New Delhi, Jan. 5: The finance ministry will initiate steps to consolidate state-run banks into corporations from the next financial year after consulting the Left parties and trade unions.
“We will go forward with a wave of consolidation but this has to be politically acceptable. Talks are needed and will happen. By the middle of this calendar year, there will be a movement on the issue,” finance ministry officials said.
Meanwhile, banks have been asked to consult the finance ministry and create synergies with each other. For instance, banks will not try to compete with each other in acquisitions or overseas branch openings.
The ministry wants the actual proposals for mergers to come from the banks themselves, though the government will play the referee.
For instance, a proposal to merge all State Bank subsidiaries into a single entity was shot down as this would create an entity big enough to compete with the parent bank. This was considered “unhealthy”.
Instead, the State Bank and its subsidiaries have been asked to develop operational synergies with each other.
The government is keen to kick off the consolidation drive in the next financial year as it is apprehensive of the outcome of the next round of WTO talks. It feels developed countries will try to barter greater market access for industrial and farm products from the third world against opening up of financial and other services by developing nations.
“Virtually every nation wants us to extend national treatment to their banks. We have not agreed to anyone’s request except that of Singapore. Two of Singapore’s designated banks has received national treatment,” said an official. National treatment allows a level-playing field to foreign banks.
Foreign banks are not allowed to enter retail banking in a large scale now. There are also restrictions on the number of branches they can open and the business areas they can explore.
There is a suggestion that the number of state-run banks should be brought down to 10 from 27, banking sources said.
However, consolidation can result in redundancies of both branches and staff. The government feels this could be solved through branch swapping.
However, officials anticipate trade union resistance to these proposals and are keen that these are resolved before the actual work begins.
Sources said the government has also asked the top management of the public sector banks to carefully study the report of global consulting firm McKinsey and Co.
McKinsey had prepared a detailed report on the Indian banking industry, elaborating the structural loopholes and suggested various measures to strengthen the industry.