Rumours about a possible Canara Bank-Dena Bank merger may be an indication of a renewed attempt by the government to push through the much-delayed consolidation among nationalised banks.

Even as finance minister P Chidambaram prepares to present the union budget, one of his favoured policy initiatives, consolidation among nationalised banks, is rumoured to be regaining some pace.

The consolidation move had to be forced on the backburner, given the strident opposition from the government's Left allies. However, now, the move may be revived in a low-key manner. Already Canara Bank is said to be preparing to take over Dena Bank and has appointed a consultant to advise it on the deal.

Chidambaram has been a staunch supporter of consolidation among nationalised banks ever since the idea was floated a couple of years back. He had argued that our state-owned banks lacked sufficient size to be able to compete effectively in the future as India opens its doors to foreign banks.

Since the government cannot fund their organic expansion due to lack of resources, the only way to build scale is to merge some of these banks.

These proposals were met with stiff resistance by the bank employee unions, supported by the Left parties and their labour affiliates that control them. They saw it as a precursor to privatisation and were completely unwilling to consider the merits of any consolidation. Despite assurances from the government, the unions and Left parties believed that consolidation in the industry would lead to job losses because of restructuring.

The proposed merger between Union Bank and Bank of India was seriously considered by the boards of both the banks and was actively supported by the government. It fell through even after much deliberation as the issue became a political hot potato. Other such proposals included a merger between Bank of Baroda and Dena Bank and a grand consolidation of the banks, which are strong in the Western region like Bank of Baroda, Bank of India, Union Bank, Dena Bank, and Bank of Maharashtra.

Buoyed by their success in the first round, the employee unions have been delaying the much awaited merger of SBI and its associate banks. Though SBI has achieved operational consolidation with its associate banks through facility sharing and common technology platforms, a full-fledged financial merger is still not being openly discussed for fear of a backlash from the powerful employee unions.

The unions were critical of the government move to acquire the majority stake held by the RBI in SBI, though it is based on the sound principle that RBI, which is also the banking regulator, should not be the owner of the country's largest commercial bank. Finally, the government had to resort to an ordinance to amend the relevant legislations as introduction of such amendments in the parliament would have met with resistance.

The only progress, if it may be called so, in the consolidation move was the formation of a loose informal business alliance between Oriental Bank of Commerce, Indian Bank and Corporation Bank. These three agreed last year to cooperate in various business segments and take up joint funding of large projects.

If the proposed merger between Canara Bank and Dena Bank goes through, it would create the second largest bank in the country - behind the government-owned SBI but ahead of the current No.2, Punjab National Bank.

The merger would be complementary as Canara Bank is very strong in the South while Dena Bank's network is concentrated in the West. Such a merger is more significant for Dena Bank where the government holding is already down to 51 per cent, which makes any further equity dilution impossible.

The unfortunate fact is that, even after a massive consolidation exercise, Indian banks would be pygmies compared to international banks. In terms of asset base, the SBI Group (including associate banks) with total assets of $156 billion is just one-tenth the size of UBS Group which has $1.53 trillion in assets. Other large Indian banks like ICICI and PNB are much smaller and are not even worth being compared ti any global bank.

Indian banks are also much smaller than their Chinese counterparts. ICBC, the top ranked Chinese Bank, has assets of close to $900 billion and a market capitalisation of around $250 billion. China Construction Bank, the second largest in China, has an asset base of $590 billion – nearly 9 times the size of ICICI Bank.