MUMBAI:The government of India's plan to consolidate public sector banks (PSBs) has more risks than benefits since these banks do not have the capital to execute mergers and could face opposition from employee unions demanding parity in pension, global credit rating agency Moody's said on Tuesday.
The Indian government aims to reduce the number to public sector banks from 27 to 10 or less. However, merging these banks will not be easy, especially in light of the weak economic environment and fragile financial metrics in these lenders since 2012.
"The banks' weakened metrics since 2012 and weak performance mean that many have difficulties meeting minimum regulatory requirements without regular capital injections from the government. As a result, few public sector banks have the excess capital required to acquire meaningfully sized peers," Moody's said.
Around 91% out of the total of Rs 5.9 lakh crore, bad loans in the banking sector are from public sector banks, mainly from the loans these banks gave to infrastructure projects and commodity-linked companies.
The New York-based credit rating agency said that the government's equity support will be crucial for these bank ratings because they are trading at a significant discount to their book value which limits their ability to receive external capital.
"No PSB currently has the financial strength to assume a consolidator role without risking its own credit standing post-merger," Moody's vice president Alka Anbarasu was quoted as saying in the report.
Finance minister Arun Jaitley had announced the government's intention to merge PSBs in his budget speech in February, which was followed by an announcement that State Bank of India (SBI) will merge its five associate banks with itself along with the newest public sector Bharatiya Mahila Bank.
Moody's said that any consolidation in the industry would strengthen banks, help save costs and improve supervision and corporate governance across the banking system. However, the downside risks to consolidation outweigh the benefits of such an exercise.