The consolidation of 10 public sector banks into four will be credit positive due to increased operational scale and capital, and improved corporate governance in the long run, rating agency Moody’s said on Thursday.
“The consolidated banks will have larger operating scale, which will result in improved competitiveness in corporate banking and retail lending, where their market share is low,” Moody’s said.
Last week, the government announced the consolidation of 10 banks into four. The process is expected to be completed by the end of the financial year.
Tech investments
“A larger scale will also enable PSU banks to increase technology investment, which is an area where they have lagged private sector peers,” the rating agency said, adding that these benefits would not be realised until the medium term.
“Based on the announced allocations, all rated PSU banks, after consolidation, will have a pro forma Common Equity Tier 1 (CET1) ratio of more than 9%,” Moody’s said.
As most of these banks have higher bad loans, Moody’s expects no significant change in asset quality and profitability, post merger.
“Asset quality and profitability will remain broadly unchanged after consolidation. PSU banks already score poorly on these two factors, and there is no reason to assume that the merged entities will make significant improvements in these metrics,” it said.
“While boards have been given more power, their roles and responsibilities will remain significantly circumscribed compared with boards of private sector companies, including private sector banks,” it said.
HR challenges
Moody’s added that flexibility in PSBs’ human resources practices, compared with private sector peers, remained limited.
“There is little latitude to provide incentives, which tends to stifle work performance. This is compounded by the rigidity of recruitment, compensation and career progression, which makes it very difficult to set goals for employees,” Moody’s said.
