New Delhi: By merging small public sector banks (PSBs) with their larger counterparts, the government has managed to rationalize the demand on government finances for capital infusion.
An analysis of the data provided in the finance ministry’s presentation shows that the larger banks stand to benefit more in terms of capital adequacy than the smaller lenders, a sharp departure from the past, wherein the government infused capital in their balance sheets year after year.
For instance, while Canara Bank had a capital adequacy ratio of 11.9 per cent and Syndicate Bank’s capital adequacy ratio was at 14.23 per cent, the merged entity will be at 12.63 per cent. Barring Indian Bank, all larger banks among their respective merger sets, have lower capital adequacy ratio than the ones they are taking over.
Experts react
Chairman and chief executive officer, Edelweiss Group, Rashesh Shah said, “The consolidation in the banking sector will create higher efficiencies through better utilization of capital, greater credit disbursal, focused customer service and global expansion opportunities. Fundamentally, we will have a cleaner, structurally robust and profitable banking system.”
Vice-president and sector head (financial sector ratings), of rating agency Icra Ltd, Anil Gupta pointed out that of the five banks under the PCA framework, capital infusion has been announced for only three banks—Indian Overseas Bank, Central Bank of India and UCO Bank. “In our view, the announced capital infusion is unlikely to be sufficient for taking these banks out of PCA in immediate future. United Bank will cease to exist upon merger and outcome for IDBI Bank will depend on its capital raising,” he said.
Welcome move
Commenting on the merger decision, PNB managing director Sunil Mehta said this is a very welcome move done by the government. “This is going to provide lot of strength to the economy because these mergers will bring synergies in operation. The amount of capital provided to the bank will provide an opportunity to grow faster. The decision will be deliberated by the board,” he said.
Canara Bank managing director R A Shankara Narayanan said the merger will add value and it will become the fourth largest public-sector bank. Union Bank of India MD Rajkiran Rai said, “We don’t foresee any problem with regard to merger. A similar timeline would be there as was in the case of BoB. It could be even faster.” SBI chairman Rajnish Kumar said, “Today’s announcements also underline the fact that the government recognizes the importance of a robust banking system in achieving the goal of $5 trillion economy as bigger banks will be better armed to meet the credit needs of a fast-growing economy like India.”
Reason for mergers
The government believes that once PSBs are merged, it will help increase for better-operating efficiencies, better usage of equity and their technological platform.
This decision by the government also marks their departure from the plan to privatize some banks or to bring in strategic investors to reform. The government decided that amalgamation is the best move to achieve a $5 trillion economic for India in five years. However, analysts pointed out that even if the move helps to scale up operations, it won’t improve their credit metrics.
Reports on previous move
According to reports, last year, the government commented that it was “a good learning experience” as profitability and business of the merged entity has improved, after joining Dena Bank and Vijaya Bank with Bank of Baroda. It became the third-largest bank by loans in India.