Small public sector banks, with assets of less than ₹2-lakh crore, should be readied for merger with five large PSBs, a Finance Ministry-appointed panel has recommended.

PSBs with less than ₹2 lakh crore assets (loans plus investments) include Andhra Bank, Bank of Maharashtra, Dena Bank, Punjab & Sind Bank, Vijaya Bank, and United Bank of India.

The large PSBs, with the capability to acquire include Bank of Baroda, Bank of India, Canara Bank, Punjab National Bank and Union Bank of India.

Ahead of the consolidation, the small PSBs will need to reorient their portfolio and improve operational efficiencies over the next one year. The Working Group on Consolidation and Restructuring of PSBs has proposed that as a means to improve profitability by leveraging economies of scale and avoiding duplication, all PSBs should share infrastructure, including back-office space, IT backbone and telecom contracts through a “shared service organisation.”

State Bank of India had kick-started the process of consolidating its associate banks almost seven years ago. In 2008 and 2010, India’s largest bank took over State Bank of Saurashtra and State Bank of Indore. Currently, it has five associate banks.

Most smaller public sector banks are caught in the middle. Having little differentiation, they focus on the same customer segments and have similar offerings.

Compared with private sector rivals, their net non-performing assets are four times more and the return on assets is just a third.

The banks will need to raise almost ₹4.50-lakh crore in Tier 1 capital (which includes â‚¹2.40-lakh crore equity capital) by March 2018 under Basel III norms.

The Working Group has suggested that over the next one year all PSBs focus on four areas — improving risk management capabilities, shifting to profitability-linked performance metrics, leveraging technology to reduce costs, and developing capital-light business models.

To rapidly reorient smaller PSBs, a performance assessment of their loan portfolio will be made so that they can exit areas where they are not strong or are unprofitable.

The next step for these banks would be to define the target customer segments.

After that, the large PSBs will identify the relevant acquisition targets based on complementary businesses and synergies. However, the panel suggested that any consolidation should be driven by market forces and decisions taken independently by the board of each bank.

There are 27 public sector banks, including State Bank of India’s five associate banks, in the country. As at March-end 2014, their share in total deposits and total advances was 77.22 per cent and 75.74 per cent, respectively. (The Hindu)