The top brass of prominent state-run banks like Punjab National Bank, Canara Bank and Bank of Baroda, which are positioned as acquiring banks, have set certain pre-conditions to acquire smaller banks if they have to fulfil the government’s agenda of consolidation.
Some of the key terms for taking over peer banks are that the target bank be a profit-making one and that the current management be given at least a three-year term after the merger to ensure that the transition is smooth. Besides, the acquiring banks have also demanded capital from the government, even if the target bank is well-capitalised.
Two senior bank officials, who did not want to be named, said these conditions were laid down when financial ministry officials had an informal meeting with the top management of large PSU banks to gauge their views on consolidation. “We have put forward our suggestions which includes demand for capital, longer term for management and inability to take over weak banks,” said another senior official. “Government will heed to these terms if they are true to their words that merger should be boarddriven,” he added.
In the last week of August, the government said that the boards of the bank will have to initiate mergers while a panel of ministers would be set up to examine and give in-principle approval to the consolidation plan.
The government is keen on reducing the number of PSU banks from 21 to 15 through consolidation so that they achieve economies of scale. Finance minister Arun Jaitley had said that the objective of the merger is to create stronger banks. However, acquiring banks are of the view that it would be difficult to get the right candidate due to the dire financial condition of most PSU banks, coupled with the fact that the government is set to infuse just about `10,000 crore in these banks this year –– almost a tenth of what’s needed to keep them afloat.
Nine banks reported losses of `18,066 crore in FY 2016-17 and nearly six banks are facing restrictions on expanding banking operations. Even among the acquiring banks, junk assets of two banks are close to the regulatory trigger to imposing restrictions. Post -provisions, PNB’s bad loans is 7.8% of total loans, while Canara Bank’s net bad loans is 6.3% as on March 2017.
Analysts fear that consolidation will take a backseat with more than a dozen banks expected to report losses this fiscal due to steep provisioning they need to make on loans of companies that are referred to bankruptcy court.
Source: The Economic Times