The government today said that it would act as a patriarch and bless public sector bank mergers that are based on synergy.

Unlike the past when a majority of the mergers took place under the Banking Regulation Act to bailout weak banks, majority of which were in the private sector, amalgamations should be based on pure business sense and at the initiative of the banks, Financial Services Secretary R Gopalan said in his first public statement since taking charge 10 days ago.

Banks should look at the cohesiveness in culture, the technology and the economies of scale and the operational benefits that would accrue due to a merger, he added. The government will not force consolidation but will provide the right kind of support. We will be the patriarchs and bless marriages and see how it progresses, Gopalan said at Bancon 2009-10.

This is also the first statement from the government since it met the heads of five public sector banks Punjab National Bank, Canara Bank, Bank of Baroda, Bank of India and Union Bank of India a few weeks ago to reopen a case for consolidation in the public sector bank.

At that time too it was made clear that the M&A activity would be driven by the banks. While some of the players have already undertaken an internal exercise to assess possible candidates, the others are yet to get moving. Bankers said that they geographical synergies would be the biggest drivers.

Though consolidation in the public sector has been talked about in the past too, the government and banks have failed to progress on the issue due to opposition from the political parties and bank employee unions. A case for consolidation was reopened by the UPA in its second innings when it formed the government, without support from the Left parties. The finance ministry is expected to meet the chiefs of smaller public sector banks to discuss the issue.

Apart from consolidation, Gopalan identified four other issues on which public sector banks needed to move. He said that the asset quality, which might come under pressure due to the global financial crisis required attention. He quoted a Crisil study which has estimated that the level of gross non-performing assets would reach 3.5-4 per cent of the gross advances by the end of March 2011, compared with 2.3 per cent at the end of March 2008.

NPAs will remain manageable due to stronger balance sheet of banks and the diversified portfolio but higher provisioning and careful husbanding of weak accounts is required, the secretary said.

He flagged current account and savings bank account (Casa) deposits as the third area on which the state-owned entities needed to focus. In recent years, private players such as HDFC Bank have build a higher proportion of low-cost Casa deposits, compared with public sector players such as State Bank of India, the countrys largest lender. Over the last 15-18 months, the public sector players have managed to improve the share of Casa in their deposit base due to a flight to safety following the global credit crisis.

Gopalan also asked public sector players to focus on human resource capabilities, for which an expert committee headed by former Bank of Baroda Chairman and Managing Director A K Khandelwal has been set up. He also said that the state-owned players should focus on strengthening the adoption of global standard such as International Financial Reporting Standard (IFRS) and Basel II norms.

He added that financial inclusion could help banks not only fulfill the requirements of the under-banked population but also provide them access to a new customer segment and access to low-cost resources.