PSU Bank Mergers Building Block For A $5 Trillion Indian Economy: Finance Secretary Rajeev Kumar

The Narendra Modi government’s decision to merge 10 public sector banks into four will act as a building block to make India a $5 trillion economy, Finance Secretary Rajeev Kumar has said.

Following the PSU bank mergers, the number of public sector banks would reduce to 12 from the current 21. They would help in better management of capital, Finance Minister Nirmala Sitharaman said, while announcing the proposal as part of a package of banking reforms for the economy.

"To support next level of growth, the country needed big banks. The mega PSU bank merger announced on Friday aims to achieve that objective. We will now have six mega banks with enhanced capital base, size, scale and efficiency to support high growth that the country requires to break into club of middle-income nations," Kumar told the Press Trust of India in an interview.

The banking sector consolidation will help create strong and globally competitive lenders with economies of scale and enable realisation of wide-ranging synergies, the finance secretary said, adding that now they will have a wider reach, stronger lending capacity and better products and technology to serve customers of New India.

The banking sector would be "technology-driven, clean, responsive" and there will be no gaming of system by any of the stakeholder in the financial sector space, be it auditors, rating agencies, creditors, or bankers, said Kumar. "All well-capitalised, well-provisioned banks to support $5 trillion economy."

The public sector banks can now look forward to efficiency gain, higher profit, better services to customers and also more benefits to their employees, he said.

For bigger banks, Kumar said, the government has provided 0.25 percent higher capital than required keeping in mind their domestic, systemically important status. Indian banks now have 1 percent higher core capital requirement than the Basel III norms, he added.

When asked about when the PSU bank mergers would be effective, Kumar said that a date would be fixed after consultation with respective bank boards, as had happened in case of Bank of Baroda's merger with Dena Bank and Vijaya Bank.

"There is a process which needs to be followed. There are some regulatory approvals which are required. Banks have sufficient time for charting out smooth and seamless amalgamation date. It could happen from Ja. 1 or April 1 depending on their readiness. It would not be later than April 1," he said.

During the intervening time frame, he said, credit growth will not stop and there will be no disruption for the customers.

When asked about rationale for doing all the four PSU bank mergers together, Kumar said, "We wanted to do it one time, give the road map and remove the uncertainty. Now there is no uncertainty and road map is all clear. Governance reforms done. Who wants to give their power, we have given it. Even in appointments we have given it. Now it is completely professionalised."

Consolidation among public sector banks has been on the agenda for the National Democratic Alliance since 2014, when it first came into power. In 2017, State Bank of India was merged with five of its associate banks and Bharatiya Mahila Bank. In 2018, the government decided to merge Bank of Baroda with Vijaya Bank and Dena Bank. The government also allowed Life Insurance Corporation of India to take over 51 percent equity in IDBI Bank Ltd., effectively privatising it.