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Government may nudge state-run banks to present M&A options
August, 25th 2017

The government will now nudge state-run lenders to present potential targets for merger and acquisitions after putting in place a procedure for quick decisions consolidation proposals and banks have been told to identify synergies across platforms including business operations and geographical spread, a senior finance ministry official said.

“They will present such options and those banks which have also shared similar inclinations, we will bring them together to pursue it further,” the official said. The union cabinet on Wednesday approved an alternative mechanism of a panel of ministers to decide on consolidation proposals for state-run banks.

“It is not necessary that a larger PSB should overtake a small or mid-size lender. If there is a synergy, two or three banks can merge to create a bigger and stronger entity,” said another finance ministry official, adding that the idea was to create stronger banks that can raise resources on their own. While the government is inclined to have at least 2-3 banks consolidating in this fiscal, it will take any decision on commercial consideration.

“SBI will be largely out of this exercise,” said the first finance ministry official quoted above. Already four banks including Dena, Syndicate, Vijaya and Canara Bank have made presentation along these lines. In the last few years, despite the government’s support for consolidation proposals, most PSBs have resisted, sometimes due to pressure from employee unions or out of fear of losing top management positions.

The urgency for consolidation comes from huge needs for capital for banks that the government is not in position to provide. Consolidation would reduce the need for government support. S&P Global Ratings estimates Indian state-run banks will need Rs 1.9 lakh crore in capital by March 2019. The government has committed only Rs 10,000 crore each in current fiscal and next. The decision to create this ‘alternate mechanism’ “would facilitate consolidation among the nationalised banks to create strong and competitive banks,” the government said in a statement.

“After the in-principle approval, the banks will take steps in accordance with law and requirements of the market regulator, Securities & Exchange Board of India,” Finance Minister Arun Jaitley had said. There are 21 state-run lenders in the country. In April, the country’s largest bank, State Bank of India, absorbed five of its associate lenders and Bharatiya Mahila Bank. SBI is now a single bank with about 24,000 branches, 59,000 ATMs, 6 lakh POS machines and over 50,000 business correspondents.

“Most banks are relying on the government’s capital support despite posting huge bad loans. It is time that the government bring these lenders to the negotiating table and fix a time frame to take a decision,” said MP Shorawala, a former independent director with Central Bank of IndiaBSE -0.61 %.

ET View: A good idea
The government, as a majority owner, is right to nudge banks to come up with viable options on mergers and acquisitions. Synergies in terms of employee integration or integration of the technology platform are important to ensure that the merger is smooth and successful. A merger, say, of a small weak bank with a not-so-strong bigger bank is wholly avoidable. There should be no duress but banks must put forth M&A proposals that are commercially sound.

 

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