More risks than benefits from banking consolidation in India: Moody’s

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he current 27. Photo: AFP

Mumbai: The Indian government’s plans to consolidate public sector banks (PSBs) could create risks in the current environment where stressed assets across banks are high, said rating agency Moody’s in a note on Tuesday. These risks could offset any potential long-term benefits.

“India’s banking system has witnessed an increase in stressed assets since 2012, with the result that no PSB currently has the financial strength to assume a consolidator role without risking its own credit standing post-merger,” said Alka Anbarasu, vice-president and senior analyst at the rating agency.

Indian banks have seen their stressed assets surge to closeRs.5.8 trillion as of 31 March, after the Reserve Bank of India conducted an asset quality review across the sector and asked banks to classify bad assets appropriately. This has also put pressure on capitalization levels as banks have had to put aside more money for provisions against bad loans.

In the absence of “significant government support” to boost banks’ capitalisation, these risks currently outweigh any potential long-term benefits, Anbarasu added.

The Indian government is pushing consolidation within public sector banks as part of one of the reforms it intends to undertake in the banking sector. On 15 June, the cabinet approved the merger of the five associate banks of State Bank of India (SBI) with the parent bank. That merger, seen as a test case for banking consolidation, is expected to take shape this fiscal.

According to a Reuters report dated 22 June, the government is also considering a mega merger among other public sector banks with the idea of creating six large banks.

In its report, Moody’s said that the Indian government’s ultimate aim is to reduce the number of PSBs to about 8-10 from the current 27.

“From a credit perspective, industry consolidation would strengthen the banks’ bargaining power, help save costs and improve supervision and corporate governance across the banking system. These potential benefits, however, are outweighed by multiple downside risks,” said Moody’s.

In particular, the weak capital position of most banks means that few public sector banks have the excess capital required to acquire meaningfully sized peers. Adding to this financial pressure, all listed PSBs are trading at a significant discount to their book value, limiting their ability to attract external capital to support acquisitions, said Moody’s.

The rating agency believes that government capital infusion will be a crucial driver of the credit outcome of potential mergers.

“Finally, Moody’s also sees considerable challenges from potential opposition from employee unions, which could hamper merger efforts and drive up costs. For example, SBI estimates that its merger with the associate banks will cost up to Rs.3 crore due to differences in employee pension schemes,” the rating agency added.