The Indian Government is reportedly considering a proposal for merging four public sector banks, namely Bank of Baroda, Oriental Bank of Commerce, IDBI Bank Limited and Central Bank of India. In case this proposal gets approval from the Government, the banking organization created through this merger will become India’s second biggest bank after State Bank of India. The combined assets of the new entity will touch a whopping Rs. 16.58 lakh crore as per reports.
The Indian Government has been hinting at more consolidation in the banking sector over the last 1-2 years. Indications have been given with regard to lowering the total number of Indian banks through mergers or closure of smaller public sector banks which are loss-making entities. The four banks that may be merged are already facing the heat with their cumulative losses touching a whopping Rs. 21, 646.38 crore for FY2017-18.
This large scale merger may be an initiative to check the alarming growth in NPAs (non-performing assets) or bad loans for Indian banks at a time when overall corporate demand has also weakened. Banks are now more cautious about lending money in an environment where there are more stringent regulations of the RBI in case of any loan defaults. Weaker banks will be empowered to lower overheads, sell off assets and shut down loss making branches as a result of this merger.
Additionally, reports indicate that a 51% stake in IDBI Bank may be sold by the Department of Financial Services which is a subsidiary of the Union Finance Ministry. The Government’s majority stake may be sold off to a large strategic investor for anything between Rs. 9-10, 000 crore approximately as per reports. There may be a stake sale to private equity investors in order to achieve the dilution of the stake held by the Government in IDBI Bank.