Fewer and stronger PSU banks but what about their stressed assets?

Key Highlights: 

• SBI post merger accounts for 23% of total banks NPAs
• Five PSBs hold half of total gross NPA in the banking system
• Govt to set up ministerial panel for consolidation of PSU Banks

Recently a Union Cabinet chaired by Prime Minister Narendra Modi gave in-principle nod for an “alternative mechanism” to oversee proposals for speedy consolidation among the nationalised banks to create 'strong and competitive banks'. A ministerial panel will be soon set up by the Government of India to facilitate consolidation in the public sector banks.

“A formal communication to CEOs of the banks from the Department of Financial Services last week has set in motion the consolidation process," a senior finance ministry official said.

Motive behind public sector banks (PSBs) consolidation is to create fewer and stronger banks.

The move is taken as credit positive for public sector banks. 

Moody's Investor Services said that poor corporate governance has been a structural credit weakness at public-sector banks and managing all 21 has proven to be unwieldy for the government, which has been unable to pay sufficient attention to key issues such as long-term strategies and human resources.

“Consolidation would address some of these issues,” said Moody's.

According to Viral Acharya, Deputy Governor of RBI, consolidation would offer the opportunity to rejig management responsibility away from those who have under-performed or dragged their feet the most. Synergies in lending activity and branch locations could be identified to economize on intermediation costs, allowing sales of real estate where branches are redundant.

Considering this it is clear that consolidation is one positive move for PSBs, but there is still one major problem that needs to be answered - Can a bank that is highly stressed with non-performing assets be merged with a bank which is considerably better - or already tangled in NPA mess?

Only one bank has successfully amalgmated with other PSBs. Largest lender State Bank of India merged with its six associate banks with effects from April 01, 2017.

As expected SBI saw its gross NPA book rising in its balance sheet post merger  – as NPAs of its associates were more than half of SBI alone before March 2017. 

Gross NPAs of SBI post merger, in percentage terms stood at 9.97% in Q1FY18 compared to 9.11% in Q4FY17 and 7.40% in Q1FY17. In value terms, gross NPAs of SBI post merger stood at Rs 1,88,069 crore in Q1FY18 as against Rs 1,12,343 crore as on March 2017 (When the SBI was solo).

Nilesh Parikh, Kunal Shah, Prakhar Agarwal and Malav Simaria, analysts at Edelweiss Financial Services said, "Q1FY18 reflected integration challenges. Henceforth, key will be merger transition. Given the scale of transition, we expect recovery trend during merger to be gradual, which will weigh on SBI’s core performance."

Now apart from SBI and its associates, there are a total 21 PSBs – who might soon become 10 – 12 PSBs.

On year-on-year (YoY) basis, banking system have seen a sharp rise of 34.17% to Rs 8,29,335 crore in June 30, 2017 compared to Rs 6,18,109 crore in the corresponding period of the previous year.

Five public sector banks account for nearly half of non-performing assets