Banks consolidation no fix, says Fitch

The proposed further consolidation of Indian state-owned banks should be a long-term positive for the industry but not necessarily a remedy for its near-term challenges, Fitch Ratings said on Wednesday.

A less fragmented banking system with larger, more diversified stable players that benefit from stronger profitability through economies of scale will be viewed positively from a credit perspective. However, this change must be accompanied by adequate capitalisation and meaningful governance reforms, it said.

Under the merger plan announced on August 30, Punjab National Bank, Canara Bank, Union Bank of India and Indian Bank are likely to be the four surviving entities merged down from 10, with state-owned banks consolidating from 27 in 2017 to 12 in this third instalment of the government’s consolidation agenda. “The consolidation and implementation risks of building a well-capitalised, competitive and profitable banking system are considerable,” it said.