Why Modi govt ordered this massive move today that has huge consequences for India

Modi government has ordered the merging of 3 state-owned banks. Why? To tackle sour debt. This move has huge consequences for India. PM Narendra Modi led government plans to merge 3 state-run banks, Bank of Baroda, Dena Bank and Vijaya Bank. This was announced by FM Arun Jaitley. Financial services secretary said on Monday, that this big step was part of efforts of the government to clean up the country's banking system, which is suffering from huge NPAs that are not allowing the economy of the country to grow, thereby hurting the people. 

This attack by PM Modi against the crippling problem shows his government's intent on the shocking banking crisis. In fact, FM Jaitley revealed today that the bank NPA crisis was not Rs 2.5 lakh cr, but a mind-blowing Rs 8.5 lakh cr!

The government will continue to provide capital support to the merged bank, expected to be India`s third largest, Rajeev Kumar told reporters. "It is a major economic, commercial decision," finance minister Arun Jaitley added. 

Banking sector reforms are a major plank of Prime Minister Narendra Modi`s administration to revive credit growth, which has slowed to multi-decade lows as banks struggle with bad loans. Needless to say, the drying up of money for loans means economy is not growing to potential.

Centre owns majority stakes in 21 lenders, which account for more than two-thirds of banking assets in Asia`s third-biggest economy. 

But these banks also account for the lion`s share of more than $150 billion in sour assets plaguing the sector, and need billions of dollars in new capital in the next two years to meet global Basel III capital norms.

Watch this Zee Business video

The proposed merger follows a similar move by the government in February last year when it merged State Bank of India with its five subsidiary banks, helping the country`s largest lender by assets increase its scale and cut expenses through synergies.

(With inputs from Reuters)