Finance ministry floats draft paper on consolidation of PSU banks

Finally the finance ministry has prepared a discussion paper titled ‘Consolidation among public sector banks’ to sought out the issue of mergers of public sector banks. In this paper the ministry has drafted the guidelines for mergers of public sector banks. One of the major guideline mentioned in the paper is that the merger entity must get hold of 5 to 7 per cent market share across regions and should be able to establish a pan-India presence.

Other guidelines include that the merger banks must be IT compatible and have proper cultural fit.

The paper states at the time of merger one of two banks chief executive officer should be close to retirement as this will not lead to any type of clash at the top level.

In the paper out of the 19 public sector banks, besides the State Bank of India there are seven other banks have been classified as ‘strong’. These include Punjab National Bank, Bank of Baroda, Union Bank, Canara Bank and Bank of India, Corporation Bank and Vijaya Bank.

A finance ministry official pointed out, “Others have been left out of the ‘strong’ category based on various criteria, including levels of non-performing assets, capital adequacy and technology adoption.” He stated that the banks which have been included in the list do not mean they are ‘weak’ banks but they have to improve in some aspects of their functioning.

With the heads of some ‘string’ banks discussion on guidelines has already been done. Soon the discussion will be taken up with other banks also.

The paper points out it is mandatory that the IT networks of the merger banks should be compatible or one of them must have approved superior technology platform which will be adapted by the other bank in the due course of merger.

Then merging banks should do a proper assessment of the cultural fit of their staff. Giving an example the paper stated the Canara Bank staff are ‘homogenous’, whereas Mumbai-based banks such as Bank of Baroda, Union Bank and Bank of India have a more cosmopolitan staff mix.

The paper has pointed out the rigour of the dozen-odd steps that banks required to go through, at the time of merger process until the final consummation. Some of them are both the merger banks have to prepare proposals and get it approved by their boards, getting consent from the government, carrying out detailed due carefully, evaluation of agreement should be done as per Reserve Bank of India and Securities & Exchange Board of India guidelines, to advertise about merger in newspapers and get the approval of shareholders.

The ministry official clearly stated that the initiative for mergers has to come from banks. “We will act as a facilitator.” At present no merger proposal is pending with the government.

Recently Finance minister Pranab Mukherjee had told the Parliament that the government will not interfere in the working nor any directive issued to any bank for merger or consolidation.

An anonymous chairman and managing director of a large public sector bank told Financial Chronicle the discussion has been done with the government on the issues in the paper. The chairman told, “We told the government that, to begin with, the stronger banks should merge, especially those which have a better cultural fit. Our advice is that all aspects should be evaluated beforehand so that, once the merger process is initiated by two banks, it should be taken to its logical conclusion. Any mid-course failure will send wrong signals.”