Cabinet clears 'Alternative Mechanism' to oversee bank mergers

New Delhi: The government on Wednesday decided to set up an Alternative Mechanism to oversee proposals for expeditious consolidation of public sector banks (PSBs) so as to create large, strong lenders. 

The move aims at meeting the credit needs of the growing Indian economy and building capacity in the PSB space to raise resources without dependence on the state exchequer, the government said. 

The Cabinet has given in-principle approval for PSBs to amalgamate through an Alternative Mechanism (AM), said an official release.  "The decision would facilitate consolidation among the Nationalised Banks to create strong and competitive banks," it said. 

Briefing about the decision, Finance Minister Arun Jaitley said the AM will oversee the proposals coming from boards of PSBs for consolidation.  "You have large number of banks in the public sector. The object is to create strong banks. Our experience of consolidation has been positive so far," he said, adding that an AM "enables a quick facilitation". 

The decision to set up the AM follows State Bank of India merging its five associate banks, as also the Bharatiya Mahila Bank, with itself. 

Jaitley said the decision regarding creating strong and competitive banks will be "solely based on commercial considerations". 

He said the process to facilitate consolidation amongst nationalised banks must come from the boards of the banks. 

The proposals received from banks for in-principle approval to formulate schemes of amalgamation would be placed before the AM.  On rationale behind consolidation, Jaitley said this will add commercial strength and prevent multiplicity of resources being spent in same area. 

Consolidation would also improves the capacity of banking system to absorb shocks that the markets may cause to it, he said. 

The finance minister said there will be a ministerial committee to oversee the mechanism. The Prime Minister will decide the members who the panel. 

After in-principle approval for consolidation, the banks would take steps in accordance with the law and Sebi requirements. The final scheme will be notified by the Central government in consultation with the RBI, Jaitley said. 

When asked if there could be some consolidations among banks in the current fiscal, Jaitley did not give any number. 

To a question if banks should be nudged to come up with proposals for consolidation, Jaitley quipped, "What do you think I am doing?". 

In 1991, the release said, it was suggested that India should have fewer but stronger PSBs.  "However, it was only in May 2016 that effective action to consolidate public sector banks began to be taken by announcing amalgamation of six banks into the State bank of India," it said. 

"The merger was completed in record time, unlike earlier mergers of State Banks of Indore and Saurashtra," it added.  There are now 20 PSBs other than SBI. 

The banking scenario has changed since 1970/80 when banks were nationalised, with more private banks, NBFCs, Regional Rural Banks, payment banks and small finance banks. 

"The decision is expected to facilitate the creation of strong and competitive banks in public sector space to meet the credit needs of a growing economy, absorb shocks and have the capacity to raise resources without depending unduly on the state exchequer," the release added.