Merger move seen as rationalizing the demand on government finances for capital infusion
Barring Indian Bank, all larger banks among their respective merger sets have lower capital adequacy ratio than the ones they are taking over
By merging small public sector banks (PSBs) with their larger counterparts, the government has managed to rationalize the demand on government finances for capital infusion. An analysis of the data provided in the finance ministry’s presentation shows that the larger banks stand to benefit more in terms of capital adequacy than the smaller lenders, a sharp departure from the past, wherein the government infused capital in their balance sheets year after year.
For instance, while Canara Bank had a capital adequacy ratio of 11.9% and Syndicate Bank’s capital adequacy ratio was at 14.23%, the merged entity will be at 12.63%. Barring Indian Bank, all larger banks among their respective merger sets, have lower capital adequacy ratio than the ones they are taking over.
Apart from the merger announcement, the government on Friday said it was looking to infuse ₹16,000 crore into Punjab National Bank, ₹11,700 into Union Bank of India, ₹7,000 crore into Bank of Baroda, ₹6,500 crore into Canara Bank, ₹2,500 crore into Indian Bank, ₹3,800 crore into Indian Overseas Bank, ₹3,300 crore into Central Bank of India, ₹2,100 crore into UCO Bank, ₹1,600 crore into United Bank of India and ₹750 crore into Punjab and Sind Bank.
“These are absolutely approximate numbers on what we would like to infuse. We will obviously tailor them according to requirements and here we are giving a broad indication," Union finance minister Nirmala Sitharaman said on Friday.
In FY19, the government had infused over ₹1 trillion in public sector banks with the last round of ₹48,239 crore in February, which allowed six banks to exit the Reserve Bank of India’s (RBI) prompt corrective action (PCA) framework. The central bank uses the PCA framework to rein in banks that have breached certain regulatory thresholds in bad loans and capital adequacy. Since FY14, the government and the Life Insurance Corp. of India have infused ₹3 trillion in PSBs.
Rashesh Shah, chairman and chief executive officer, Edelweiss Group, said: “The consolidation in the banking sector will create higher efficiencies through better utilization of capital, greater credit disbursal, focused customer service and global expansion opportunities. Fundamentally, we will have a cleaner, structurally robust and profitable banking system."
Anil Gupta, vice-president and sector head (financial sector ratings), of rating agency Icra Ltd, pointed out that of the five banks under the PCA framework, capital infusion has been announced for only three banks—Indian Overseas Bank, Central Bank of India and UCO Bank.
“In our view, the announced capital infusion is unlikely to be sufficient for taking these banks out of PCA in immediate future. United Bank will cease to exist upon merger and outcome for IDBI Bank will depend on its capital raising," he said.