Until bad loans are sorted, consolidation in PSBs will take time

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26 Aug, 2025 12:21

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Beena ParmarMoneycontrolEven as the government has approved State Bank of India’s (SBI) merger with its five subsidiaries, further consolidation in the public sector banking space could take time as bad loans weigh heavily on their books.

A senior public sector bank executive said, “The government may still take some time for the merger of other banks as large banks are still reeling from the pressure of bad loans, lower margins and high credit costs…A takeover would put further pressure on the acquiring bank.”

On Monday, Finance Minister Arun Jaitley met top public sector bank (PSB) heads and took their suggestions on GST (Goods and Services Tax), bad loan resolution mechanisms and capital situation of banks keeping aside the consolidation talks for now.

Another PSB chief said, “The consolidation topic was not on the discussion table. Mostly it was about GST and bad loans. The FM took stock of the bad loan situation and wants to help banks to deal with it.”

Karthik Srinivasan, Senior Vice President and Group Head, Financial Sector Ratings, ICRA said, “I do not see it happening right now as all PSBs are going through a tough time and any two weak entities merging doesn’t help. Any merger takes a toll on the capital and at this stage that is one of the biggest constraints apart from bad loans.”

Historically, after a merger the pain of asset quality to subside takes time. Similarly, integration and synergies to happen over a period of time take another a couple of years at least, he added.

Banks have been saddled with stressed assets to the tune of over 20 percent of total loans in the banking sector. The stressed assets stand at about Rs 6 lakh crore right now.  

India Ratings and Research expects gross bad loans to peak at 12.5-13 percent by FY18/FY19 from 12 percent in FY17. The net interest margins are also expected to shrink by 15-20 basis points from the current 2.3 percent impacting the profitability of banks.

Abhishek Bhattacharya, Director at India Ratings and Research, said, “Banks have seen shrinkage in margins; credit costs have risen and the quantum of capital discipline also has to be maintained. Hence, the valuations have taken a hit, because of which the interest in acquiring has also come down in consolidation.”

The ratings agency expects banks to require Rs 91,000 crore in tier-1 capital till March 2019 to grow at a bare minimum pace of 8-9 percent compounded annual growth rate.

Given the weak health of banks, government may only wait for the banks to tide over the core problems of bad loans and profitability to create healthy larger banks.