RBI's Mundra sees room for consolidation

Says cleaning up the balance sheet before consolidation is the only way to arrive at a fair valuation

Reserve Bank of India (RBI) Deputy Governor S S Mundra on Friday said there was room for consolidation in the Indian banking sector, but that should not weaken a strong bank by merging a weak bank with it.

"I think consolidation will have its own merit with the growth in the economy... It can have its own advantage. What is important, sequencing is right, intention is right and process is right. If all the things are there, the outcome will definitely be right," Mundra said at an event organised by Indian Merchants' Chamber.

State Bank of India (SBI) had said on Tuesday that it would move to merge its five associate banks and the Bharatiya Mahila Bank with itself. Unions went on strike protesting the move and on Friday, the unions at the associate banks held protests against the plan. All India Bank Employees Association said more strikes would follow on June 7 and July 28-29 against the proposal.

Mundra said while any merger should be an activity that is well calibrated. For now, banks' priority should be to clean up balance sheets, he added.

"Why I say cleaning up of balance sheet before consolidation is important because that is the only way you can arrive at a fair valuation. Then, the consolidation should happen for the right reasons. It should bring the synergy," Mundra said, adding: "Right now, the merger which is being talked about is in any case integrated in a majority of ways..." and the prerequisites for merger were met.

Earlier in the day, rating agency Moody's said the merger would have limited financial impact on SBI as the associate banks are anyway part of the group and the Mahila Bank is just a new entity, accounting for less than 0.1 per cent of SBI's total assets.

The parent bank has to buy out minority shares in State Bank of Bikaner and Jaipur, State Bank of Mysore and State Bank of Travancore for about Rs 1,660 crore.

"Assuming SBI completes the transaction using own cash, its common equity tier-1 ratio would decrease by only about 12 basis points. In addition, on a consolidated basis, the merger will have limited impact on the financial metrics of SBI, including its asset quality and capitalisation level," said Moody's.

SBI can leverage the synergies with the banks it would acquire but there were some overlap in branch networks that the bank can then streamline. "Nevertheless, we expect the implementation of the merger will be challenged by strong employee unions that oppose this action," said Moody's.

However, Mundra said that when private bank mergers had happened in India, there was no reason to fear loss of jobs.