Sep 18, 2018: Three state-run banks – Dena Bank, Vijaya Bank and Bank of Baroda – will be merged to create the third-largest bank in the country, the government said on Monday, as part of efforts to clean up the country’s banking system. The finance minister said he expected the process to be completed in the current financial year, which ends on March 31, 2019.
The decision to merge the three banks came at a meeting held under the “alternative mechanism” framework that was drawn up last year to consider consolidation in banking. Besides Jaitley, the alternative mechanism includes defence minister Nirmala Sitharaman and railway minister Piyush Goyal.
The government will continue to provide capital support to the merged entity. The announcement, made by Financial Services Secretary Rajiv Kumar during a press conference with Finance Minister Arun Jaitley, comes as the country’s banking sector grapples with Rs. 8.99 lakh crore worth non-performing assets or NPAs.
The merged entity has a combined business of Rs 14.8 lakh crore, deposits of Rs 8.4 lakh crore, gross advances of Rs 6.4 lakh crore, and 85,675 employees, based on the position as on June 30. The boards of these three banks are expected to meet in the next two weeks to consider the proposal and work out modalities.
Jaitley said the successful experience of merging State Bank of India (SBI) with five of its subsidiary banks and Bharatiya Mahila Bank prompted the government to explore the latest proposal in consultations with the Reserve Bank of India (RBI). Explaining the context of the proposed amalgamation, Jaitley said many state-run banks were in a fragile condition due to excessive, “adventurous” lending in the past (2008-14) and consequent ballooning of stressed assets with them.
The NDA government, through an unprecedented Rs 2.11-lakh-crore infusion over two years through FY19 that was announced last year, sought to capitalise PSBs to meet regulatory capital requirements and also support lending. “This amalgamated entity will increase banking operations,” Jaitley added.
The merger will not cause any job loss in any of these banks and, as was in case of SBI, no employee of the three banks would have service conditions that are adverse to their present one, he added.
The government currently owns majority stakes in 21 lenders, which account for over two-thirds of the country’s banking assets. But they also account for an overwhelmingly large share in total non-performing assets (NPAs) in banking.
The merger announcement came even as PSBs recovered Rs 36,551 crore in the June quarter from bad loans, almost half of the entire 2017-18. Their operating profits rose 11.5% quarter-on-quarter and losses dropped 73.5%, in a sign that the worst is behind, said Kumar. The 11 of 21 PSBs that are under the prompt corrective action could be out of it this fiscal, he had said recently.
The RBI in its latest financial stability report said the increase in bad loans is estimated to be the highest for PSBs. In the base case, the banking regulator expects the gross NPA ratio for state-owned banks to rise to 16.3% by March 2019 from 15.6% in March 2018. In the worst-case scenario, the bad loan ratio could go up to 17.3%.
