Any proposal to amalgamate banks must be initiated by boards of state-owned lenders and a merger must be based on commercial considerations, said by finance minister Arun Jaitley. Jaitley was addressing the media after the Cabinet approved an “alternative mechanism” by which an inter-ministerial panel will be set up to oversee the merger of public sector banks (PSBs). While the government may have formally kicked off the process of consolidation, analysts believe there is virtually no room for a merger on “commercial terms” given most banks have just the required amount of capital. Moreover, if a relatively strong bank acquires a weak bank, it will find it harder to raise capital from the market. Analysts feel the government, as the largest shareholder in PSBs, might need to nudge some of the stronger lenders to acquire weaker ones. To many, the fact that capital is being allocated only to select banks that fulfill certain criteria is a form of stealth consolidation. Banks should ensure that the lender being acquired is a strategic fit for it. One objective of the mergers would be to reduce costs over the medium term, experts said. Prime Minister Narendra Modi will choose the members of the inter-ministerial panel that will likely be headed by Jaitley. The presence of the panel is expected to help speed up the process and give lenders some support. No law is required to be amended for the consolidation exercise although Parliament’s approval might be needed.

(Financial Express)