Even though the mega merger of 10 public sector banks is a step in the right direction as it will increase operational efficiencies of the merged entities, the key issues of low capital and higher bad loans will continue to plague them, say analysts. Amidst the growing signs of deepening slowdown, finance minister Nirmala Sitharaman Friday announced four new set of mergers of state-run banks-- Punjab National Bank taking over Oriental Bank of Commerce and United Bank of India, creating the nation's second-largest lender; Syndicate Bank merging with Canara Bank; Union Bank of India will amalgamate with Andhra Bank and Corporation Bank; and Indian Bank will merge with Allahabad Bank.
These mergers will bring the number of state-run banks to 12 from 19. The minister significantly did not specify when will the merger be completed. Srikanth Vadlamani, vice-president for financial institutions group at Moody's , said, "the consolidation move is credit positive as it enables the consolidated entities to meaningfully improve scale of operations and help their competitive position in segments such as corporates where their share of customer wallet tends to be low, and retail loans where their operations are sub-scale." The scale factor should also help them invest in technology where they fare very poorly compared to their private sector peers, he added.
Fitch director for financial institutions in India Saswata Guha said it is a step in the right direction and a way to prepare them for the future, but this is not a remedy to the current problem that banks are dealing with such as low capital and high non-performing loans. "For banks to grow and support the economy, they need capital. Unless capital issue is resolved, I don't think there would be much action by banks," Guha said.
According to Fitch, banks would require USD 13-15 billion of capital by FY21 over and above the Rs 70,000 crore that government is pumping into them this year. Sitharaman also announced an infusion of Rs 55,250 crore into these 10 banks.
Crisil senior director Krishnan Sitaraman said consolidation will bring in economies of scale, increase operating efficiencies and bring in business synergies. "If implemented well, it can bring in structural benefits over the medium-term, enabling them to compete more effectively with other constituents in the financial sector landscape," he said.
India Ratings head of financial institutions Prakash Agarwal said the mergers are mostly among larger banks, with absorbing bank not necessarily in strong health. However, given that the merged banks are on similar technology platform, the integration should be smoother. "Also it is likely that management attention and bandwidth of the entities being merged could get split impacting loan growth and reduced focus on strengthening asset quality in the short-term," Agarwal said.
Icra's Anil Gupta said amalgamation will require harmonisation of asset quality and provisioning levels and may spike the credit provisions this year as was seen in the case Bank of Baroda, which took over two smaller players earlier this year. "However, given the sizeable capital infusion being announced for these 10 banks, the merger is unlikely to credit negative for merging banks," Gupta said.
State Bank chairman Rajnish Kumar said the merger is a cohesive and a clear recognition that bigger banks have that much more ability to absorb shocks, reap economies of scale as well as the capacity to raise resources without depending unduly on the exchequer. "The move underlines the fact that the government recognises the importance of a robust banking system in achieving the goal of USD 5 trillion economy as bigger banks will be better armed to meet the credit needs of a fast growing economy like ours," Kumar said.
Oriental Bank of Commerce and United Bank merger will merge into Punjab National Bank to create a bank with Rs 17.95 lakh crore business and 11,437 branches. The merger of Syndicate Bank with Canara Bank will create the fourth largest public sector bank with Rs 15.20 lakh crore business and a branch network of 10,324.
Andhra Bank and Corporation Bank's merger with Union Bank will create the fifth largest public sector bank with Rs 14.59 lakh crore business and 9,609 branches, while the merger of Allahabad Bank with Indian Bank will create the seventh largest public sector bank with Rs 8.08 lakh crore business. In April this year, Bank of Baroda amalgamated with Dena and Vijaya. In April 2017, State Bank merged its five associate banks--State Bank of Patiala, State Bank of Bikaner and Jaipur, State Bank of Mysore, State Bank of Travancore and State Bank of Hyderabad and also the Bharatiya Mahila Bank.
After these mergers, the country will have 12 public sector banks, including State Bank and Bank of Baroda. Also, Indian Overseas Bank, Uco Bank, Bank of Maharashtra and Punjab & Sind Bank, which have strong regional focus, will continue as separate entities. The finance minister also unveiled governance reforms in public sector banks, saying their boards will be given autonomy and enabled to do succession planning..
(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)