The government announced that Bank of Baroda, Vijaya bank and Dena bank will be merged to create third largest commercial bank by asset after SBI and PNB displacing ICICI to 4th position as part of efforts to revive credit and economic growth.
The idea of merger was first recommended by committee headed by M Narasimham, former RBI governor in 1991. In 2014, PJ Nayak committee also talked out on merging or privatising state-owned banks. In 2017, the cabinet gave approval for PSB amalgamation through an Alternative Mechanism.
The amalgamation was proposed by a Ministerial Panel comprising chairperson Jaitley and cabinet ministers Piyush Goyal and Nirmala Sitharaman.
Crisil Ratings in its report said that success of the three-way merger will be crucial as it will pave the revival path for other weak public sector banks (PSBs), mainly those under the RBI’s prompt corrective action (PCA) framework.
.@bankofbaroda, Dena Bank, Vijaya Bank merger: The merged entity will have NPAs of about 13%, worse than BoB’s present 12.4%. What is the message the govt is sending to BoB’s shareholders?
The fact is PSB boards suffer from appalling governance standardshttps://t.co/4dkyw5O5G7
— Business Standard (@bsindia) September 19, 2018
“Such consolidation will engender economies of scale, and can structurally improve operating efficiencies and governance,” said Krishnan Sitaraman, senior director, Crisil Ratings.
The board of Bank of Baroda approved a resolution to consider looking at acquisition targets, which conform to its technology and culture. All three banks are on the same technology platform named – Infosys’ Finacle 10.
Dena Bank, without a CEO, was an ideal candidate. It is culturally similar to Bank of Baroda as both have a strong presence in the western India. Vijaya Bank, the only profit-making state-run bank with lowest share of bad loans, was included to strengthen the combination. It is also the only state-run bank to pay dividend to government in 2017-18.
Dena Bank, under Prompt Corrective Action (PCA) programme, is facing restriction on lending and expanding business. It is heavily dependent on the government for capital support. It has shown no signs of a turnaround.
“India needs to reduce the number of state-owned banks through consolidation for better management,” said SBI chairman Rajnish Kumar.
There are concerns whether the merged entity will be able to raise capital. Provision of accounts is also considered a challenge. For instance, there could be some accounts which may be standard in one bank and sub-standard in another. The provision and classification of accounts will have to be aligned.
Another concern is branding and logo. There is also a need to preserve the brand value as customers have strong brand loyalty.
With reduction in number of PSBs, capital allocation, performance milestones and monitoring would become easier for the government. The capital burden on the government will reduce.
The number of branches will grow and the final entity will have a deep penetration in markets where they are invested. Customer base will expand and they will get access to low cost deposits.
“The proposed amalgamation will be a big positive for these lenders as it will ensure synergies for network, low-cost deposits and subsidiaries,” said the finance ministry official.
“This is a progressive move and signifies the government’s determination to strengthen the banking sector in the country for a better performance and service delivery,” said Rashesh Shah, President of FICCI.
“A stronger banking sector is vital for the overall health of the economy and we hope to see more such measures in the times ahead,” Shah added.