The move comes close on the heels of the government’s proposal earlier this week to merge three state-run banks — Bank of Baroda, Vijaya Bank and Dena Bank — to create the country’s third-biggest lender.
“We want PSBs to pursue differentiated banking. Smaller banks should not be competing for large corporate loans or for sectors where they don’t have the strength or capacity to fund long term,” he said.
The boards of the three banks are already considering the clearances for the proposed merger. Bank of Baroda is the largest of the three with a business of Rs 10.29 lakh crore as on July 2018.
The government has made it clear that it is looking at national banks and regional banks, and existing players will have to make plans for reorganising their organisational resources, including human resource and information technology systems, the above quoted official said.
“We are looking to bring down the number to around 10-11 banks,” he added. At present there are 21 PSBs, which include country’s largest, State Bank of India.
“It is for the banks’ board to take these decisions. What we have conveyed is that any capital support from the government is linked to performance,” said another finance ministry official.
Banks that are under Reserve Bank of India’s prompt corrective action (PCA) framework have also been told to present their turn-around plans and look at leveraging their competitive advantage for regional market business. At present, there are 11 PSBs under the PCA framework.
“This will also mean rationalisation of branches,” the above quoted finance ministry official added.
Finance minister Arun Jaitley will hold a quarterly review of the performance on September 25 and it is expected that banks under PCA will share their plans.
The government under its reforms agenda for state-run lenders termed EASE — Enhanced Access and Service Excellence — has directed banks to reduce their corporate exposure to below 40% by March 2019 or by at least 15% from September 2017 level.
Former independent director with state-run Central Bank of India MP Shorawala said PSBs should not be cannibalising each other. “It is a good move by the government, as promoters, to direct the smaller PSBs to focus on niche lending rather than taking on the likes of SBI,” he added.