India has announced plans to merge a raft of state banks as Prime Minister Narendra Modi seeks fresh ways to battle a deepening economic slowdown.
Finance minister Nirmala Sitharaman said on Friday that the government would consolidate 10 existing banks, including Punjab National Bank, the country’s second-largest state lender, into four entities in a bid to get credit flowing into the economy.
The move by the government came on the same day figures showed Indian economic growth slowed sharply in the second quarter to its weakest level in six years. State banks, which account for about two-thirds of assets in the banking sector, have been hamstrung in recent years by bad loans and governance concerns, prompting calls for the government to intervene by consolidating or privatising them.
The woes of India’s banking system is one of the leading causes of the alarming slowdown, say analysts and economists, as bad debts limit banks’ ability to keep lending and repeated scandals erode trust. Modi’s government has looked to consolidate the public-sector banks in order to cope with their challenges, with a focus on merging smaller, weaker banks into larger, stronger banks. In 2017, the State Bank of India, the largest public sector bank, was asked to amalgamate five of its smaller associates and last year the government approved the merger of the Bank of Baroda with two smaller ones.
Punjab National Bank was last year at the centre of a major scandal after reporting a $2bn fraud allegedly perpetrated by companies associated with celebrity jeweller Nirav Modi, and last month reported a separate $500m scam. A lawyer for Nirav Modi has denied the allegations. The new entity, to be merged with Oriental Bank of Commerce and United Bank, will have the largest branch network in India.
Recommended Indian economy India’s economic growth rate drops to slowest in six years Sunil Kumar Sinha, the principal economist of Fitch affiliate India Ratings and Research, said the mergers would help weaker banks to continue lending while offering them the better governance of bigger banks.
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