PSU Bank Consolidation: The Government’s Gameplan

Addressing the press after the conclusion of Wednesday’s Union Cabinet meeting, Finance Minister Arun Jaitley said that the government had approved the setting up of a ministerial panel which will clear any proposals of mergers between state-owned banks. The merger proposal, however, will need to come from the banks themselves, Jaitley said, making it appear as yet another statement of intent to consolidate India’s large but stressed public sector banks.

Jailtey’s comment masked behind-the-scenes work on consolidation that has been going on for months now. The work will mean that some consolidation is likely within the current year.

Public sector banks are already in talks for amalgamation and the first such merger can be expected in this financial year, a senior government official told reporters on condition of anonymity. Consolidation will reduce credit risk and make state-owned lenders more competitive, the official added. The eventual decision would be based on commercial considerations, the official said.

Also Read: Government Grants In-Principle Approval To PSU Bank Mergers

There are presently 22 state-owned lenders in the country. This includes J&K Bank, which is owned by the state government, and State Bank of India, which is governed by a separate Act. Any consolidation in the space is, hence, likely to be focused on banks other than these two.

Banks will identify potential candidates for merger and inform stock exchanges, said the official quoted above. This would stem any criticism that the government is pushing mergers on banks even though they are governed by individual boards who are meant to decide on commercial matters.

The government being the largest shareholder, which also has a board seat, can still influence the decision, Pradeep Kumar, former managing director of State Bank of India told BloombergQuint.

“What I believe will happen is that all of these banks have representatives of the government on their boards, I think the nudge will come from there,” said Kumar while adding that the suggestion that the decision is being left to bank boards is a ‘facade’.

Under the new mechanism proposed by the government, once a bank proposes a merger, a committee of ministers will look into it. The composition of the committee would be decided by the Prime Minister, Jaitley told reporters.

The committee will examine the initial proposal of banks on share valuation, share swap ratios and will take into account the view of minority shareholders, said the official quoted above. The Reserve Bank of India will also be part of the consultations, added the official.

Also Read: PSU Bank Mergers Needed But Brace For Short-Term Pain, Former Banking Secretary Says

Open To Merging Large Banks

While the government has given no hints on which banks will be part of the consolidation process, the official quoted above suggested that all options are open. This includes a merger between two large lenders if it makes commercial sense.

Most analysts have speculated that a merger would likely take place between a large and a small bank or regional-focused lenders.

No matter what the merger combination, it won’t be an easy run for banks.

Shares of public sector banks rose on the news of a renewed push towards consolidation with the PSU Bank Index gaining 2 percent in trade on Monday. Long term upside from the merger plan, however, will be limited, Manish Ostwal, senior research analyst at Nirmal Bang Securities told BloombergQuint.

“I don’t see a significant premium being paid for the smaller banks so the minority shareholders should not play the merger theme,” said Ostwal who remains negative on PSU banks.

Vishwanath Nair contributed to this report