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HomeEconomyModi govt may push for mergers to tackle crisis in state-run banks

Modi govt may push for mergers to tackle crisis in state-run banks

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Apart from the insolvency and bankruptcy code, the govt may announce additional mechanisms to strengthen recovery and reduce NPA levels.

New Delhi: The Modi government has begun work to find a “viable” solution to fix weak and poorly-performing public sector banks. And this could include speeding up the merger of banks, top government sources told ThePrint.

Interim finance minister Piyush Goyal and his team have already held several meetings to address the issue, they said.

The government, which has already implemented the insolvency and bankruptcy code (IBC), could also announce additional measures to strengthen recovery and reduce the level of non-performing assets (NPAs) or bad loans.

The list of such banks includes Central Bank of India, Allahabad Bank, Bank of Maharashtra, United Bank, UCO Bank, Indian Overseas Bank, Oriental Bank of Commerce and Punjab National Bank.

“While merging a few weak banks at this point is being resisted by the lenders that are doing relatively well, the idea is to have fewer banks under the government, so that even if capital infusion is required, it will be for a handful,” a top government official told ThePrint.

Decisions on mergers may not be left to the banks anymore, the official added.

While the IBC is underway and a few NPA accounts such as Bhushan Steel and Electrosteel Steels have been settled, banks have had to take sizeable haircuts.

“The IBC is working but has some limitations, and this is creating problems. Many NPAs, especially in the power sector, have not found any takers, so the thought is to bring in an additional mechanism to try and resolve this,” the official said.

The finance ministry has decided to infuse Rs 11,336 crore in five banks, including PNB, Corporation Bank and Andhra Bank, to ensure that their regulatory capital requirements are maintained.

In October, the government announced a recapitalisation package of Rs 2.11 lakh crore. According to the plan, state-owned banks will get Rs 1.35 lakh crore through re-capitalisation bonds, while the other Rs 76,000 crore would be raised through capital from the market.

A pressing need

The gross bad loans of all public sector banks put together touched 15 per cent of advances in 2017-18. The level of bad loans could further rise for these banks by the year-end, a banking analyst said.

The NPA level for all PSU banks, barring Vijaya Bank and Indian Bank, are in double digits. The Reserve Bank of India has already barred Dena Bank from giving out further loans, or going in for fresh recruitments. The government-owned Life Insurance Corporation (LIC) has come to the rescue of IDBI Bank.

“If this problem is not resolved immediately, it could lead to disastrous circumstances. The government has to think out of the box, or else it will keep absorbing taxpayers’ money,” Ajay Chhibber, chief economic adviser, FICCI, told ThePrint.

IBC is not enough

Arvind Subramanian, outgoing chief economic adviser to the Centre, had underlined the need to create a bad bank that would have taken the NPAs. This would have left the lenders with a clean slate and provided them the required elbow room to start lending, critical for their bottomlines. However, due to political pressure, the government has ruled out setting up a bad bank.

“The IBC is very effective, but it is important to have something more to that. The problem will have to be handled effectively and only IBC may not be enough. We need the IBC and something more,” Subramanian had said.

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