Consolidation of banks in India risky, warns rating agency Moody’s

New Delhi : The cabinet has approved the merging of the five associate banks of SBI with the parent bank on 15 June, but according to the rating agency Moody’s said consolidation of public sector banks (PSB’s) could create risks in the current environment and could offset the potential long-term benefits.

The country’s largest state-run bank State Bank of India in May announced that it will merge with six banks, including five associate banks.

It is believed from a credit perspective, industry consolidation would strengthen the banks’ bargaining power, help save costs and improve supervision and corporate governance across the banking system.

That merger, seen as a test case for banking consolidation, is expected to take shape this fiscal.

The vice-president and senior analyst Alka Anbarasu at the rating agency said “India’s banking system has witnessed an increase in stressed assets since 2012, with the result that no PSB currently has the financial strength to accept a consolidator role without risking its own credit standing post-merger,”

He also adhere that financial pressure, all listed PSBs are trading at a significant discount to their book value, limiting their ability to attract external capital to support acquisitions and the government capital infusion will be a crucial driver of the credit outcome of potential mergers.

As a result, few public sector banks have the excess capital required to acquire meaningfully sized peers and rest no PSB currently has the financial strength to assume a consolidation.

Consequently, Moody’s believes that government support will be a crucial driver of the credit outcome of potential unification, of the equity capital required to shore up capital buffers. (ANI)