India starts moving to merge debt-ridden state banks

The government has asked the central bank to prepare a list of merger candidates.

Bloomberg reports that the Indian government is said to have asked the Reserve Bank of India (RBI) to come up with a list of viable state lenders for merger as well as a time frame for the consolidation that is expected to strengthen the country's debt-ridden banking system.

Also read: The full-fledged recovery of India's banks hinges on privatisation and mergers

This comes on the heels of an acquisition of state-owned Life Insurance Corporation (LIC) which bought a controlling stake (51%) in state lender IDBI Bank after the government reportedly failed to find a suitable buyer from the private sector.

IDBI Bank has been one of the worst-performing state owned lenders with gross nonperforming assets at around 27.95% as of end-March.

There are also earlier reports that larger players like Bank of Baroda, Canara Bank and Union Bank of India are being considered as strong enough to absorb smaller lenders. 

Also read: India to close a third of overseas public sector bank branches

Government lenders hold an estimated 91% of the banking sector’s nonperforming loans as 11 out of the 21 banks are operating under an emergency programme restricting lending activities to avoid aggravating the bad debt problem.

“Mergers amongst the PSBs would be credit positive for them because they would give scale efficiencies to the remaining enlarged banks. They would also help improve corporate governance,” credit rating agency Moody’s said in an earlier report.

Moody’s added that the task of overseeing the country’s 21 public sector banks (PSB) is proving to be too unwieldy for the government who has already shelled out $30.07b (INR2.1t) in a massive recapitalisation programme, rendering it unable to pay attention other key issues like long-term strategies and human resources.

Also read: Does India need to trim its bloated banking sector?

The International Monetary Fund (IMF) also joined the chorus for the privatisation of the banking sector which could help cut down the growing ills of the sector. “A first step would be to strengthen the quality and independence of these banks’ boards, and privatisation could also eventually be considered,” it said in a statement.

Here’s more from Bloomberg:

Photo from Kabi1990 - Own work, CC BY-SA 3.0