Merger of two large state banks in Mumbai planned

Consolidation of India’s public-sector banks would represent a final step in rebuilding a financial system capable of underwriting credit growth and job-creating investment in Asia’s third-largest economy. First, though, the state banks must cleanse their balance sheets. They accounted for 88 per cent of a pile of stressed loans that exceeded $138 billion in June, the legacy of a lending binge under the last government that has hobbled Prime Minister Narendra Modi’s growth agenda. Vinod Rai, the veteran bureaucrat hired this year to head a new Banks Board Bureau, said a next step could be the merger of “two large Mumbai-based banks” that he declined to identify. 

“Once that consolidation has taken place, in the second phase, we will put a weaker, smaller bank into this merged entity,” he said. Rai declined to go into detail, saying deliberations were preliminary and depended on the success of efforts to restructure the balance sheets of India’s nearly two dozen public sector banks. Apart from market leader State Bank of India, now acquiring several affiliates, the two largest public sector banks based in India’s financial capital are Bank of Baroda and Bank of India. The Scheme for Sustainable Structuring of Stressed Assets, or S4A for short, survived a leadership transition at the central bank and is backed by its new governor, Urjit Patel, who announced after his first policy meeting last week that he would tweak its terms to make it more practical for banks.