The finance ministry is set to push for consolidation in the public sector banking space and has started work on a road map to create eight to 10 large entities.
According to sources close to the development, finance secretary Ashok Chawla, who is driving the process, is working on a concept note to provide the framework for consolidation.
While the ministry was in favour of such a consolidation for the last few years, it could not push the process due to opposition from the employee unions and the Left parties, which were the United Progressive Alliance's ally till June. With the Left no more a part of the UPA, the government is seeking to again push its agenda.
In addition, 10 bank chiefs are due to retire in 2010, which will make it easier for the government and bank managements to work out the process.
The sources, however, said the government was not keen to create four-five large public sector banks as this could lead to a concentration of risks. Instead, the idea was to create eight to 10 large entities, they added.
"State Bank of India and its associates account for almost a quarter of the banking business in India and then there is Punjab National Bank. There is a huge gap between the two that needs to be filled," said a source privy to the discussions.
Sources said the decision would be left to individual managements.
A few weeks ago, Chawla had suggested that mid-sized banks should explore the possibility of merging over the next five to 10 years. The sources said the road map would plan for the next few years.
The government and chiefs of some banks such as Union Bank of India and Bank of India have in the past explored the option of merging. However, the process could not be completed.
As a result, public sector players have had to be content with acquiring weak players in alliances pushed by the government and the Reserve Bank of India. For instance, Oriental Bank of Commerce acquired Global Trust Bank while IDBI Bank took over United Western Bank a couple of years ago.
State Bank of India has, however, managed to merge State Bank of Saurashtra with itself and is in the process of merging another subsidiary, State Bank of Indore.
