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Mega bank mergers in India credit positive but...: Here is global rating agency Moody's take

The mega merger of 10 state-run banks is credit positive, as it can increase their operational scale and growth capital, apart from improving their corporate governance over the long term, says a report.  

Edited by: PTI New Delhi Published on: September 05, 2019 15:51 IST
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Global rating agency Moody's take on bank mergers in India

The mega merger of 10 state-run banks is credit positive, as it can increase their operational scale and growth capital, apart from improving their corporate governance over the long term, says a report.

Last Friday, finance minister Nirmala Sitharaman had announced plans to integrate 10 state-run banks into just four, leaving only a dozen entities in the fray, down from 21.

Global rating agency Moody's in a report Thursday said the proposed mergers will significantly alter the structure of state-run banks which control over two-thirds of the system.

"The merged banks will have larger operating scale, which will result in improved competitiveness in corporate banking and retail lending, where their market share is low," the agency said.

Their larger scale will also enable them to increase investments in technology, where the state-run lenders lag their private sector peers. The agency, however, said these benefits will be only realised in the medium-term say over the next three years. It also said from an asset quality and profitability perspective, where the state-run banks fair poorly, things will remain unchanged.

"There is no reason to assume that the merged entities will make significant improvements in these metrics (asset quality and profit)," the note said.

With fewer state-run banks, there is now a greater scope for improving corporate governance, with a greater focus on the quality -- and roles and responsibilities - of board members and senior management, it said.

From a longer term perspective, the merger can result in better credit metrics as they seek to address the weakness of corporate governance, which include poor board supervision and poor HR practices, it said, and pointed out that it is the poor corporate governance is one of the core factors driving weakness in credit metrics.

On the flip side, the agency flagged the lack of clarity on issues like role of the board in key areas like deciding on long-term strategy and HR practices.

It also said these changes are only incremental and a public sector bank chief does not go at par with her private sector peers.

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