India’s government is merging three state-owned lenders to create one of the country’s largest banks
- On September 17th, Finance Minister
Arun Jaitleyproposed the consolidation of Bank of Baroda(BoB), Vijaya Bankand DenaBank.
- The merged entity will become the third-largest bank in India and have nearly 9,500 branches.
- Given its status as the weakest bank, Dena Bank is expected to benefit the most of the
merger. Its NPA ratio is more than double that of the other two banks.
The problems plaguing India’s public sector banks are well known. In addition to poor governance, their balance sheets are disproportionately burdened with bad loans when compared to their private sector counterparts. The smaller, weaker ones are unable to compete in a crowded market and require fresh infusions of capital.
The Modi administration’s approach to the problem has been to merge small state-owned banks with their larger peers. In early 2017, plans for
On September 17th, Finance Minister Arun Jaitley proposed the consolidation of two relatively well-capitalised banks - Bank of Baroda (BoB), Vijaya Bank - with Dena Bank, a struggling lender faced with credit limits as a result of being placed on the RBI’s Prompt Corrective Action (PCA) framework.
The merged entity will become the third-largest bank in India and have nearly 9,500 branches. Bank of Baroda is the largest of the bunch with ₹10.3 trillion of total business, while Vijaya and Dena have ₹2.8 trillion and ₹1.8 trillion of business, respectively.
Dena to benefit the most
Given its status as the weakest bank, Dena Bank is expected to benefit the most of the merger. It has a
Jaitley said that the government was making a conscious decision not to merge the operations of weak lenders. Rather, the merger of two strong banks and one weak bank seemed to be a more viable option, keeping in the mind the long-term sustainability of the merged entity and the potential for expansion. Bank of Baroda has a considerable national footprint, while both Dena and Vijaya have a strong presence in their respective regions of Maharashtra and Karnataka, especially in the small-and-medium enterprises (SME) segment.
While bankers have lauded the move, the success of the consolidation strategy isn’t guaranteed yet. SBI has seen its performance decline following the merger with the associate banks. However, while the adjustment and integration process may prove a drag in the short term, the three banks mentioned above all have strengths that can be capitalised upon and overlapping cost centres that can be excised.
The respective boards of each bank will now vote on the merger and if approved, will commence preparations on a plan for the amalgamation of the three entities and decide on a share-swap ratio. The merger plan will then need to be approved by the Indian Parliament.
Since the government is a majority owner in all three banks, it seems more likely than not that the merger will be approved. The entire process is expected to take six months. Once the merger is completed, there will be only nine public-sector banks left on the PCA watchlist.