Moody’s: Merger of BoB, Vijaya Bank, Dena Bank to improve efficiency, governance

19 September, 2018, 01:03 | Author: Gerard Cortez
  • Centre announces merger of three banks

The Centre has made a decision to merge three state-run banks - Bank of Baroda (BoB), Dena Bank and Vijaya Bank - which will create the third-largest lender in the country.

Jaitley said the merger would create a sustainable mega-bank which would be third largest in the country.

The government on Monday announced the decision and said that it is being done as part of efforts to revive country's economic growth and credit system.

This is the third major restructuring in the public sector banking space undertaken by this government. Many in the market believe that the stressed lender could be merged with banks in the South.

The government says that three banks will continue to work independently post merger and there won't be any job loss.

The amalgamated bank would be the third largest bank in India and will be strong competitive lender with economies of scale, he said adding the three would have synergies for network, low-priced deposits and subsidiaries.

Notably, this would be the second big merger in the banking sector after the merger of SBI associate banks with the SBI. "No employee will face any adverse service conditions after the amalgamation". Top lender State Bank of India a year ago merged with five of its subsidiary banks and took over Bharatiya Mahila Bank, catapulting it to be among top 50 global lenders.

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Consolidation is always anticipated to be disadvantageous for the stronger banks. "After the government in principle makes this opinion, it suggests to the banks to consider it and we await the bank's consideration of it", he said.

Jaitley said while consolidation of banks was on agenda and was even announced in the Budget, the government was waiting for the non-performing assets (NPA) situation to take a turn for the better before going ahead. "That took a toll on the economy".

He said the RBI's asset review in 2015 revealed the total NPAs were actually to the tunes of Rs 8.5 lakh crore, not Rs 2.5 lakh crore.

Unsurprisingly, BoB share price plunged a whopping 16 per cent to Rs 113.45 in Tuesday's trade, while Dena Bank hit upper circuit of 20 per cent, and Vijaya Bank settled at Rs 56.40, down 5.69 per cent.

The government's Monday announcement signaled that this alternative approach may be tried out in the future too as a step to address the weakness in the banking system which is saddled with almost Rs 9 lakh crore of bad loans.

"This was accompanied by sweeping the NPAs below the carpet so that the real picture doesn't come out", Jaitley added.



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