PSBs on merger track may get recapitalisation allocation in Budget 2020

Bankers expect merger-related provisioning costs to reflect in the December and March quarter financials of FY20
With a little over three months left to complete the process of consolidation of public sector banks (PSBs), as announced by the finance minister in September, the 10 banks involved in the mergers are understood to be in advanced stages of due diligence.  

Punjab National Bank (PNB), Union Bank of India, Canara Bank, and Indian Bank — known as anchor banks — will acquire six smaller nationalised banks (see chart). Given the amount of the additional provisioning burden that the merger process may entail, it is expected that the upcoming Union Budget may provide for another round of recapitalisation, banking sources said. 

In order to estimate the amount of capital required by these banks, which the government may have to pump in, the due diligence process has been put on fast track. Audit and consultancy firm PwC has been appointed by Canara Bank, while Indian Bank has appointed KPMG to conduct due diligence. Deloitte has the mandate from PNB and Union Bank.  

“We expect to complete the due diligence process by December,” said Padmaja Chunduru, managing director and chief executive officer of Indian Bank. 

According to a top executive of a state-run bank where a merger is underway, all banks lined up for consolidation have been asked to meet the December 31 deadline to complete due diligence. “By the first or second week of January 2020, we are expected to furnish the findings of due diligence and also state the extent of additional provisioning that anchor banks and amalgamating banks may have to make in their books because of the merger,” he said. 

Bankers expect merger-related provisioning costs to reflect in the December and March quarter financials of FY20. “Banks could once again slip into losses in the next two quarters, though we believe that capital adequacy may not be tested because of the fund infusion, which was recently completed,” said another banker with a PSB. 

Therefore, they expect another round of capital infusion once consolidation takes place. “The merged entities will come into effect from April 1, 2020, and we believe that capital will be infused into these (merged) entities by the first quarter of the next financial year,” said another public sector banker involved in the consolidation process. 

While it may be early to estimate the amount of recapitalisation likely to be announced in the Union Budget, bankers say it may not be as large as the previous rounds. 

Capital of Rs 2.66 trillion has been pumped into PSBs since FY18 to aid them clean-up the toxic assets and maintain the regulatory capital threshold. This time around, with Rs 8,857 crore coming in for Canara Bank, PNB, and Union Bank from the resolution of Essar Steel, the recapitalisation amount may be restricted to Rs 50,000 crore or less. 

“What’s making it difficult for us (PSBs working on merger) to assess the additional provisioning burden are the loan accounts on which inter-creditor agreements have been signed. We expect resolution in at least 50 per cent of these cases, but we can’t say anything with certainty,” said one of the bankers quoted above.  

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