Execution remains key in amalgamation of public sector banks: Ind-Ra

India Ratings and Research (Ind-Ra) said on Wednesday the amalgamation of 10 public sector banks (PSBs) along with implementation of specific measures on governance reforms could improve their performance on a sustainable basis, subject to the successful execution of the same.

However, in the near term, the priorities of management of these 10 banks could shift towards ensuring the successful integration of the entities, resulting in reduced focus on business growth as well as improvement in asset quality.

Since 2013-14, the government and Life Insurance Corporation (LIC) have infused Rs three lakh crore in PSBs even as their systemic importance continued to decline. The banks reported significant losses over FY16 to FY19, resulting in erosion of their capital and hence their ability to maintain their systemic importance, especially through their share of advances and deposits.

In its recent report on PSBs, Ind-Ra had highlighted the need for structural reforms to improve the performance and sustainability of PSBs. The agency believes that governance reforms are a step in the right direction to improve overall functioning of PSBs.

If the specific measures related to empowering of the board, strengthening the board committee system, enhancing the effectiveness of non-official directors and leadership development are implemented effectively and are supplemented with adequate resources and persistent commitment, they will go a long way in addressing many of the issues that have plagued these banks historically.

The measure related to the recruitment of a chief risk officer at market-linked compensation especially is likely to drive an improvement in the risk framework, said Ind-Ra.

Furthermore, ensuring a minimum tenure of two years for the designation level of general manager and above will drive continuity of the business policy. Other measures related to improving the efficacy of the board, effectiveness of the board members and focussing on leadership development are likely to improve the quality of the board of directors and enhance the performance of PSBs on a sustainable basis.

The proposed amalgamations are likely to bring about material operating efficiencies over time for these banks while reducing their combined operating costs and funding costs.

However, in the short term, credit costs and slippages in certain cases are likely to increase as some of the management bandwidth will be diverted towards the amalgamation process, and recognitions and provisions will need to be harmonised.

Additionally, the near-term focus of the banks is likely to shift to the integration of information technology systems, treasuries, employees and branches which could result in issues such as credit growth and improvement of asset quality being accorded lower priority, said Ind-Ra.