Pranab sees merit in bank consolidation for stability

Pranab sees merit in bank consolidation for stability
The Hindu Business Line, June 11, 2009, Page 1

Wants banks to provide credit at reasonable rates to push growth.

Ramesh Sharma

Our Bureau, New Delhi

The Finance Minister, Mr Pranab Mukherjee, has put his weight behind consolidation of banks, stating that this may be necessary to improve the state of competitiveness of Indian banks globally and also to reduce the risk to financial stability.

The stock market cheered the Finance Minister’s talk on consolidation with many public sector bank (PSB) stocks recording a surge and closing the day with more than 3 per cent gains over the previous day’s close.

Easing credit

In his first meeting with chief executives of PSBs after taking charge as Finance Minister, Mr Mukherjee also nudged the banks to “explore the possibility” of bringing about a further reduction in their lending rates.

“As a financial intermediary, the banks have to standby to provide credit at reasonable rates,” he said.

He observed that the reduction in key policy rates by the Reserve Bank of India was not getting adequately reflected in the reduction of benchmark prime lending rate (BPLR) of banks.

The PLR of banks had come down to 12-12.5 per cent against 13.75-14.25 per cent six months ago.

Stating that providing credit at reasonable rates was an area of concern in many quarters both within the Government and outside, Mr Mukherjee urged banks to address these concerns expeditiously and in adequate measure.

This would help restore the environment for rapid economic growth, he said.

In its Annual Credit and Monetary Policy statement for 2009-10, the RBI had noted that there was more room for banks to cut deposit and lending rates.

Cuts in the offing

Indications are that after today’s meeting, many public sector banks may go in for 50-75 basis point cut in lending rates.

The Finance Minister also hoped the economy would turnaround soon on the back of various pro-growth measures and the three stimulus packages.

On the issue of merger of PSBs, Mr Mukherjee pointed out that the Government had always maintained that the initiatives for consolidation in the banking sector had to come from the managements themselves. The Government would only play a supportive role as a common shareholder, he added.

Merger support

“At the meeting today, I had emphasised that the PSBs should look at consolidation as a serious option in order to reduce risk to financial stability and to face competition.

“Any consolidation initiative in the banking sector would be viewed positively and Government, as a majority shareholder, would continue to play a supportive role in the process,” Mr Mukherjee told reporters here.

In the earlier UPA regime also, the Government had stressed the need for consolidation among public sector banks.

The only transaction that happened at the ground level was State Bank of India’s acquisition of State Bank of Saurashtra, which was the smallest of SBI’s associate banks.

Although the SBI top management has been hinting that it could push further consolidation within the SBI Group, such efforts may face resistance from bank unions, which have been opposed to this idea. However, the SBI Chairman, Mr O.P. Bhatt is confident of driving consolidation within the SBI Group once there is a signal to do so from the new Government.