Amalgamation to improve the performance of Public Sector Banks on a sustainable basis : Ind-Ra

Biznextindia : The Amalgamation of 10 Public Sector Banks (PSBs) could improve the performance of the PSBs on a sustainable basis. However, in the near term, the priorities of the management of these 10 banks could shift towards ensuring successful integration of the entities, resulting in reduced focus on business growth as well as improvement in asset quality, analysed Credit Ratings and research Agency Ind-Ra.
“ The amalgamation of the 10 public sector banks (PSBs), along with the implementation of the specific measures on governance reforms, could improve the performance of the PSBs on a sustainable basis, subject to successful execution of the same. However, in the near term, the priorities of the management of these 10 banks could shift towards ensuring successful integration of the entities, resulting in reduced focus on business growth as well as improvement in asset quality. Since FY14, the government of India (GoI) and Life Insurance Corporation (LIC) have infused INR3.0 trillion in PSBs, even as their systemic importance continued to decline. The banks reported significant losses over FY16-FY19, resulting in the erosion of their capital, and hence, their ability to maintain their systemic importance, especially through their share of advances and deposits” said Ind-Ra.
The recent amalgamation of Bank of Baroda (BOB), Dena Bank and Vijaya Bank was more balanced in the sense that a large  well capitalised bank was absorbing two smaller entities that more or less offset each other in terms of their financial performance. In the current round of amalgamations, the challenges are likely to be bigger. This is because, in some cases, banks of almost equal sizes are being amalgamated, while in some other cases, the amalgamating bank’s financial health is also equally under pressure. Due consideration has, however, been given to the amalgamation of banks that have similar technology platforms and allocation of capital has been done in a manner that would ensure that regulatory requirements are adequately surpassed and any asset quality shocks are absorbed. Over the long term, these measures would give the amalgamated entity a wider pool to plan succession at the top levels, the ability to bring operational synergies in most of the proposed amalgamations, redirect additional manpower to the business, and acquire more bargaining power vis-à-vis large better-rated banks.

The agency believes that the governance reforms are a step in the right direction to improve the overall functioning of PSBs. If the specific measures related to: 1) empowering of the board; 2) strengthening the board committee system; 3) enhancing the effectiveness of the non-official directors; and 4) leadership development are implemented effectively, and are supplemented with adequate resources and persistent commitment, they will go a long way in addressing many of the issues that have plagued these banks historically.

The proposed amalgamations are likely to bring about material operating efficiencies over time for these banks while reducing their combined operating costs and funding costs. The amalgamations would also strengthen the risk management practices on a consolidated basis, besides increasing the scale and reach moderately. However, the agency believes that, in the short term, credit costs and slippages in certain cases are likely to increase, as some of the management bandwidth would be diverted towards the amalgamation process, and recognitions and provisions would need to be harmonised.