The Finance Ministry is open to providing capital support for facilitating consolidation among state-owned banks, which are reeling under mounting bad loans, official sources said.

The Union Cabinet has approved the setting up of an alternative mechanism, or a panel of ministers, to decide on consolidation proposals for state-run banks.

On receiving a proposal from stressed banks, if the Ministerial panel finds that the merger is going to create a strong bank, it will not let it go for want of fund shortage, the sources said, adding that acquisition would come at a cost. “First, the merger proposal should come from the board,” said a source, who did not want to be named.

“If the alternative mechanism finds the match viable, the Finance Ministry could provide capital support to the acquiring bank if there is a shortfall,” he said.

Sources said the government is keen that at least one merger proposal reaches a logical conclusion by the end of the current fiscal. Finance Minister Arun Jaitley had said the government had not set any target for consolidation.

There are now 20 public sector banks (PSBs) other than SBI. These state-owned banks are grappling with Rs. 6 lakh crore worth of non-performing assets (NPAs) or bad loans, which is about 75% of the total distress.

Final nod

After in-principle approval for consolidation, the banks would take steps in accordance with the law and SEBI requirements. The final scheme will be approved by the Cabinet.

An official source said: “It is not necessary that a larger PSB should takeover a small or mid-size lender. If there is synergy, two or three banks can merge to create a bigger and stronger entity so that the dependence on the public exchequer is minimised.”