Over half the 21 listed PSBs are unfit to absorb weaker state-owned banks

Many of the remaining 11 contenders are also in a precarious position; Indian Bank appears to be the only one to have the financial muscle to absorb some of the bleeders

Last week, the Central Government announced the merger of three public sector banks — Bank of Baroda, Dena Bank and Vijaya Bank — setting off speculation that similar mergers of public sector banks may be around the corner.

But given the deteriorating financial health of most public sector banks (PSBs), the fundamental question is whether there are any healthy PSBs left that can absorb the weaker ones.

Of the twenty-one listed PSBs, eleven banks namely Dena Bank, Allahabad Bank, United Bank of India, Corporation Bank, IDBI Bank, UCO Bank, Bank of India, Central Bank of India, Indian Overseas Bank, Oriental Bank of Commerce and Bank of Maharashtra have been placed under the Reserve Bank of India (RBIs) prompt corrective action (PCA) framework, making them unsuitable candidates to absorb other PSBs.

This leaves another 10 possible contenders. But analysts that Business Standard spoke to say that the financial position of several of these banks is also in a precarious position.

“While eleven banks are currently under PCA, another six PSBs namely, Andhra Bank, Union Bank, Canara Bank, Punjab and Sind Bank, Punjab National Bank and Syndicate bank meet some of the conditions laid out by the RBI in its PCA framework,” said Anil Gupta, sector head, financial services ratings, Icra.

Banks are placed under PCA depending on their asset quality, capital adequacy levels, leverage positions and other factors. The RBI judges them on the basis of indicators such as tier-I capital ratio, net non-performing assets (NPA) and return on assets. For instance, under the PCA framework, if the net NPA ratio crosses 6 per cent, the bank enters the risk threshold 1 category. Similarly, if the capital to risk-weighted assets ratio (CRAR) and the capital conservation buffer of the bank is greater than 7.75 per cent but less than 10.5 per cent, then also the bank enters the risk threshold 1 category.

Now, five of the above mentioned six banks namely, Punjab National Bank, Canara bank, Union Bank, Syndicate Bank and Andhra Bank have net NPAs of more than six per cent. Punjab and Sind Bank barely makes the cut with net NPAs at 5.9 per cent. Moreover, the capital adequacy ratio of some of these banks is also lower than the desired levels.

So, with Bank of Baroda, Dena Bank and Vijaya Bank being merged, this leaves only two banks — State Bank of India (SBI), and Indian Bank as possible contenders for anchor banks around whom the merger can be structured.

SBI has already taken over its subsidiaries, leaving it with little room to absorb the bleeding banks. “I don’t think SBI will absorb any of these other public sector banks,” said a former chairman of a public sector bank.

This leaves only Indian Bank.

A look at the bank’s finances suggests that it is in much better position than most of its peers.

The bank had a loan book of Rs 2.29 trillion at the end of 2017-18, of which roughly 40 per cent was directed towards priority sector lending, while the remaining was in the non-priority sector space. And while its gross NPAs stood at 7.2 per cent at the end of Q1FY19, its net NPAs were the lowest among PSBs, at 3.8 per cent. This suggests that the bank has made sufficient provisions to weather the storm. Its tier-I capital ratio was 11.6 per cent at the end of Q1FY19, which is higher than most public sector banks, placing it in a comfortable position to absorb the losses of some other weaker PSBs.

“The only possible contender to absorb other weaker public sector banks is Indian Bank because of its better capital position and asset quality,” said Gupta.