PSB mergers a credit positive move: Moody's

The government’s decision to set up a ministerial panel to consider and oversee mergers among public sector banks (PSBs) was a “credit-positive” move as the consolidation would provide scale efficiencies and improve corporate governance, rating agency Moody’s said on Monday.

The government is seeking to consolidate 21 PSBs. Last week, the Union Cabinet gave its in-principle approval for the mergers, and decided to form a panel led by Finance Minister Arun Jaitley to oversee the process. 

Such mergers, however, would not improve PSBs’ weak capitalisation in the face of lack of fresh capital infusions from the government, the agency said in a statement.

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

Consolidating PSBs would also help from a scale perspective. PSBs are the dominant segment of India’s banking system, holding around 74 per cent of all deposits. However, with the exception of State Bank of India (Baa3 positive, ba14 ), none of the other PSBs is 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-sector banks.

Notwithstanding the positive effect on corporate governance and scale efficiencies, any proposed mergers would not improve PSBs’ weak capitalisation. 

Most PSBs had weak capital levels, so merging two or more entities with weak capital levels would create a larger entity with weak capital, Moody’s said. 

Until there was clarity on the merger process, including which entities would merge with whom as well as the terms of such a merger, PSBs would continue to have difficulty accessing the equity capital markets, the agency said. 

“As a result, we continue to believe that capital infusions from the government remain key to improving these banks’ capital levels,” it added.