Quality of consolidating PSU banks will determine their effectiveness: Moody's

The consolidation of 10 public sectors banks announced by the government is credit positive but there will not be any immediate improvement in their credit metrics as all of them have relatively weak solvency profiles, global rating agency Moody's has said.

The move will enable consolidated entities to meaningfully improve the scale of operations and help their competitive positions in segments such as corporate where their share of customer wallet tends to be low, and retail loans where their operations are sub-scale, said Srikanth Vadlamani, Vice-President of Financial Institutions at Moody's Investors Service.

"The scale factor should also help them invest in technology where they fare very poorly compared to their private peers," he said. "At the same time, there will not be any immediate improvement in their credit metrics as all of them have relatively weak solvency profiles."

However, said Vadlamani, consolidation will also provide scope for improvement in corporate governance, and the measures announced to improve the functioning of banks' boards are a step in that direction.

"These measures though are incremental rather than structural, and the quality of their implementation will determine their effectiveness," he said.

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