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Finance ministry to set ball rolling for bank mergers
January, 11th 2010

The finance ministry will soon appoint NM Rothschild, Ernst & Young and McKinsey & Co as consultants to guide Canara Bank, Bank of India and Bank of Baroda through bank consolidation, looking to expedite a process that has been moving at a snails pace for over six years.

Consultants for two other banks are likely to be appointed by the monthend , said a finance ministry official involved in the process. Banking consolidation has seen little progress due to dogged resistance from various quarters, particularly trade unions and boards. While small banks fear losing their identity, the big ones are against embracing assets that might turn liabilities in the long run.

But the UPA government could do little on this front in its first term due to opposition from its then Left allies. In its second term too, the process has been hanging fire as unions are against the idea. But this time is the government is keen on going ahead with bank mergers .

The finance ministry plans to take the unions on board.
Unions have no reason to be alarmed as the grading system, pay scale and business environment among banks on the merger radar are almost the same, said another official involved with the process.

New banking secretary R Gopalan will meet state-run bank heads in February in this regard, this official added.
Already, Punjab National Bank chairman KR Kamath, Canara Bank chairman AC Mahajan, Union Bank of India chairman MV Nair, Bank of India CMD AK Misra and Bank of Baroda chairman MD Mallya met a finance ministry official to discuss the implications of mergers.

The head of a bank that is looking to merge with Mangalore-based Corporation Bank said top officials there have already been sounded out. They are okay with the idea as long as long as the interests of the employees, shareholders and customers are taken care, he said, requesting anonymity. The governments push for bank mergers comes from its stated aims to improve the state of competitiveness of Indian banks globally and reduce risk to financial stability.

The lack of global scale for Indian banks, the government said, came into sharp focus during the recent international financial crisis that saw several international banks reneging on their funding commitments to Indian companies , but local banks could not step into the breach because of balance sheet limitations.

Despite its commitment to mergers and the burst of developments, the finance ministry says it will only act as a facilitator in the consolidation process and the initiative must come from the banks themselves.

The ministry has not set a deadline as there is no urgency from the point of capital infusion into weak banks. The $3.1-billion loan from World Bank to be disbursed soon will provide capitalshort banks to expand for another 3-4 years without fund infusions.

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