NEW DELHI: Post-merger, public sector banks (PSBs) have seen an improvement in profitability in the year ended March 2021 despite the coronavirus pandemic induced disruptions.
In FY21, PSBs reported a combined net profit for the first time in five years. Only two of the 12 public sector banks — Punjab & Sind Bank and Central Bank of India — reported a net loss for the year. The key reason for PSBs to post a combined profit of Rs 31,817 crore was the end of their legacy bad loan problem. Other factors include lower cost of funds, reduced operating expenses and higher gains on bond portfolios amid declining bond yields.
Last year, the merging entities posted huge losses in the fourth quarter before the integration, which contributed to the Rs 26,015-crore loss among public sector banks in FY20. This year, however, the acquiring banks made profits with Indian Bank topping the list at Rs 3,004 crore followed by Union Bank at Rs 2,905 crore.
The pandemic year 2020-21 has seen most PSBs remain preoccupied with the merger integration process. The bad loan cycle that involved large corporate loans during FY16-FY19 manifested mostly on PSB balance sheets. Many lenders saw their capital erode below the mandated regulatory minimum when mergers among PSBs were seen as the only way out. The amalgamation of these banks came into effect from April 1, 2020.
While the benefits of the merger could be measured in figures related to profitability, the human impact of the big bang bank merger is huge and cannot be measured by financial numbers. That apart, state-owned banks continue to lag private peers in terms of mirroring efficiency parameters. Further, anaemic loan growth and spike in stressed loans amid an unprecedented health crisis as well as inept digital abilities has been a drag on PSBs’ overall performance.
Having done two rounds of bank consolidation earlier, the central government in 2019 decided to merge six disparate and weak PSBs into four in one stroke — the biggest consolidation exercise in the banking space. Punjab National Bank (PNB) took over Oriental Bank of Commerce and United Bank of India; Allahabad Bank became part of Indian Bank; Canara Bank subsumed Syndicate Bank; and Andhra Bank and Corporation Bank merged with Union Bank of India. Earlier, State Bank of India (SBI) with five of its associate banks while Vijaya Bank and Dena Bank were merged with Bank of Baroda.
Mergers of banks, first mooted by the Narasimham Committee more than a quarter century ago, began in India in the 1960s in order to bail out the weaker banks and protect the customer interests. In the post liberalisation period the quest to create an Indian bank that would be in the league of global giants had been continuing since 1990.
“After successfully completing the amalgamation during the previous year, the bank is now reaping the synergy benefits. Since we have achieved this level (of profitability) despite the challenging environment, we expect this to be sustainable unless we are hit by further crisis,” said Indian Bank Managing Director and CEO Padmaja Chunduru.
Credit growth continues to remain steady at lower levels of 3-4% year-on-year growth for PSBs, however with better asset quality and profitability position, most of the public banks are well placed to support the growth if the credit growth improves. Notwithstanding, the improvement in the reported gross non-performing assets (NPA) (9.4% as on March 2021 from 10.7% as on March 2020) and net NPA (3.1% vs 3.8%) in FY21, the overdue loan book across banks remains high.
Anil Gupta, vice-president, sector head - Financial Sector Ratings, ICRA, says a merger could drive elimination of redundancies with many PSBs having branches and other infrastructure which can be rationalised. “While these could be immediate cost benefits, the long-term benefits will arise from better synergies created out of a lesser number of lenders to a large borrower. We saw in the previous asset quality cycle, that because of the presence of a large number of lenders to a corporate borrower, the pace of decision making was impacted resulting in delayed resolutions and recoveries, which lead to higher losses,” he added.
Going ahead, there are underlying concerns, which if not addressed could result in larger and potentially weaker banks.
For instance, Gupta says: “With incremental growth from the corporate sector staying low, and retail being the key engine for credit growth, PSBs will need to keep enhancing their lending abilities and improve turnaround time by digitally sanctioning the loans by enhancing their customer profiling through online tools. When the corporate credit cycle rebounds over the medium term, the ability of the banks to implement sufficient risk filters in credit selection and incorporate the learnings from the previous credit cycle while sanctioning new loans to corporates is something which remains to be seen.”
Reaping benefits of synergy
The bank is now reaping the synergy benefits. Since we have achieved this level (of profitability) despite the challenging environment, we expect this to be sustainable unless we are hit by further crisis, says Indian Bank MD & CEO Padmaja Chunduru
