Center Asks RBI To Identify Public Sector Banks For Merger

The Reserve Bank of India (RBI) is all set to make a list of banks that can be merged, on the request of Government of India. There are speculations that this initiative has been taken by the Government to strengthen the banking system which is currently suffering from bad debts and loans.

In July 2018, India Today had reported that Minister of State for Finance Shiv Pratap Shukla said that the government has asked the Reserve Bank of India (RBI) to suggest the possible combination of Public Sector Bank mergers. Reportedly, the government has asked RBI to prepare a list of candidates for the merger among 21 government sector banks and also suggest a time frame for the consolidation of the same.

Government aiming to strengthen the Banking System

According to Times Of India, officials from the Ministry of Finance held a meeting with RBI this month in which they have asked the RBI to give a suggestion regarding the time frame for the consolidation. The ministry has also refrained people from naming anything in public. The government has created an alternative mechanism, a group of ministers for considering the merger of PSBs. The ministers included Finance Minister Piyush Goyal, Defence Minister Nirmala Sitharaman and Union minister Arun Jaitley reported Business Standard. It is said that the Government is taking these steps to create better-capitalized lenders and improving regulations in the banking system.

India has the highest bad-loan ratio after Italy

Reportedly, among the world’s ten largest economies, India has the highest bad loan ratio after Italy. Last month, the outgoing chairman of Bank of Baroda Ravi Venkatesan had said, “state-backed lenders need to consolidate to avoid losing more market share to peers in the private sector”. The public sector banks are estimated to hold 90% of non-performing loans, and 11 out of 21 government lenders are operating under the emergency programme under the supervision of RBI. The central bank has restricted banking activities of these banks and has increased regulatory oversight on them.

Why a merger might be problematic?

RBI Governor Urjit Patel on April 25 had said that the Indian banking system will be better off if some PSBs are consolidated. According to The Hindu, he said, “As many have pointed out, it is not clear that we need so many public sector banks. The system could be better off if they are consolidated into fewer but healthier banks.”

The idea of consolidating banks is not a new idea, in fact, it was conceptualised at least two decades ago. However, the plan to merge PSBs has its own loopholes as well. An Economic & Political Weekly article on the same topic states that several studies have shown that merger announcements give rise to confusion, insecurity and anxiety among staff, which leads to a slowdown in business, another challenge lies on the technology front. To forge uniformity and to roll out a single common system for the smooth functioning of the banks merged might emerge as a challenge.

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