Government looking at merger of two big PSU banks: report

The government is looking at merging two state-owned major banks as a final step to bring them out of messy bad debt problem that has compounded with a weakening of the economy.

With state-owned banks failing to get anywhere near the target of reducing bad loans the government is pushing ahead with its merger plans to resolve the issue of bad loans, a Reuters report quoting an official overseeing the turnaround of banks said.

The report quoted Vinod Rai, who heads the newly-constituted Banks Board Bureau, as saying that a next step could be the merger of ''two large Mumbai-based banks.''

Rai, however, declined to identify the banks and the details of the planned merger, saying deliberations were preliminary and depended on the success of efforts to restructure the balance sheets of public sector banks.

Besides the planned merger of top public sector lender and market leader State Bank of India (SBI) with its affiliates and the newly set up Mahila Bank, two other major public sector banks - Bank of Baroda and Bank of India – are likely to be merged as part of a consolidation process, say reports.

''Once that consolidation has taken place, in the second phase, we will put a weaker, smaller bank into this merged entity,'' Reuters quoted Rai as saying in an interview.

With the bad loan cleanup veering off course, the government sees consolidation of public-sector banks as the final step in rebuilding a financial system capable of underwriting credit growth and job-creating investment.

While banks are stuck with still-mounting mounting bad loans, it is not known how a compounding of bad loans through mergers would help reduce the debt burden of the merged entity. This can only be done by understating debt over overstating assets of merging banks. In any case, these state-owned banks too must cleanse their balance sheets.

According to Rai, the merger could be the second phase of the clean-up act after they resolve the bad loan issue. 

Banks in India continue to be under capitalised and this constrains their lending ability. Finance minister Arun Jaitley has made a budget provision of Rs70,000 crore ($10.5 billion) over four years to March 2019 for bank capitalization. But that will fall far short of requirements.

The only way out is seen as reducing government ownership and infusion of private equity. Starting 2017-18 fiscal, minority shareholders in state-run banks will be encouraged to subscribe to rights issues – offerings of new shares – alongside the state.

Rai said these investments would be attractive because many state banks are valued at a discount to their book value and the process would move ahead once non-performing assets, or NPAs, are dealt with.