India to merge three state-owned banks

India to merge three state-owned banks

In an attempt to create stronger public sector banks in the country, the Central government on Monday said three state-owned lenders - Bank of Baroda, Vijaya Bank and Dena Bank - will be merged to create the country's third largest lender. "We have made a decision to merge Dena Bank, Vijaya Bank and Bank of Baroda".

Announcing Monday's decision, Finance Minister Arun Jaitley said the government did not want a merger of weak banks and has, therefore, suggested the idea of amalgamating one weak bank and two strong banks, in order to create an entity which is able to increase banking operations.

Banking sector reforms are a major plank of Prime Minister Narendra Modi's administration to revive credit growth, which has slowed to multi-decade lows as banks struggle with bad loans.

But these banks also account for the lion's share of more than $150 billion in bad debt which is weighing on the sector, and need billions of dollars in new capital in the next two years to meet global Basel III capital regulations.

"Boards of the three banks will examine amalgamation proposal". Top lender State Bank of India previous year merged with five of its subsidiary banks and took over Bharatiya Mahila Bank, catapulting it to be among top 50 global lenders. Around 9,500 branches are likely to be closed during the merger.

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Enumerating the benefits, Mr. Kumar added that the proposal entailed that the amalgamated entity would be the third largest in India. While it may make sense to amalgamate Vijaya Bank and Bank of Baroda as both banks have relatively strong financials, including Dena Bank in the consolidation exercise is fraught with pitfalls, he added. "This will hopefully create a mega bank that will be sustainable", Jaitley added.

S Nagarajan, General Secretary, All India Bank Officers' Association, said the argument that mergers will help tackle bad loans does not hold water.

According to Rajiv Kumar, secretary, Department of Financial Services, the boards of all the three banks had already been advised by the government to consider the proposal, which will be taken soon. "The best of the service conditions will apply to all of them".

As was in case of SBI, no employee of the three banks would have service conditions that are adverse to their present one.

"Over time, this (merger) will strengthen the global positioning of Indian banks, but there will be a considerable transition period for this", said Sujan Hajra, chief economist and head of research at Mumbai-based broker Anand Rathi. This was accompanied by another step which was really to sweep the NPAs below the carpet so that the real picture does not come out. "And between 2008 and 2014, there was lending of nearly Rs 55 lakh crore", he said. "And the first step was to accept there were NPAs of Rs 8.5 lakh crore on account of adventurous lending", Jaitley said.

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