PSB consolidation move in India is credit positive: Moody's

Capital Adequacy to remain weak despite M&A

Rating agency Moody's on Monday said the government’s decision to form a panel to consider and oversee mergers amongst public sector banks is credit positive as consolidation would provide scale efficiencies and improve corporate governance.

Last Wednesday, the Union Cabinet decided to form a ministerial panel led by Finance Minister Arun Jaitley to consider and oversee mergers among the country’s 21 public-sector banks.

However, such mergers would not improve the banks’ weak capitalisation due to lack of fresh capital infusions from the government, Moody’s said in a statement.

Most public banks have weak capital levels, so merging two or more entities will only create a larger entity with weak capital.

Poor corporate governance has been a structural credit weakness at public-sector banks, and managing all 21 has proven to be unwieldy for the government. The government has been unable to pay sufficient attention to key issues such as long-term strategies and human resources. Consolidation would address some of these issues.

Consolidating public banks also would help from a scale perspective. Public-sector banks are the dominant segment of India’s banking system, holding around 74% of all deposits. However, with the exception of State Bank of India (Baa3 positive, ba14 ), none of the other public banks are large enough to have a competitive advantage.

This may change with consolidation, given the potential for some of these banks to grow to levels that exceed even large private banks.

Until there is clear visibility on the merger process, including which entities would merge with and the terms of such a merger, public-sector banks will find it tough to access equity capital markets. “As a result, we continue to believe that capital infusions from the government remain key to improving these banks’ capital levels,” Moody’s added.