The Union government may cut the number of public sector banks to 12 from the existing 21 in the medium term, as part of a three tier structure, there would be at least 3 to 4 banks of the size of SBI, the country’s largest lender, according to the sources.
Prime Minister Narendra Modi government may set up three to four global sized banks and reduce the number of state owned lenders to about 12 as a part of its consolidation agenda.
In June, Finance Minister Arun Jaitley said ‘the government is actively working towards consolidation of public sector banks but declined to provide details, saying this was price sensitive information’.
Public Sector Banks (PSBs) are banks where a majority stake that is more than 50% is held by a government. The shares of these banks are listed on stock exchanges. There are a total of 21 Public Sector Banks (PSBs) in India.
The Central Government entered the banking business with the nationalization of the Imperial Bank Of India in 1955. A 60% stake was taken by the Reserve Bank of India and the new bank was named as the State Bank of India. The seven other state banks became the subsidiaries of the new bank when nationalized on 19 July 1960.
The Reserve Bank of India (RBI) is India’s central banking institution, which controls the monetary policy of the Indian rupee. It commenced its operations on 1 April 1935 during the British Rule in accordance with the provisions of the Reserve Bank of India Act, 1934.
The next major nationalization of banks took place in 1969 when the government of India, under prime minister Indira Gandhi, nationalized an additional 14 major banks. The total deposits in the banks nationalized in 1969 amounted to 50 crores. This move increased the presence of nationalized banks in India, with 84% of the total branches coming under government control.
The next round of nationalization took place in April 1980. The government nationalized six banks. The total deposits of these banks amounted to around 200 crores. This move led to a further increase in the number of branches in the market, increasing to 91% of the total branch network of the country.
The share of the banking sector held by the public banks continued to grow through the 1980s, and by 1991 the public sector banks accounted for 90% of the banking sector. A year later, in March, 1992, the combined total of branches held by public sector banks was 60,646 across India, and deposits accounted for Rs. 1,10,000 crore. The majority of these banks were profitable, with only one out of the 21 public sector banks reporting a loss.
Five associate banks and Bharatiya Mahila Bank became part of State Bank of India in the last consolidation drive that ended on 1 April, making it one of the top 50 banks in the world.
State Bank of Bikaner and Jaipur (SBBJ), State Bank of Hyderabad (SBH), State Bank of Mysore (SBM), State Bank of Patiala (SBP) and State Bank of Travancore (SBT), besides BMB, were merged with SBI.
The Finance Ministry is considering clearing another such proposal by this fiscal if bad loan situation comes under control. Public sector banks are sitting on a mountain of bad loans to the tune of over Rs 6 lakh crore.
The RBI identified 12 accounts for insolvency proceedings with each of them having over Rs 5,000 crore of outstanding loans, accounting to 25 percent of the total non performing assets (NPAs) of banks.
These 12 accounts would qualify for immediate reference under the Insolvency and Bankruptcy Code (IBC), the RBI said. The banking sector is saddled with non performing assets (NPAs) of over Rs 8 lakh crore, of which Rs 6 lakh crore is with public sector banks (PSBs).
A provision of Rs 9,555 crore has been made for recapitalisation of PSU banks, including the National Bank for Agriculture and Rural Development, Export-Import Bank of India (Exim Bank), India Infrastructure Finance Company and Small Industries Development Bank of India in 2015-16.
Last year, a provision of Rs 11,200 crore had been made for recapitalisation of PSU banks, but a mere Rs 6,990 crore was spent infusing money into banks, including the SBI, Bank of Baroda, Punjab National Bank, Canara Bank and Syndicate Bank.
According to sources, region centric banks such as Punjab and Sind Bank and Andhra Bank will continue to operate as independent entities while some mid-size lenders would also remain.
According to former RBI governor C Rangarajan, the system will have some large banks, some small banks, some local banks and so forth. ‘What is needed in the system is variety,’ Rangarajan said.
The bank merger should be need based and the initiative should come from the lenders themselves. ‘Initiative for merger should come from banks themselves and there must be felt a need for it. Therefore, the world over, the larger banks are coming into cooperation,’ Rangarajan said.
The objectives behind nationalization were:
- To break the ownership and control of banks by a few business families,
- To prevent the concentration of wealth and economic power,
- To mobilize savings from masses from all parts of the country,
- To cater to the needs of the priority sectors
The factors like regional balance, geographical reach, financial burden and smooth human resource transition have to be looked into while taking a merger decision, a very weak bank should not be merged with a strong one as it could pull the latter down, according to official sources.