The government is moving afresh to create mega banking entities by consolidating public sector banks to face stiff competion from new private banks that are expected following the passage this week of a banking reform bill that would usher in more bank licences.

Parliament on Thursday finally passed the Banking Laws (Amendment) Bill, paving the way for the entry of new banks in the country.
“The issue of consolidation (of public sector banks) has been taken up by the finance ministry, though it is still at a nascent stage,” said a senior finance ministry official on condition of anonymity.

India’s largest bank, the State Bank of India has already merged some of its associate banks with itself and other such moves in the public sector may gather steam.

Finance minister P Chidambaram, during the tenure of UPA I, had batted for bank consolidation but faced stiff opposition from trade unions. While he underlined the need for banks to merge, he left it to banks to take the process of merger through.

“The issue has been brought up once again, we want good large banks to merge with each other and this has to happen,” the official said.

The Reserve Bank of India is expected to come up with guidelines on new banking licences in the next fiscal year.

Size and customer service are among the key challenges that public sector banks face at this stage.

At present, there are 23 public sector banks in the country with over 700,000 employees.

Banks, however, maintain that the government needs to aid banks in this transition.

“It is important that the government takes the initiative if this exercise has to be made a success, it would be difficult for banks to carry out such an exercise,” said the chairman and managing director of a mid-sized state-owned bank.