Centre says consolidation of banks essential for economy
By Joseph Samson
Nov 20, 2009
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The government has asked leading public sector banks to seek mergers and acquisitions opportunities to aid the economy in increasing its GDP.

Financial ministry officials met the country's top most banks' officials and asked them to start identifying strategic fits after taking into consideration the geographical and business synergies.

Senior officials from leading banks like PNB, Bank of Baroda, Union Bank, bank of India and Corporation bank attended the meeting held at the banking division of finance Ministry.

MV Nair, Chairman and Managing Director of the Union Bank of India said, "The banks have to do their homework and find out strategic fits with whom they can merge. It is going to take time to workout the finer details."

Presently, the number of public sector banks in India is 27 and the government feels that consolidation in the industry would allow the banks to achieve scale that they otherwise would not have been able to achieve.

A government note circulated during the meeting said, "Small and weak banks pose systemic risk with their low capital adequacy ratio and high NPAs. Consolidation is a timely response to augment efficiency, which would lead to income generation and add to GDP of the country. The lack of global scale for Indian banks came into sharp focus during the recent financial crisis that saw several international banks reneging on their funding commitments to Indian companies, but local banks could not step into the breach because of balance sheet limitations."

KR Kamath, CMD of PNB, the second largest public lender said that the bank did not have any qualms in acquiring other smaller banks in the domestic market.

The government is being cautious while pushing the consolidation agenda because it has been perceived as a sensitive issue. The smaller banks are apprehensive about losing their identities while bigger banks fear that the assets might become a liability for them in the long term.

Most bank employees are unhappy with the consolidation in the industry. Around 4 lakh officers and employees have decided to go on a strike on 16th December to protest against the proposed merger of State bank of Indore with its parent company, State bank of India and other possible mergers in the industry.


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