Massive mergers no fix for Indian banks' near-term challenges

Credit quality and capital shortfalls remain a key problem.

Although India's wide-spread consolidation plans is expected to boost the sector's long-term growth prospects, mergers are unlikely to resolve banks' near-term challenges, according to Fitch Ratings.

Under a plan announced in last August, the number of state-owned banks in India will be reduced from 27 in 2017 to 12 in the third instalment of the state's consolidation agenda. The move comes after Bank of Baroda's merger with two smaller lenders, Vijaya Bank and Dena Bank) in April, and State Bank of India's merger with its five associate banks in 2017. 

The most immediate challenge for the mergers are confrontational trade unions. Integrating cultures will also prove to be significant over the long term. 

"The long-term benefits far outweigh short-term challenges that tend to be associated with a sector consolidation process," Saswata Guha, analyst at Fitch Ratings said in a report.  

Once capitalised, the banks can lend more and take additional risk without affecting their intrinsic risk profiles without proper governance. However, Fitch estimates that banks still require an additional $13-15b until FY21 to pursue meaningful credit growth.