Industry, Analysts Split Over Govt’s Public Sector Bank Mergers

Amidst the growing signs of deepening slowdown, FM Sitharaman announced four new sets of mergers of state-run banks.

Amidst the growing signs of deepening slowdown, finance minister Nirmala Sitharaman on Friday announced four new set of mergers of state-run banks.

(Photo: PTI)

The government's move to consolidate public sector banks indicates its resolve to address the slowdown in GDP growth, as the country's economy expanded at its weakest pace in over six years in the April-June quarter of 2019-20, industry said on Friday.

Amidst the growing signs of deepening slowdown, finance minister Nirmala Sitharaman on 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.

Need a Reform a Week

"Well this certainly ruined my Friday & will dampen the weekend. A lot of work to be done. But I remain steadfastly optimistic. Was pleased to see the bank consolidation announced by @nsitharaman. A 'reform a week' is just the kind of tonic we need...," Mahindra Group Chairman Anand Mahindra tweeted.

Now, with the government and the Reserve Bank having common prescription, the economy should bottom out soon and things should improve in the coming quarters, Assocham President B K Goenka said.

Commenting on the consolidation exercise, Ficci President Sandip Somany said the decision reflects the government's commitment to provide the country the financial base on which we can grow and move towards the USD 5 trillion mark.

Goenka said these mergers would result in better banking to customers, more credit to the industry and agriculture, professional governance structure and a greater autonomy and accountability of the bank boards.

‘Pace of Expansion Resoundingly Lower Than Forecast’

"The pace of expansion of GDP and GVA in Q1 FY2020 was resoundingly lower than forecast, driven by a collapse in manufacturing GVA growth, even as the performance of most of the other sectors was largely along expected lines," Aditi Nayar, Principal Economist ICRA Ltd said.

Ranen Banerjee, Leader- Public Finance and Economics, PwC India said while the situation may not be as bad given the headwinds the economy is facing, this will further dent sentiment and put downward pressure on consumption.

The case for announcing enhanced government capital expenditure becomes further strong sacrificing fiscal prudence a few basis points to positively impact sentiment, he added.

Consolidation of Banks a Positive Move

Commenting on the consolidation of banks, automotive industry body SIAM's President Rajan Wadhera said such announcements will have a positive impact on the economy, consumer sentiments and in turn, benefit the auto industry.

Deloitte India Partner Sanjoy Datta termed it a very positive move, however, adding that the key to success would be to ensure rigour in execution of the mergers with specific emphasis on technology systems and human assets.

Bank consolidation is a good move from government towards improving efficiency of the PSBs, Prakash Agarwal, Head-Financial Institutions, India Ratings and Research said.

Commenting on the GDP numbers, CII President Vikram Kirloskar said the moderation in the growth print was not completely unexpected but at the same time does reinforce the concerns that industry has about entering a phase of slowdown.

Need Appropriate Interventions From Govt

While not at variance with global growth trends, CII hopes that India should buck the trend with appropriate interventions from the government, he said.

"As a very receptive government, we have seen prompt action in terms of the first tranche of the stimulus being announced on 23 August and significant measures on bank consolidation being announced today. CII is expecting that the Finance Minister would soon follow this up with the next tranches of stimulus measures, which would help the economy turnaround," said the CII president.

He further said that despite the lower GDP print, it is heartening to note that agriculture growth moved to the positive territory of 2 percent in the first quarter after recording negative growth in the previous quarter.

Merger Can’t Tackle Issues of Low Capital, Higher NPAs

However, some analysts said that 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.

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.

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.

Govt Recognises Importance of Robust Banking System

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.