The Union Finance Ministry on September 17, 2018 announced the proposal to merge three public sector lenders - Bank of Baroda, Dena Bank and Vijaya Bank. The combined lending entity will create India’s third largest bank with a total business of more than Rs 14.82 lakh crore.
The announcement was made during a press conference by Rajeev Kumar, Secretary of Department of Financial Services, Union Ministry of Finance.
The proposal will now need the approval of the boards of these individual banks. The banks' boards will shortly meet and take up the decision, said the Finance Minister Arun Jaitley after Kumar's statements.
The merger of these three state-owned banks is a part of the government's agenda of consolidation of public sector banks. The consolidation was proposed by the Alternative Mechanism comprising Chairperson Arun Jaitley.
The amalgamation would be through share swap which will be the part of scheme of merger. The scheme of amalgamation, which will now be formed, will be laid before Parliament. However, it would require no change in the banking law. This amalgamated entity will increase banking operations and expansion is inevitable. The three banks will continue to work independently post merger. The amalgamation would be carried out under Alternative Mechanism. Finance Minister Arun Jaitley, who heads Alternative Mechanism, assured capital support to the merged entity. Other members of Alternative Mechanism included Railway Minister Piyush Goyal and Defence Minister Nirmala Sitharaman. Post this merger, the number of PSU banks will come down to 19.
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The state-owned Bank of Baroda, Vijaya Bank and Dena Bank will be merged to create the country's third largest lender after the SBI and ICICI Banks, as part of efforts to revive credit and economic growth.How these three banks will add value to each other?
Dena Bank, with gross NPA ratio of 22 percent, is currently under the Prompt Corrective Action (PCA) framework and has been restrained from further lending. Dena bank would no longer be covered under PCA after amalgamation.
Vijaya Bank is among the better performing public sector banks with a gross NPA ratio of 6.9 percent. The Bank of Baroda has a bad loan ratio of 12.4 percent.
The Bank of Baroda has a wide spread network, while Dena Bank and Vijaya Bank are more regionally focused. The Global network strength of Bank of Baroda will be leveraged to enable customers of Dena Bank and Vijaya Bank to have global access.
Dena Bank’s strength in the Micro, Small and Medium Enterprises (MSME) will further augment the strength of the other two banks to position the amalgamated bank for being an MSME Udyamimitra.
Merged entity will benefit from Bank of Baroda’s high Capital Adequacy Ratio; Vijaya Bank’s strong asset quality position; and Dena Bank’s strong CASA (Current Account Savings Account) base.
| Parameters | Bank of Baroda | Vijaya Bank | Dena Bank | Amalgamated Bank |
| Total Business (Rs lakh cr) | 10.29 | 2.79 | 1.72 | 14.82 |
| Gross Advances (Rs lakh cr) | 4.48 | 1.22 | 0.69 | 6.4 |
| Total Deposits (Rs lakh cr) | 5.81 | 1.57 | 1.03 | 8.41 |
| Branch Presence | 5,502 | 2,129 | 1,858 | 9,489 |
| Return On Assets (%) | 0.29 | 0.32 | -2.43 | -0.02 |
| Tier -1 CET (%) | 9.27 | 10.35 | 8.15 | 9.32 |
| CRAR (%) | 12.13 | 13.91 | 10.6 | 12.25 |
| Net NPA | 5.4 | 4.1 | 11.04 | 5.71 |
| Employees | 56,361 | 15,874 | 13,440 | 85,675 |
| Consolidation of public sector banks | |||
These five subsidiaries were State Bank of Bikaner, State Bank of Mysore, State Bank of Patiala, State Bank of Travancore, and State Bank of Hyderabad. The merger resulted in:
The Modi Government had announced the consolidation of public sector banks in 2016, owing to mounting Non-Performing Assets (NPAs). The plan was to cut down the number of PSBs by half from 21 to about 10-12 banks. The Union Cabinet in August 2017 approved amalgamation of Public Sector Banks through Alternative Mechanism (AM) with an aim to facilitate consolidation among the Nationalised Banks to create strong and competitive banks. |
Why is there a need of banks consolidation in India?
• India is the fastest growing major economy in the world. To sustain this growth, there is a need for mega banks that only will ensure investments into the large scale infrastructure projects.
• At present, there are a total of 20 public sector banks (PSBs) in the country, including the amalgamated SBI. The consolidation helps in leveraging the benefits of economies of scale.
• Banking sector is suffering from non performing assets (NPAs) problem. To overcome this, the government is resorting to capital infusion. Consolidation will increase capital efficiency, apart from improving the ability of banks to recover bad loans.
• Consolidation will help in leveraging the synergies among the banks that have diverse portfolios, focus areas and coverage areas.
• As the government is the only common owner of all the PSBs, the process of consolidation is much easier and effortless.
• At present, there is only a single Indian bank in the top 50 global banks list that is the SBI. The consolidation is expected to fill this gap, and, consequently, help build the ‘Brand India’ among international investors.
• International experience is also favourable towards consolidation. Banks in Japan gained a lot as a result of large scale merger and acquisition process between 1990 and 2004.
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