The Reserve Bank of India has been asked to identify and prepare a list of government controlled lenders that can be merged together. Along with this the finance minister has also asked a time frame for the consolidation. This is being done to strengthen the banking system that is burdened with bad debt, according to media reports.
Mergers is aimed at creating lesser number of lenders but having them better-capitalized and eventually improving regulatory oversight.
Out of the 21 public sector banks that are currently operating, 11 are under an emergency program. This essentially means they are supervised by RBI and have a restricted lending program. India has been ranked second in the bad-loan ratio in world’s 10 largest economies, and the public sector banks are estimated to hold 90 percent of the non-performing loans in the country.
Losing out market share to private sector
Consolidation will also ensure that public sector banks will regain at least a part of the market share currently lost to the private sector players. With high competition from private sector banks and newly formed payments banks like Paytm and Airtel, consolidation of public sector banks seems the much needed lifeline.
It is also estimated that 70 percent of new deposits went to private banks in the last fiscal year; and that they will gain nearly 80 percent of incremental loans by 2020 due to the restricted lending by public sector banks.