The Reserve Bank of India, in an analysis, says merged public sector banks (PSBs) are riskier than the unmerged ones. It said Indian banks are much better off now than they were in the first COVID wave.
The analysis, RBI’s latest Financial Stability Report, found that the systemic risk in the banking sector receded in 2021 from its elevated level during the first wave of the pandemic. “Systemic risk posed by PSBs was higher than private banks. The risk generated by the category of merged PSBs is comparatively higher than the unmerged PSBs,” the report said.
The central bank found that one of the benefits of consolidation is higher operational efficiency gains to reduce the cost of lending. Banks with scale for building a $5 trillion economy will have enhanced risk appetite.
It should be noted that the Corporation Bank and Andhra Banks were merged with Union Bank of India; Syndicate Bank was merged with Canara Bank; Oriental Bank of Commerce and United Bank of India were merged with Punjab National Bank; the Allahabad Bank was merged with Indian Bank. These got operational from April 2020. This came about after the mergers of Dena Bank and Vijaya Bank with Bank of Baroda, as well as the merger of associate banks with the State Bank of India.
The report said the capital levels of Indian banks would be way above the prescribed minimum level of 9% even in a severe stress scenario. “Stress test results indicate that the system level CRAR may decline to 15.4% by September 2022 under the baseline scenario and to 14.7% and 13.8% under the medium and severe stress scenarios, respectively.”
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The RBI pointed out that the common equity Tier 1 (CET 1) capital ratio of the commercial banks may reach 12.5% by September 2022 under the baseline scenario and decline to 11.9% and 11.2% under the medium and severe stress scenario. It noted that even under adverse scenarios, no bank would face a decline of the CET 1 capital ratio below the regulatory minimum of 5.5%.
