Who's next? That's the real PSU banks consolidation question everyone is asking now. The NDA government struck headlines by merging an anchor lender Bank of Baroda with relatively good  lender Vijaya Bank and a weak lender Dena Bank. With this, it made its agenda clear of maintaining fewer, but much stronger, public sector banks (PSBs). Now, that BoB and co's merger is done and dusted, every PSB is wondering whether it will meet the same fate. This first stage of consolidation in PSBs was when the largest state-owned lender SBI merged its associate banks with itself. Government has been very focused in tackling NPA crisis in banking system, which is why consolidation was a key target for it  to solve the problem once and for all. However, not everyone agrees with this formula to bring relief to PSBs from stressed assets. 

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While board of BoB, Vijaya and Dena will be busy over the next few months in deciding how to take the amalgamation drive to its conclusion, many have started to question which other bank/s will be amalgamated next. 

There are 18 public sector banks left after SBI and BoB-Vijaya-Dena merger.  

Keeping aside BoB, Vijaya and Dena, many reports have started to flood in showing another pair of PSU mergers. Some have started to speculate that Punjab National Bank, Indian Bank, Indian Overseas Bank merger and Canara Bank, Syndicate Bank and UCO Bank  merger.

It’s noteworthy that there are 11 PSBs that are under RBI’s PCA framework, which makes them the weakest ones. Some of the names are - Allahabad Bank, United Bank of India, Corporation Bank, IDBI Bank, UCO Bank, Bank of India, Central Bank of India, Indian Overseas Bank, Oriental Bank of Commerce, Dena Bank and Bank of Maharashtra. 

The banks that come under PCA framework are restricted from opening new branches, staff recruitment and increasing the size of their loan book depending on the risk thresholds set. 

This leaves PSBs like PNB, Canara Bank, Indian Bank, Punjab & Sind Bank and Syndicate Bank in relatively better positions than the above mentioned ones. 

Interestingly, Rakesh Kumar and Chintan Shah, analysts at Elara Capital said, “Considering fundamentals of BOI IN, PNB IN and UNBK IN, we do not expect, these three large banks to absorb any of the smaller PSBs at this juncture.”

The duo added, “Although, Canara Bank (CBK IN) is relatively better positioned in terms of core capital (CET at 9.35%) and net NPA at 6.9%. Therefore, there exists a reasonable probability of CBK IN taking over some of the smaller PSBs.”

The case of Punjab National Bank, which was once the third largest PSB, can come as a life lesson for other banks, with massive amounts becoming fraud-hit. Two jewellers, Nirav Modi and Mehul Choksi drove a fraud of over Rs 14,000 crore and this was reflected in the earnings of PNB. The gross NPA of PNB stand at 18.26% by end of Q1FY19. 

As for Union Bank and BOI their gross NPA come in at 16% and 16.66% respectively. 

On the other hand, SBI chief Rajnish Kumar on Thursday mentioned that, his bank is not in position to acquire more banks currently, as it still requires another 2 - 3 years time in recovering from the merger with associates. SBI is in RBI’s ‘Too Big Too Fail’ bank list because of its wide reach and capability to overcome crises. SBI is the largest bank and the chairman also believes that further acquisition of more banks will lead to monopoly of SBI. 

Considering the above, SBI, PNB, BOI and Union Bank can be seen as not the preferred ones for further merger of weaker ones.
 
However, analysts have given thumbs up to the latest BOB-Vijaya-Dena merger, as the government tried to balance out the risk by merging three different levels of banks. 

So, how the government decides the next course of PSU merger drive will be keenly watched. 

Because pf NPA crisis, PSBs have to make higher provisions for tackling bad loans, which results in weaker credit growth, losses in earnings and net interest income. The asset quality of PSBs are far worse than private banks. 

NPA of PSBs is thrice that of the private banks as of June 2018. NPA ratio of PSBs stood at 13.88% while that of private banks stood at 4.48% at the end of Q1 FY19. 

Tired with rising NPA, government is now focused on consolidation concept which is not entirely new in India. In 1991, it was suggested that India should have fewer but strong PSBs.