Following the Cabinet’s approval to constitute a mechanism to fast track the consolidation of state-owned banks, the government has set up a three-member ministerial panel to oversee mergers of public sector banks.
Finance Minister Arun Jaitley has been appointed as the head of the panel, which also includes Nirmala Sitharaman, the Minister of Defense and Piyush Goyal, the Railway and Coal Minister.
Referred to as alternative mechanism (AM), the panel will review merger proposals received from state-run banks, approve the eligible ones and will send a quarterly report to the cabinet on the cleared proposals.
As per the government’s statement, the alternative mechanism panel should define the appraisal procedure of consolidation proposals by banks on its own, while following the guidelines set by the Banking Companies’ Acquisition and Transfer of Undertakings Acts, 1970 and 1980 .
The Reserve Bank of India (RBI) will guide the panel before according an in-principle approval. It will also direct the banks to consider consolidation proposals from other banks.
Last week, when government announced Rs.2.11 trillion recapitalisation plan to boost public sector banks, it mentioned that a series of banking reforms will be unveiled in the coming months as part of the capital infusion plan.Setting up the AM panel is one reform in that direction.
The move will consolidate struggling PSUs with a market share of above 70% and have bad loans exceeding 80%, to create strong lenders that cater to the credit needs of growing Indian economy. It will also increase the capacity of state-run banks and improve their risk-taking ability.
Experts opine that the consolidation will help banks to deal better with their credit portfolio and will also prevent overspending of resources in the same area. It will further arm the banks to deal with shocks effectively.
The concept of consolidating weaker banks has been around since 1991, but was brought into light by former RBI governor M. Narasimham, who proposed the merger of banks in to a three-tiered structure. The State Bank of India is the first to implement the idea by merging five of its associate banks and Bharatiya Mahila Bank with itself in the beginning of 2017.
Following the SBI merger, the number of state-run banks has come down to 21 from 26.
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