Bank Merger of BOB, Dena Bank and Vijaya Bank | Burning Issue

Table of Contents

SECOND MAJOR MERGER

The State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala and State Bank of Travancore, and Bharatiya Mahila Bank were merged with State Bank of India with effect from 1 April 2017. NOTES The government on Monday proposed the amalgamation(combination, union, merger) of state-owned Bank of Baroda (BoB), Dena Bank and Vijaya Bank to create India’s third-largest bank. The move is part of the reforms initiated in the public sector banking segment.

WHEN WAS THE DECISION TAKEN?

The decision was taken at a meeting of a ministerial panel (called Alternative Mechanism), headed by Finance Minister Arun Jaitley, that oversees merger proposals of state-owned banks.
The other members of the panel include Railways Minister Piyush Goyal and Defence Minister Nirmala Sitharaman.

2 STRONG + 1 WEAK BANK

“This major decision was taken by [the] Alternative Mechanism today to amalgamate Bank of Baroda, Dena Bank and Vijaya Bank. While making this suggestion, we have borne in mind that we don’t want a merger of what are relatively weak banks,” Mr. Jaitley said, adding, “You can have two well-performing banks absorbing a weak one in the amalgamation process and hopefully, creating a mega bank which will be sustainable, whose lending ability will be far higher.”

UNDERSTAND THE BASICS

Bank of Baroda is strong in western and northern India while Dena Bank has a larger base in Gujarat and Maharashtra and Mangalore-based Vijaya Bank has a presence in south India. Both Bank of Baroda and Vijaya Bank have relatively better credit metrics than Dena in terms of asset quality, capitalisation and profitability NOTES But post-merger, the non-performing assets (NPAs) will be a problem for all the three banks with cumulative gross NPAs around Rs 80,000 crore. This will also require an increased focus on the clean-up process. Vijaya Bank saw improvement in April to June quarter with gross NPAs at 6.19 percent vs 6.34 percent in the January to March quarter. On the one hand, Bank of Baroda’s gross NPAs grew to 12.46 percent in Q1FY19 compared to 12.26 percent in Q4FY18, on the other, its net profit more than doubled to Rs 528 crore.

DENA BANK – WEAK LINK

Dena Bank, which is also under prompt corrective action (PCA) framework, saw its loss widen to Rs 722 crore and its asset quality deteriorated further to 22.69 percent from 22.04 percent.

DENA BANK UNDER PCA

Prompt Corrective Action (PCA) framework
PCA is a process or mechanism to ensure that banks don’t go bust.
Under it, RBI has put in place some trigger points to assess, monitor, control and take corrective actions on banks which are weak and troubled

. RAGHURAM RAJAN WON’T HAVE LIKED THE IDEA

“One has to be very careful in deciding who to merge with whom. The best of all is where you merge strong banks together because they have the resources, health and culture, and they will not have any problems to fix other than merger itself,” he said while delivering a lecture in January 2014

THE RESULT OF THE MERGER

If the proposed merger of the three banks fructifies, total employee strength will be 85,675, with 56,361 employees of BoB, 15,874 of Vijaya Bank and 13,440 employees of Dena Bank. Finance Minister Arun Jaitley, however, assured there will be no job losses stating employees of relatively small banks will get an opportunity to improve their working conditions and the amalgamated entity will increase the banking operations.

NOTES

Dena Bank, Vijaya Bank and the Bank of Baroda– that will make it the country’s third largest bank with a combined business of Rs.14.82 lakh crore.

BACKGROUND ON MERGER OF BANKS

Consolidation of state run banks was first mooted by the first Narasimham Committee in 1991. This committee had recommended that all government run banks should be merged and a three tier structure should be created from it. 1. Three large banks with international presence 2. Around 8-10 national banks 3. Several other regional banks.

MERGER IN PSB

The current proposal to merge all the state PSBs comes in the backdrop of increasing Non-Performing Assets (NPAs) and consequent deteriorated asset quality and lower earnings.
Top 5 banks with highest NPA are none another than the public sector banks (PSBs) namely SBI, Punjab National Bank, Bank of India, IDBI Bank and Bank of Baroda (BoB). These banks account for 47.4% of total NPA.