PSB consolidation off the table for now

Focus of banks to shift towards enhancing recoveries, risk management and improving their liability profile

The drive for consolidation among public sector banks will subside with the government announcing a Rs 2.11-lakh-crore capital infusion plan for them. Instead, the focus will shift to nursing ailing PSBs back to health.  

Public sector bank executives said the government was over the past year engaged in an exercise for the merger of some banks. This was not an apt time for M&As with PSBs deep in the red due to a huge portfolio of bad loans and the obligation to provide for them, they added.

With a government assurance on infusing capital, the focus in the coming quarters will shift to enhancing recoveries, risk management and improving the liability profile. All this should eventually help banks to be ready for prudent lending when credit demand revived, the executives said.

Combining two weak banks or asking a strong one to acquire stressed rivals was unviable, sources said. Any action on that front would have complicated matters without any value addition, they added.

A functionary with Indian Banks’ Association said a mere merging of balances sheets and integration of banks would not take away the challenges. The cultures and technologies of banks were distinct, which would have to be dealt with in a methodical manner to minimise disruption and ensure a healthy merger, he added.

Chief Economic Adviser Arvind Subramanian, however, made a case for consolidation in the banking industry, stating the country ideally should have five to seven large lenders.

In an ideal world, India needed both large public sector and private banks competing domestically and internationally, he said during a lecture in New Delhi. He cited the example of China, whose four big banks were now among the biggest in the world.

Quoting former Reserve Bank of India Governor YV Reddy, Subramanian said the aim must be to narrow the scope of unviable banks.