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, says Una Galani.
India needs to maintain order in cleaning up the banking system. The government wants healthier banks and is keen on consolidating state-run lenders, Finance Minister Arun Jaitley says. It makes sense to have fewer stronger banks but consolidation is not a substitute for repairing weak balance sheets. Indian banks require capital before deal-making.
India has roughly 50 banks, with 27 public-sector lenders holding about 70 per cent of total assets. Outfits that serve the same kinds of clients, or work in the same regions, could consolidate. Indian media say the government would ideally like to see six to 10 big state banks.
Size does matter. India is keen to see its banks rank amongst the top global players. Countries like Australia and Malaysia have shown that larger banks tend to be more efficient and profitable.
State Bank of India, the country's largest lender, generated a 3.2 per cent net interest margin at home in the quarter that ended in December, or almost a third more than some of its smaller but relatively healthy rivals.
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