer, LIC, was eventually “instructed” to take a majority stake in the latter.

The case of SBI

The enthusiasm for bank mergers follows the successful absorption of five associate banks by the State Bank of India in April 2017. The impetus behind the merger was to reduce the costs of the smaller banks and shore up their balance sheets.

Just like the SBI merger, the government wants larger banks to acquire smaller banks that aren’t well-capitalised and are hurting from a pile-up in bad debts. The merged entity subsequently benefits from a larger capital base and a buffer against risk and liquidity issues. It also becomes better-equipped to take on private sector banks, which is important because public-sector banks have continually been losing market share to their private counterparts.

The RBI currently has 11 public-sector banks under its prompt-corrective action framework, which imposes credit extension limits and restructuring requirements. Additionally, a lower number of government-owned banks will also reduce the resources needed for regulatory oversight.
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