Mumbai: The merger of 10 public sector banks (PSBs) into four entities is unlikely to revive credit growth or have meaningful cost synergies, said a report by Credit Suisse.

"Coupled with the ongoing moderation in growth for private banks led by auto sector slowdown and increased cautiousness, credit growth, thus, is unlikely to be revived by PSB mergers," it said in a report dated 2 September.

The merger is also unlikely to meaningfully revive the flow of credit to the liquidity pressed non-banking financial companies (NBFCs) as given the already high share of NBFC exposure in constituent banks, all four merged entities will have more than 10% of their loan exposure towards NBFCs, the report added.

"Hence, credit flow to NBFC will remain a challenge even as bond market access continues to remain differentiated for them," said Credit Suisse.

Given the limited flexibility on restructuring and rationalisation, meaningful cost synergies from PSB mergers are unlikely, it said. While the large recapitalisation improves the capacity for banks to grow loans, recent experience of State Bank of India (SBI) and Bank of Baroda (BOB) indicates that focus on integration impacts near-term growth, the report said.

"While the recap amount puts all four merged entities comfortably above the regulatory threshold of 8% common equity tier 1 (CET1), given the recent experience of SBI and BOB, we believe focus on integration affects near-term growth, and hence, expect growth to be impacted for them too," it said, adding that even as size and scale of operations increase, core profitability for these banks is likely to remain weak.

"Hence, they will continue to depend on external infusions inviting frequent dilutions," said Credit Suisse.

Last Friday, finance minister Nirmala Sitharaman announced the merger of Punjab National Bank, Oriental Bank of Commerce and United Bank with business worth ₹7.95 lakh crore to make India’s second-largest bank. The other merger will be between Canara Bank and Syndicate Bank, which will make the country's fourth-largest bank, with ₹15.2 lakh crore in business.

Also, Union Bank of India will be merged with Andhra Bank and Corporation Bank to build India’s fifth-largest public sector bank with ₹14.59 lakh crore in business. Indian Bank will be merged with Allahabad Bank to make India’s seventh-largest PSB with a business of ₹8.08 lakh crore.

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