Public sector banks' consolidation presents more risks than benefits: Moody's

Sounding caution on consolidation of public sector banks India, rating agency Moody's today said that in the current macro economic environment, proposals like these will create risks that could offset the potential long-term benefits.

India's banking system has witnessed an increase in stressed assets since 2012. None of them currently have the financial strength to assume a consolidator role without risking its own credit standing post-merger, said Alka Anbarasu, Vice President and Senior Analyst at a Moody's.

Barring significant government support to boost the banks' capitalization, the risks arising from the potential consolidation currently outweigh the potential longer-term benefits, Moody's said.

The Indian government's ultimate aim is to reduce the number of PSBs to about 8-10 from the current 27. The rating agency rates India at "Baa3 positive".

The consolidation of Indian PSBs is gaining policy momentum, says Moody's, as the government aims to strengthen the banking system.

Moody's analysis was part of its just released report on Indianbanks, entitled: "Banks -- India: Consolidation of Public Sector BanksWill Face Challenges Under Current Conditions".

In his budget speech for the fiscal year ending March 2017 (FY2017), the finance minister stated that a road map was being formulated and an expert committee would be constituted.

In line with this trend, the State Bank of India (SBI, Baa3 positive,ba1) - the country's largest PSB - in May announced that it will merge with six banks, including five associate banks.

From a credit perspective, industry consolidation would strengthen the banks' bargaining power, help save costs and improve supervision andcorporate governance across the banking system.

These potential benefits, however, are outweighed by multiple downside risks, says Moody's. Many have difficulties meeting minimum regulatory requirements without regular capital injections from the government, Moody's said.