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Bank mergers: Finance Ministry examining various possible options to create robust financial institutions
June, 06th 2014

The finance ministry is examining various suggestions made by investment bankers to merge the country's biggest state-run banks to create much stronger financial institutions.

One proposal suggests Punjab National Bank, Indian Bank and Dena Bank be merged to create a bank with an asset base of more than Rs 9 lakh crore. Another possible combination is Bank of India, Allahabad Bank, Corporation Bank, Bank of Maharashtra and Punjab & Sind Bank.

The finance ministry is examining proposals that include consolidation based on geography, business mix and information technology systems. Both private and public sector investment banking firms have made proposals, a senior finance ministry official told ET.

Separately, ET has learnt that at least three investment banks made suggestions while pitching for mandates. "We are examining those inputs. The basic framework is to look at creating large banks with a pan-India presence," the official said, adding that any merger decision will hinge on political more than economic considerations. India's banks are still small when compared with global rivals. The country's largest, State Bank of India, is ranked 16th in Asia while Bank of Baroda is at 32.

According to a report by Morgan Stanley, there is significant overlap among various state-owned banks in terms of branches, mode of operation and clients. "Consolidation should enable (state-owned) banks to extract synergies fairly easy," it said.

But, it also noted that mergers won't be easy given the strength of the unions. In presentations to the finance ministry, most investment bankers pointed to HR issues standing in the way of consolidation efforts.

One proposal, based on business mix and the absence of conflicting subsidiaries, calls for the merger of Bank of India, Allahabad Bank, Corporation Bank, Bank of Maharashtra and Punjab & Sind Bank to create an entity with an asset base of more than Rs 11 lakh crore.

"The only challenge in this scenario is how to achieve integration of technology as all these banks work on different banking solution platforms," said the official cited above.

If the government decides to integrate banks on the same IT platform, it would mean about six banks, including PNB and United Bank of India, can be merged with an asset base of Rs 16 lakh crore. "In such a merger, there will be a lot of issues with business integration and geographical presence," the official said.

The finance ministry is looking at three to four large banks with a pan-India presence with entities present across all financial service sectors.

The Reserve Bank of India (RBI) is also open to the idea of mergers that aren't forced. RBI governor Raghuram Rajan has said that the central bank is open to voluntary mergers.

"When you go forcing mergers, then there is an issue of culture... so we should be careful about forcing mergers," he had said.

According to RBI, state-run banks will need about Rs 4.15 lakh crore to meet Basel-III norms - equity capital of Rs 1.5 lakh crore and non-equity capital of about Rs 2.75 lakh crore. The government, with its fiscal deficit, won't be able to capitalise banks over a long period.

The department of financial services is also considering the establishment of a holding company of all state-run banks to have a single mechanism to enable the government to better manage banks' capital needs.

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