Consolidation and higher capital infusion in PSU banks (PSBs) will be a positive development for the sector in the long run, Fitch Ratings said on Thursday.
“Consolidated Indian banking structure would be a positive development
in the long term for the Indian banking system. We believe that consolidation, coupled with higher capital requirements and governance reforms, would position the banking system better in support of a more open and higher-growth economy,” Fitch said.
More stable banking systems tend to be structured around a number of large 'pillar' banking groups.
“These large banks in a consolidated banking system enjoy scale benefits, leading to better diversification of risks and stronger overall profitability, contributing to higher credit ratings,” Fitch said.
It cited examples of consolidation as evident in the Asia-Pacific, including Australia, Singapore as well as some less-developed banking systems in Thailand and Malaysia.
“In the Indian context, the financial systems would benefit from more banks of a similar size to State Bank of India (SBI),” it noted.
The Indian banking system is quite fragmented at present with around 50 domestic banks - with PSBs accounting for around 70 per cent asset share.
SBI has performed much better than its PSB peers through this credit cycle partly due to greater scale benefits, which enhance pricing power from a funding perspective and diversification. The bank has a stronger capital ratio and is better positioned to absorb asset-quality issues that have plagued the sector, according to Fitch.
“A well-structured banking system would be in a better position to support the growth potential of the economy. The banking system would need sufficient lending capacity to fund these large corporates as Corporate India expands and extends its global reach,” Fitch said.
It acknowledged implementation challenges that come with any consolidation process, and so, "this will require the commitment of all interested parties”.
“It appears that momentum for change may be building. The long-term benefits far outweigh short-term challenges that tend to be associated with a consolidation process that is forced on the sector,” it said further.
“Unfortunately, when consolidation is not executed on a voluntary basis, it then tends to be forced on the sector when it least wants to entertain it.”
Fitch marked out addressing PSBs' asset quality and potential capital shortfalls as more immediate issues that need to be addressed despite the talk of potential consolidation.
Finance minister Arun Jaitley had in his Budget speech favoured consolidation of public sector banks once their balance sheets are strengthened.
The government plans to infuse Rs 25,000 crore in PSBs next fiscal.
An expert panel will be set up shortly to frame a strategy for consolidation of PSBs as India needs stronger lenders rather than a “numerically large number” of them, Jaitley had said last week.
(PTI)
