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.
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
The case of SBI
The enthusiasm for bank mergers follows the successful absorption of five associate banks by the
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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