The government has decided to merger three banks – Bank of Baroda, Dena Bank and Vijaya Bank — to reduce the amount of capital it needs to put into these banks and help clean their balance sheets. The three merged state-owned banks will the third-largest lender after State Bank of India and HDFC Bank. The name of the merged entity and the share-swap ratio will be decided soon. Bank unions, however, were quick to oppose the merger.

While Dena Bank has been placed under the prompt corrective action framework by Reserve Bank of India with restriction on lending, Vijaya Bank is among the only two lenders to have reported a profit in 2017-18. As a percentage of total assets, Dena Bank has the highest net non-performing assets at 11.04% while Vijaya Bank has 4.10% and Bank of Baroda 5.4%. The weaknesses of Dena Bank are being diluted by pooling them with the strengths of the other two.

The merger of the three banks is a signal for further consolidation among the 17 state-owned banks that have seen spiraling non-performing assets.  One of the reasons to merger these three banks were that they use the same software – Finacle from Infosys making the task of merging the technology platforms and back-ends easier.  In the past, the government merged State Bank of India’s associate banks with the parent and let Life Insurance Corporation take over the debt-ridden IDBI Bank.

The three concerns expressed by investors are about the quality of Dena Bank’s book, distraction from the growth journey for Bank of Baroda and Vijaya Bank and whether the merged entity will be able to raise capital. There are also concerns that whether Bank of Baroda will get distracted to the point that growth will suffer in the long-run. Any merger of such a type will raise these doubts. The answer will be in proper integration process. The merger proposal will first need to be approved by the board of directors of the three banks. The government will then prepare an amalgamation scheme, which will need to be approved by the cabinet and Parliament.

In general, challenges on asset quality and profitability, erosion in networth and high dependence on government for capital support continues to hamper the growth aspirations of state-owned banks, especially under the RBI’s prompt corrective action framework. In fact, state-owned banks account for over 80% of the Rs 10.4 lakh crore of non-performing assets in the banking system as on June 30, 2018, and reported aggregated losses of Rs 1 lakh crore for the past five quarters.

The combined entity: Gaining scale

Please Subscribe to read the full article.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

0 Comments