Govt plans to reduce number of PSU banks to 10-15

Updated on Aug 21, 2017 03:54 PM IST

Consolidation will not result in 4­5 banks as envisaged earlier as it will create too-­big-­to-fail lenders.

New logo/ monogram of State Bank of India.(Hemant Mishra/Mint)
New logo/ monogram of State Bank of India.(Hemant Mishra/Mint)
Livemint, Mumbai | BySahib Sharma

India is looking to reduce the number of state-run banks to 10 to 15, more than what was envisaged earlier, through a series of mergers and acquisitions so that none of the banks become too big to fail, said Sanjeev Sanyal, principal economic adviser at the finance ministry.

“Consolidation will not be taken too far to four or five as speculated since the whole system breaks down even if one fails. Eventually possible number will come down between 10 and 15. It will be done purely on commercial basis,” Sanyal said.

The consolidation of the struggling state-run banks, which have about a 70% market share and account for more than 80% of the bad loans in the Indian banking system, is aimed at building scale and bolstering their risk-taking ability. The government hopes that this, along with measures such as capital infusions in weak banks, will trigger a revival.

“In case of consolidation one should not factor balance sheet only but also process, integration of technology and people. For State Bank of India (SBI) it was easy because they were relatively under the same architecture,” said Kartik Srinivasan, senior vice-president at rating agency ICRA Ltd.

SBI has merged operations of five of its associate banks and Bharatiya Mahila Bank with itself earlier this year, marking the first consolidation move in the sector following the bad loans crisis. The merger has reduced the number of state-controlled banks to 21 from 26.

It has, however, turned out to be much costlier for SBI than expected with a drastic deterioration in its asset quality post the merger.

One reason for the sharp increase in bad loans was that the non-corporate loan book of associate banks followed an internal classification standard that was different from SBI’s, chairman Arundhati Bhattacharya said after announcing the SBI’s June quarter earnings.

The government, Sanyal said, is willing to go an extra mile to support the lenders by infusing capital in excess of the Rs.20,000 crore promised as part of the Indradhanush plan over this fiscal year and the next.

Under the Indradhanush scheme introduced in 2015, the government had agreed to infuse Rs 70,000 crore in state-run lenders over four years. They were to receive Rs.10,000 crore each in 2017-18 and the following year. The government has so far proposed to infuse Rs.8,586 crore in 10 public sector banks this year, subject to the recipient banks meeting stringent requirements for improving their health.

“Once (the bad loans) resolution process moves somewhat, we will get a better fix on how much money banks need after accounting for provisioning and recovering,” Sanyal said. “There are number of options before the government, ranging from recapitalisation through bonds, general budget and reducing holding down to 52% without doing privatisation. Some combination of these will be used.”

Reserve Bank of India (RBI) governor Urijit Patel last week said that public sector banks (PSBs) will require higher recapitalisation. “It is clear that PSBs will need to take haircut on current exposure and resolution plan agreed within or outside the Insolvency and Bankruptcy Code. Higher provisions requirement will affect the capital position of several banks. This will necessitate higher recapitalisation of these banks,” Patel said.

Along with resolving stressed assets, banks also have to comply with Basel 3 norms which require them to maintain a capital adequacy ratio of 10.875% by March 2018 and 11.50% by March 2019. In addition, new accounting standards (IND AS) for banks will kick in from 1 April 2018, requiring them to make higher provisions.

“Recovery is not much happening in the system and on contrary NPA stock is rising. Going forward new accounting standards will bring along its own share of volatility on mark to market value, thus increasing more pain for the banks,” said Srinivasan.

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