New Delhi, March 6: The government will nudge banks to consider mergers and infuse more capital into banks that have been performing well.
The finance ministry has been seeking to usher in a wave of mergers and acquisitions among PSU banks to create mega-entities, which will take on global competition.
Banks with strong balance sheets will also be encouraged to issue fresh shares to the public to raise extra capital required to meet capital adequacy norms.
Officials said the North Block would be studying various proposals for mergers among PSU banks.
"We would like banks that have branches in the south to merge with a bank with most branches in the north ... however, issues like a bank's work culture, level of integration will have to be taken into consideration before pressing for such mergers," an official said.
The government feels banks need to merge into single large entities before the Indian financial market is opened up to large foreign banks.
US and European countries have long been demanding greater access to the Indian financial markets in return for concessions in the services sector.
Officials point out that the next round of global trade talks as well as several free trade pacts being negotiated will see demands for opening up of the financial sector.
The government has in the past toyed with ideas such as merging the State Bank of India's (SBI) associates with it or creating a SBI-2 by merging some of these associates. Some SBI associates such as the State Bank of Indore were merged with the SBI in the past.
Loss-making banks have been similarly merged with profitable ones to create larger entities.
To nudge banks along, the government has already decided that only profitable banks with a good performance record would be recapitalised.
A provision of Rs 9,555 crore has been made for recapitalisation of PSU banks, including the National Bank for Agriculture and Rural Development, Export-Import Bank of India (Exim Bank), India Infrastructure Finance Company and Small Industries Development Bank of India in 2015-16.
Last year, a provision of Rs 11,200 crore had been made for recapitalisation of PSU banks, but a mere Rs 6,990 crore was spent infusing money into banks, including the SBI, Bank of Baroda, Punjab National Bank, Canara Bank and Syndicate Bank.
The ministry also wants state-run banks to aggressively sell bad loans to asset reconstruction companies to fall in line with Basel norms as the North Block has decided to limit its infusion into state-run banks not only this year but in the years to come.
Non-performing assets (NPA) of state-run banks rose to 4.44 per cent of their gross advances as on March 31, 2014 compared with 2.32 per cent at the end of March 2011.
Reports suggest that NPA levels for PSUs are likely to be near 5 per cent for the year ended March 31, 2015.
According to the All India Bank Employees Association (AIBEA), the country's top 406 loan defaulters together owe PSU banks a whopping Rs 70,300 crore. The association says this list includes Kingfisher Airlines, Winsome Diamonds, Electrotherm India and S. Kumars Nationwide.
Analysts said among banks which could raise capital easily were the country's two largest lenders the SBI and PNB.
The government's current holding in the SBI, the country's largest lender, is 58.6 per cent. A share issue which dilutes government holding by 5 per cent will take it down to below 54 per cent.
Officials, however, said it was not the intention of the government to give up a majority stake in any PSU bank at present.
The PJ Nayak committee set up by the RBI had, however, last year recommended that the government's shareholding in banks should be cut to below 50 per cent. In PNB, a 5 per cent dilution of the government's stake will takes its holding down to 54 per cent from 59 per cent.