The government today said it would act as a patriarch and bless public sector bank mergers that were based on synergy.
“Unlike the past, when a majority of the mergers took place under the Banking Regulation Act to bail out weak banks, majority of which were in the private sector, amalgamations should be based on pure business sense and at the initiative of the banks,” Financial Services Secretary R Gopalan said in his first public statement since taking charge 10 days ago.
Banks should look at cohesiveness in culture, technology, economies of scale and operational benefits that would accrue due to a merger, he added.
“The government will not force consolidation, but will provide the right kind of support. We will be the patriarch and bless marriages and see how it progresses,” Gopalan said at Bancon 2009-10.
This is also the first statement from the government since it met the heads of five public sector banks – Punjab National Bank, Canara Bank, Bank of Baroda, Bank of India and Union Bank of India – a few weeks ago to reopen a case for consolidation in public sector banks.
At that time too, it was made clear that the merger activity would be driven by banks. While some of the players have already undertaken an internal exercise to assess possible candidates, others are yet to get moving. Bankers said geographical synergies would be the biggest driver.
Though consolidation in the public sector has been talked about in the past too, the government and banks have failed to progress on the issue due to opposition from political parties and bank unions. A case for consolidation was reopened by the United Progressive Alliance government in its second innings, when it formed government without support from the Left parties. The finance ministry is expected to meet the chiefs of smaller public sector banks to discuss the issue.
Apart from consolidation, Gopalan identified four more issues on which public sector banks needed to move. He said asset quality, which might come under pressure due to the global financial crisis, required attention. He quoted a Crisil study which has estimated the level of gross non-performing assets (NPAs) would reach 3.5-4 per cent of gross advances by the end of March 2011, compared with 2.3 per cent at the end of March 2008. “NPAs will remain manageable due to stronger balance sheet of banks and diversified portfolios, but higher provisioning and careful husbanding of weak accounts are required,” Gopalan said.
He flagged current account and savings bank account (Casa) deposits as the second area on which the state-owned entities needed to focus. In recent years, private players such as HDFC Bank have build a higher proportion of low-cost Casa deposits compared with public sector players such as State Bank of India, the country’s largest lender. Over the last 15-18 months, public sector banks have managed to improve the share of Casa in their deposit base due to a flight to safety following the global credit crisis.
Gopalan also asked public sector players to focus on human resource capabilities, for which an expert committee headed by former Bank of Baroda Chairman and Managing Director AK Khandelwal has been set up.
He also said the state-owned players should focus on the adoption of global standards such as International Financial Reporting Standard (IFRS) and Basel-II norms. He added that financial inclusion could help banks not only fulfil the requirements of the under-banked population, but also provide them access to a new customer segment and access to low-cost resources.
