With the government’s recapitalisation plan for state-run banks gaining momentum and the resolution of stressed assets showing signs of progress, banking sector experts are of the view that the time is right for starting the process of consolidating the public-sector lenders.
“The key issue in the past was the capital level — most of the public-sector banks were capital starved. Hence, it was not clear how consolidation would take place. Now that the capital issue has been addressed, there is no reason why consolidation should not go through,” said Srikanth Vadlamani, vice-president, Financial Institutions Group, Moody’s Investors Service. “We don’t know which bank will get how much capital, but I don’t see capital infusion and consolidation as necessarily being unrelated issues. Capital infusion into individual banks may take into account the potential consolidation scenario,” Vadlamani added.
Consolidation is likely to help the state-run banks streamline costs and improve governance. Due to better risk management procedures, bad loans of the combined entities could also come down in future. It is also likely to lead to strengthening of the management teams at banks and an improvement in oversight by the government.
A recent report by Fitch suggests that the government will prioritise lending growth while allocating capital. Banks currently in the Reserve Bank of India’s (RBI) prompt corrective action (PCA) framework will receive no more than the capital necessary to ensure they do not breach minimum regulatory capital requirements, while the healthier and larger banks will be the main recipients, Fitch said.
The government is looking to infuse Rs 80,000 crore into the public-sector banks through the first tranche of the recapitalisation bonds. Last week, the Lok Sabha approved the government’s request for additional spending for strengthening the banks. This fund will be utilised by March 2018. Last year, the government had announced `2.11 lakh crore for bank recapitalisation, of which `1.35 lakh crore is to be provided through recapitalisation bonds. The remaining amount will come from budgetary allowances and the banks’ own capital raising programmes.
“This is a step in the right direction. But there has been no formal communication yet. The weaker banks that have been put under PCA could be the potential takeover targets. The consolidation will not only improve operational efficiency, but also reduce the quantum of capital the government needs to infuse,” said Krishnan Sitaraman, senior director, Crisil Ratings.
By Shamik Paul