Vision set for global scale PSU banks in India

Reduction in the cost of borrowing and improved income opportunities will boost revenues and can increase the bottom line of the new entities.

In the latest episode of the mini-budget press meet series, Finance Minister Nirmala Sitharaman announced another major measure towards making India a $5-trillion economy. To create global sized banks, the merger of 10 public-sector banks (PSBs) into four entities was announced so that the struggling sector is streamlined, revived and rejuvenated.

From a global perspective, we don’t have a single bank among the Top 20. For example, five biggest banks of China, which find a place in the Top 20 list, have contributed to growth in all major sectors. Lower funding costs and technological scalability of large banks assure that banking services are accessible to the last person.

Post mergers, more than 80 percent of the PSB business will be with 12 banks that will ensure they have a strong business book with an all-India presence.

Geographical presence, technological platforms and cultural aspects among the new entities will help in realising operational synergies and lending capacity will be enhanced, which, in turn, can improve credit growth.

Reduction in cost of borrowing and improved income opportunities will boost revenues and can improve the bottom line of the new entities.

Announcement of capital infusion, asset quality review (AQR) mechanism, good pace of recovery of bad loans and insolvency and bankruptcy code (IBC) framework have resulted in the reduction of GNPAs and increased the provision coverage ratios of these banks, which can make sure that they lend aggressively to revive growth.

Even after fresh infusion of capital, few weaker banks are likely to stay in the prompt corrective action framework. Few banks may use the new money to lend instead of provisioning for existing loans.

However, more funds are required to meet regulatory requirements and business growth. An overall careful allocation of recapitalisation funds has ensured that all the new entities are on a level playing field in terms of capital requirements and business growth.

Creation of position of a non-executive chairman, recruitment of a chief risk officer and performance appraisal of general managers will ensure best talent and professionalism in PSU banks, which can give strong competition to their private sector counterparts. Linking of SWIFT messaging system with core banking will help detect frauds and also ensure best practices are put in place.

Apart from allocating capital, we can assess that the government is trying to bring in some good governance practices in the PSU banking sector.

All the above steps can reduce the valuation gap between the private and public sector banks. Apart from technological and financial benefits, careful deployment of manpower, without any retrenchment, ensures that the government is considerate about employees.

On the other hand, clarity has to emerge on who will be handling these mergers and heading these mammoth banks.

One hopes that various nuances, procedures and rigour associated with the execution of such big-ticket mergers doesn't divert the attention of top PSU bankers from the need to push credit growth with due diligence, which is the number one priority, given that the GDP growth rate has slowed to 5 percent.

Post amalgamation, minority shareholders did not gain much from SBI and Bank of Baroda. Further reforms like privatisation of major PSBs, bringing down the government’s stake and control will ensure that shareholders’ wealth is not eroded.

Speedy resolution of issues at IBC and implementation AQR framework for non-banking financial companies will further strengthen the financial space.

With these reforms, the finance minister has tried to ensure that the foundation of the PSU banking sector is strengthened and reflect the government's commitment to providing required financial base to take the economy towards the $5-trillion mark.

PSU banking stocks are expected to be buoyant in the coming days, as more reforms are expected. In the short term, with the positive sentiment, short covering is likely in the beaten-down PSU banking stocks. The medium-term price trajectory will depend on the merger ratios. The long-term price performance of these stocks will depend on the working style, business growth and asset quality in the coming quarters.

Best Share Market News, Click Here To Get More News - Share Market Tips, Stock Market Tips, for 2 Days Free Trial give a missed call @9644405057 and Get Share Market Services.