India to merge 3 Public Sector Banks into a Single Entity
Bank of Baroda, Vijaya Bank and Dena Bank to become one — India’s Third Largest Bank
The Government of India has initiated the process of merging three Public Sector Banks into one giant entity. The envisaged amalgamation will be the first-ever three-way consolidation of banks in India, with a combined business of Rs. 14.82 lakh crore ($ 190 billion) , making it India’s third largest bank after HDFC Bank and the State Bank of India (SBI).
The merger of Bank of Baroda, Vijaya Bank and Dena Bank, is essentially a case where two stronger banks are absorbing a weaker entity. Dena bank has one of the highest NPA ratios (22% on June 30, 2018) and has been restricted from lending or recruiting new employees by the Reserve Bank of India (RBI). Dena bank posted a net loss of Rs 721.71 crore for the quarter ended June 2018.
The bank unions and the shareholders of the two stronger banks have expressed concerns over the development. Bank of Baroda and Vijaya Bank posted a net profit of Rs 528.3 crore and Rs 144.34 crore for the quarter ended June 2018.
However the government has built a strong case for the merger. It feels that the amalgamated entity would have significant cost benefits from synergies: a larger distribution network will reduce operating and distribution costs.
- The envisaged amalgamated entity is expected to have a Provision Coverage Ratio (PCR) of 67.5%, which is well above Public Sector Banks (PSBs) average (63.7%).
- Its net NPA ratio is expected to be 5.71%, significantly better than PSB average (12.13%) and gross NPAs for the combined entity would decline by Rs. 1,048 crore in Q1.
- The Cost to income ratio of the combined entity at 48.94% would be better than the PSB average of 53.92%.
- The Capital Adequacy Ratio (CRAR) at 12.25% would be significantly above the regulatory norm of 10.875%, and the stronger amalgamated bank will be better positioned to tap capital markets
- Dena Bank’s strength in the MSME sector will further augment the strength of the other two to position the amalgamated bank for being an MSME Udyamimitra
- The global network strength of Bank of Baroda will be leveraged to enable customers of Dena Bank and Vijaya Bank to have global access
- Wider range of products and services through leveraging of bank subsidiaries and leveraging a larger network for offering more value-added non-banking services and products
“The consolidation will help create a strong globally competitive bank with economies of scale and enable realisation of wide-ranging synergies. Leveraging of networks, low-cost deposits and subsidiaries of the three banks has the potential of yielding significant synergies for positioning the consolidated entity for substantial rise in customer base, market reach, operational efficiency, wider bouquet of products and services, and improved access for customers,” said a statement by the Ministry of Fianace.
The Alternative Mechanism comprising its Chairperson, the Union Finance Minister Arun Jaitley and Cabinet Ministers, Piyush Goyal and Nirmala Sitharaman met here today in New Delhi and decided that Bank of Baroda, Vijaya Bank and Dena Bank may consider amalgamation of the three banks.
During the budget for the financial year 2019, the government had announced that bank consolidation was on the agenda. Today’s announcement marks the first step in this process. The merger proposal will now have to be approved by the board of directors of the three banks, after which the government is expected to prepare a plan that has to be sanctioned by the union cabinet and both houses of the parliament.
