Merged public sector banks are more risky than unmerged ones, finds an analysis by the Reserve Bank of India, though Indian banks are less riskier now and are much better off than the first wave of the pandemic.
Using stock market indicators to measure systemic risk in the banking sector, it is found that the systemic risk in the banking sector receded in 2021 from its elevated level during the first wave of the pandemic, according to an assessment made in the latest Financial Stability Report released by the Reserve Bank of India. Also, systemic risk posed by public sector banks (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 Reserve Bank analysed daily returns of 32 major bank stocks covering 90 per cent of the banking sector assets and the correlation of the daily stock returns for each bank pair was computed for each calendar year from 2011 onwards to measure the systemic risk levels in the banking sector.
The government in August 2019, announced a merger of ten public sector banks to four. One of the benefits of consolidation is higher operational efficiency gains to reduce cost of lending according to the official presentation made at the time of announcing the merger. Besides, banks with scale for building a $ 5 trillion economy to have enhanced risk appetite, it had said.
Corporation Bank and Andhra Banks was 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. While Allahabad Bank was merged with Indian Bank. These got operational from April 2020. This was after an earlier experience of merging Dena Bank and Vijaya Bank with Bank of Baroda and also merger of associate banks with State Bank of India.
But the capital levels of Indian banks would be way above the prescribed minimum level of 9 per cent even in a severe stress scenario. “ Stress test results indicate that the system level CRAR may decline to 15.4 per cent by September 2022 under the baseline scenario and to 14.7 per cent and 13.8 per cent under the medium and severe stress scenarios, respectively” the report said.
The common equity Tier I (CET 1) capital ratio of the commercial banks may reach 12.5 per cent by September 2022 under the baseline scenario and decline to 11.9 per cent and 11.2 per cent under the medium and severe stress scenario, respectively. Even under adverse scenarios, no bank would face a decline of the CET 1 capital ratio below the regulatory minimum of 5.5 per cent, the report said.
