Analysts: Merger can’t tackle 2 key sore spots affecting PSU banks

New Delhi: Analysts have said that even though the merger of 10 PSU banks is a step in the right direction, it is likely to increase operational efficiencies of the merged entities. They warned that the key sore spots of low capital and big bad loans will continue to plague them. The statement comes a day after Finance Minister Nirmala Sitharaman announced a slew of measures directed at the finance sector.
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‘Not a remedy to the problem banks are dealing with’

Fitch director for financial institutions in India Saswata Guha dubbed the measure as a “step in the right direction” and a way to prepare for the future. But he added that it is not a remedy to the current problem 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 $13-15 billion of capital by financial year 2020-21 over and above the Rs 70,000 crores that the government has said it will pump in this year.

‘Credit positive’

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.”

‘Reforms will bring in economies of scale’

Crisil senior director Krishnan Sitaraman said that the mergers 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 takes a cautious view

India Ratings’ head of financial institutions Prakash Agarwal opined that the amalgamation of PSU banks is happening mostly among larger banks. He noted that the absorbing bank in each of the four entities is not necessarily in strong health. “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.

‘Amalgamation may spike credit provisions’

Icra’s Anil Gupta said amalgamation will require harmonisation of asset quality and provisioning levels. Gupta added that the move may hike credit provisions this year as was seen in the case Bank of Baroda, which took over two smaller banks.

“However, given the sizeable capital infusion being announced for these 10 banks, the merger is unlikely to credit negative for merging banks,” Gupta said.