Merger of 10 Public Sector banks, governance reforms may improve performance of PSBs: Ind-Ra

New Delhi:  Fitch Group's India Ratings and Research (Ind-Ra) on Wednesday said that the amalgamation of the 10 public sector banks (PSBs), along with the implementation of the specific measures on governance reforms, could improve the performance of the PSBs on a sustainable basis.

The rating agency said that though the proposed amalgamations may face hiccups in short term, the governance reforms are a step in the right direction to improve the overall functioning of PSBs.

“Many of these measures are in line with Ind-Ra’s expectations, as highlighted in the agency’s recently released report, ‘Recapitalisation of Public Sector Banks Disappearing into Quicksand’,” Ind-Ra said.

However, in the near term, the priorities of the management of these 10 banks could shift towards ensuring successful integration of the entities, resulting in reduced focus on business growth as well as improvement in asset quality, it added.

The recent amalgamation of Bank of Baroda (BOB), Dena Bank and Vijaya Bank was more balanced in the sense that a large  well capitalised bank was absorbing two smaller entities that more or less offset each other in terms of their financial performance.

“In the current round of amalgamations, the challenges are likely to be bigger. This is because, in some cases, banks of almost equal sizes are being amalgamated, while in some other cases, the amalgamating bank’s financial health is also equally under pressure,” Ind-Ra said.

The agency believes that, in the short term, credit costs and slippages in certain cases are likely to increase, as some of the management bandwidth would be diverted towards the amalgamation process, and recognitions and provisions would need to be harmonised.