India's banks are not currently fit for consolidation, however. Lenders are riddled with bad loans and a huge clean-up effort has only just begun under the direction of the central bank. Recognising the problem is the first step.
Gross non-performing assets doubled to over 10 per cent at the dozen public-sector banks that have reported their results for the fourth quarter, according to Credit Suisse.
The next logical step would be to raise capital. Analysts at the bank note that the provisions for these bad loans remain low at around 42 percent of the total. The government reckons lenders will need Rs 1.8 trillion ($27 billion) of fresh capital for banks to meet global requirements by 2019, of which it envisions supplying just 40 per cent itself. The real amount required is likely to be higher.
Consolidation will not reduce the amount of capital that is required from the public purse. But it will disrupt an already demanding turnaround. Mergers between healthy banks are complicated enough. Many of India's sleepy state banks don't have the management capacity they need to tackle bad debts and deals at the same time.
Una Galani is a Reuters Breakingviews columnist. The opinions expressed are her own.
Photograph: Krishnendu Halder/Reuters
