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Moody's: India's plan to merge state-owned banks is credit positive

The Indian government's proposal to consolidate 10 state-owned banks is credit positive for the banks, Moody's said.

If the consolidation plan is implemented, it would result in increased operational scale and capital at the banks, and potentially lead to improved corporate governance in the longer term, the rating agency said. The mergers will also change the structure of public sector banking in India as they would cut the number of such banks to 12 from 21 at the beginning of 2018.

In late August, the government announced plans to consolidate 10 state-owned banks into four entities. Further, it announced capital injections for the affected banks, as well as measures to improve the functioning of the banks' boards and senior management.

Moody's expect the mergers to be completed by mid-2020. The merged banks will have larger operating scales, which will yield improved competitiveness in corporate banking and retail lending. It will also enable state-owned banks to increase technology investment. The agency said the banks' asset quality and profitability will remain unchanged after the mergers.