Government preparing for next round of public sector bank mergers

A senior finance ministry official stated that the government intends to launch the next round of public sector bank mergers after analysing comprehensive research on the outcomes of mergers in state-run banks.

The State Bank of India (SBI) is the largest financial institution in India. The goal is to create 4-5 banks that are as large and robust as SBI, the source added, requesting anonymity.

There are currently seven main public sector banks and five minor institutions.

"Concerned banks have been invited to provide input by the end of the month. Before finalising the future approach, we will conduct broader consultations through the Indian Banks Association (IBA) and with other interested parties "the speaker stated.

In 2019, the government announced the consolidation of ten nationalised banks into four big institutions, reducing the number of public sector banks (PSBs) to twelve. In 2017, there were 27 state-sponsored lenders. The merger became effective in April 2020.

In a paper released earlier this week, the National Council for Applied Economic Research (NCAER) argued for the privatisation of all PSBs except SBI.

Poonam Gupta, director of the NCAER, and economist Arvind Panagariya, co-authors of the paper, found that during the last decade, PSBs have generally lagged behind commercial banks in all important performance measures. "Their debts have gone bad and their operational expenditures have skyrocketed," it stated. Additionally, these public sector entities have earned poorer returns on assets and equity than their private sector counterparts.

However, according to the finance ministry official, state-owned banks have improved their performance on all important indices over the past few years and increased their earnings in FY22.

"The government will continue to retain its presence in this sector, although we would prefer to reduce the number of its banks to between four and five from the current twelve," stated the official cited above.

In the upcoming monsoon session of parliament, the government will likely submit a law to promote the privatisation of state-owned banks.