Larger public sector banks may acquire smaller peers

6 June 2018: The government has resumed discussions on public sector bank consolidation with some of the "larger and stronger" players such as Bank of BarodaNSE 1.88 % (BoB), Canara Bank and Union Bank of IndiaNSE 3.74 % seen as potential candidates with which the smaller ones can be merged. 
Sources said that lenders such as IDBI Bank and Dena Bank are with those on the radar for a possible alliance with some of the debates in the banks have already begun. "There are various options that are being searched but nothing has been finalized so far," said an official source, who did not wish to be identified. While the Narendra Modi government has been discussing the possibility of consolidation, it has abandoned to move beyond the merger of State Bank of IndiaNSE 1.97 %'s (SBI's) assistant banks with the parent. In addition, Bharatiya Mahila Bank was also merged with the country's largest lender. In the past too, the UPA, as well as the Atal Bihari Vajpayee government, had discussed the possibility but given up due to lack of interest from any of the lenders. 
While finance minister Arun Jaitley had declared plans to sell a stake in IDBI Bank a couple of years ago, the plan was abandoned due to disinclination from a powerful section in the finance ministry. Similarly, the incorporation plan was put on the back burner after banks reported a spike in bad debt due to RBI's provisioning norms. But with little signs that bleeding will stop immediately, along with the need to reform the public sector space, the finance ministry has once again opened the case of consolidation
  At the same time, it realizes that with less than a year to go for general elections, it may not be in a position to push through a mega-consolidation. Besides, sources said, involving more than two banks will make the entire process cumbersome and the new entity will be unwieldy. As a result, the exercise may be limited to one or two cases with IDBI Bank expected to be first off the block. 
"The government will try to clean up things at IDBI Bank despite it being an election year.  It can be through a strategic sale or a merger," said a source. While the bank has seen total non-performing assets rise to 28 percent of its loan book at the end of March 2018, the finance ministry believes that there has been an improvement in various significant parameters. 
The other "large players" such as Bob, Canara Bank, and Union Bank too reported losses and have a restricted appetite. 
There are political issues to fight with as well since a merger of one of the three Kolkata-headquartered lenders — Allahabad Bank, UCO Bank and United Bank — is surely going to cause compliant from Mamata Banerjee's Trinamool Congress and the Left parties