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Govt unveils big-bang plan to merge state-run banks
India's Finance Minister Nirmala Sitharaman | Photo Credit: Reuters

The government will merge 10 state-run banks into four as part of a big consolidation drive to clean up the banking system, revive lending and boost economic growth that has slowed to a six-year low.

Finance minister Nirmala Sitharaman said at a press conference on Friday that India will have 12 state-run banks after the exercise is completed from 22 at present and 27 in 2017, when the first such mergers took place.

Prime Minister Narendra Modi’s government had merged State Bank of India—the country’s biggest bank by assets—with its six associate banks in the first leg in 2017 and combined Bank of Baroda, Vijaya Bank and Dena Bank last year.

In the latest phase of the consolidation, the government will merge Syndicate Bank into Canara Bank, and combine Oriental Bank of Commerce (OBC) as well as United Bank of India with Punjab National Bank (PNB), Sitharaman said.

Union Bank of India will absorb Corporation Bank and Andhra Bank while Indian Bank and Allahabad Bank will also be combined.

The combined PNB, OBC and United Bank will be the second-largest state-run bank, finance secretary Rajeev Kumar tweeted.

The combined Canara Bank and Syndicate Bank will be the fourth-largest state-run lender while the merged Union Bank, Andhra Bank and Corporation Bank will be the fifth-largest, he tweeted.

Six state-run banks that have been left untouched thus far are Bank of India, Central Bank of India, Indian Overseas Bank, UCO Bank, Bank of Maharashtra, and Punjab and Sind Bank.

The six merged banks (including SBI and Bank of Baroda) will now command 82% of the business with state-run lenders and 56% of the commercial banking business. 

The consolidation was long overdue, said Rajesh Narain Gupta, managing partner at law firm SNG & Partners. “This will help in laying the groundwork for implementing best business practices in compliance with global banking standards.”

Mahesh Singhi, founder and managing director at investment bank Singhi Advisors, said this is a key reform initiative that can reinvigorate the banking system.

Capital infusion, governance reforms

The government move comes just a week after the finance minister announced the infusion of Rs 70,000 crore into state-run banks to revive lending. Finance secretary Kumar said on Friday no further capital injection into these banks will be needed.

Of the total infusion, PNB will receive the lion’s share at Rs 16,000 crore while Union Bank of India and Bank of Baroda will get Rs 11,700 crore and Rs 7,000 crore, respectively. Canara Bank and Indian Bank will get Rs 6,500 crore and 2,500 crore, respectively. 

The numbers aside, the finance minister also unveiled a slew of governance reforms in the banking sector, which she said will help make the banks more robust and market friendly. 

Sitharaman said that the performance of bank officials of the rank general manager and upwards (going up to the managing director), will be appraised by a board committee of nationalised banks. Moreover, after consolidation, the banks will be given the discretion to introduce new positions at the level of chief general manager “as per business needs.”

Banks will also have the power to recruit a chief risk officer from the market at “market-linked compensation” to attract the best available talent.

Moreover, in a bid to enable succession planning, bank boards will be empowered to decide upon a system of a development plan of “all senior executive positions”. The boards will also be authorised to prescribe “residual service” of two years for appointment of officers of the rank of general manager and upwards, in order to “ensure sufficient tenure,” the government said. 

Further, bank boards have been empowered to enhance the sitting fees of non-official directors and also reduce or rationalise the various board committees that work under their supervision. Non-official directors will now be analogous to independent directors, the government said. 

More importantly, perhaps, the loan sanction thresholds for management committees of bank boards have been doubled, to enable them to clear higher value loan proposals. All large banks will now have at least four executive directors “for better functional focus and thrust to technology”.

Sitharaman also said that like previous bank mergers, the current round of amalgamation will not see any retrenchment of employees. Together, the banks that will be merged have more than 3.08 lakh employees.

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