India announced a series of mergers involving 10 state-owned banks on Friday, as it moves to strengthen a sector struggling under a mountain of debt and ensure stronger balance sheets to boost lending and revive economic growth.
The mergers, which cut to 12 the total number of state-owned banks from 27 in 2017, are the first since Indian Prime Minister Narendra Modi’s government won re-election in late May.
Modi’s government has vowed to clean up the banking sector and reduce the number of state-run banks.
“Twelve solidly present, well-consolidated, energised, adequately capital-endowed banks will now operate,” Finance Minister Nirmala Sitharaman told a news conference. “We’re trying to build the NextGen banks.”
The announcement came as India released data showing its economic growth in the April to June quarter fell to 5%, the weakest in more than six years.
The government has been taking steps to boost investment in the country, and to aid sectors such as banking and auto manufacturing.
Sitharaman said Oriental Bank of Commerce and United Bank would be merged with New Delhi-based Punjab National Bank to create India’s second largest lender after State Bank of India.
Two lenders based in southern India, Canara Bank and Syndicate Bank, would be amalgamated, the government added.
Elsewhere Andhra Bank and Corporation Bank are to merge with Union Bank, while Indian Bank will merge with Allahabad Bank.
“The mergers have been done selectively to ensure that the stronger banks are not impacted due to the weaker banks in the merger process,” said Siddharth Purohit, a research analyst at SMC Institutional Equities.
In 2017, the government merged State Bank of India with its associate banks, and this year it merged Bank of Baroda with some smaller peers.
“The consolidation will aid economies of scale for these banks, resulting in improved cost of funds and operating efficiency,” said Mona Khetan, a banking analyst at Reliance Securities.
However, merger-related issues including human resources and technology concerns, branch rationalization, and realigning non-performing assets may impact banks’ interim profitability, she added.
Sitharaman also announced the ten lenders to be granted funds in the government’s latest cash infusion into state-run banks, after it announced in July plans to inject another 700 billion rupees ($9.79 billion) into the sector this fiscal year.
PNB is to be the biggest beneficiary, receiving 160 billion rupees, followed by Union Bank with 117 billion rupees.
The government has injected roughly $36 billion rupees of taxpayers’ money into state-run banks over the last five years to revive the sector.
“The infusion is primarily aimed at giving a boost to the economy,” said Sitharaman, while adding that gross non-performing asset levels at state-run banks have fallen sharply over the last fiscal year.
Apart from injecting more funds, the government is also taking steps to strengthen the banks’ boards oversight capabilities. It has allowed them to hire external chief risk officers and to provide them market-linked compensation.
This will improve underwriting standards at these banks, which has been a long-time concern, added Khetan.