Mumbai: Even though the mega merger of 10 public sector banks (PSBs) 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, say analysts.
Srikanth Vadlamani, VP 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."
Fitch director for financial institutions in India Saswata Guha said it is a step in the right direction, 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.
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.
India Ratings head of financial institutions Prakash Agarwal said "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.