Consolidation of banks will offer long-term benefits: Fitch

A consolidated Indian banking structure would be a positive development in the long term for the Indian banking system, according to Fitch Ratings.

This observation comes in the context of Finance Minister Arun Jaitley recently stating that (public sector) bankers themselves have supported the proposal of consolidation of banks in order to have strong banks rather than a numerically large number of banks.

The credit rating agency observed that large banks in a consolidated banking system enjoy scale benefits leading to better diversification of risks and stronger overall profitability contributing to higher credit ratings.

A consolidated system would also be better in achieving financial inclusion, one of the key objectives of the government, it added.

Fitch Ratings, in a statement, said the long-term benefits far outweigh the short-term challenges that tend to be associated with a consolidation process that is forced on the sector.

However, it cautioned that when consolidation is not executed on a voluntary basis, it then tends to be forced on the sector when it least wants to entertain it.

The agency said: “We believe that consolidation (among public sector banks) coupled with higher capital and governance reforms would position the banking system better in support of a more open and higher-growth economy.”

Saswata Guha, Director, Fitch Ratings, estimated 16 per cent credit growth for the banking system over the next three years. Given that about $140 billion is needed for buffering the balance sheet to meet the Basel III capital requirements, banks will have to find more capital to fund loan growth.

SBI better placed It said the Indian financial system would benefit from more banks of the size of State Bank of India. The system is quite fragmented at present, with around 50 domestic banks — with public sector banks (PSBs) accounting for around a 70 per cent asset share.

SBI, according to Fitch, has performed much better than its PSB peers through this credit cycle, thanks in part to greater scale benefits which enhance pricing power from a funding perspective and diversification. SBI has stronger capital ratios and is better positioned to absorb the asset-quality issues that have plagued the sector.

The banking system would need sufficient lending capacity to fund large corporates as India Inc expands and extends its global reach.

“Furthermore, private credit to GDP in India should rise from current levels of just over 50 per cent as the middle class grows and becomes more affluent. This would imply higher credit growth rates relative to GDP over an extended period.

“This evolution is not without risks, and so necessitates a system that is competitive, profitable and well-capitalised,” said Fitch.

Implementation challenges Referring to the fact that there will always be implementation challenges, as with any consolidation process, the agency said this will require the commitment of all interested parties and “it appears that momentum for change may be building.”

However, notwithstanding the talk about potential consolidation, the need to address the PSBs’ asset quality and potential capital shortfalls are the more immediate issues, the agency added

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