The Bank of Baroda, Dena Bank and Vijaya Bank merger, explained

By Prarthana Mitra

The government on Monday announced the decision to merge Bank of Baroda, Dena Bank, and Vijaya Bank to create the third-largest lending entity in the country.

The all-stock deal is ten days away from the final agreement, which analysts suspect is certain to go through since the centre owns the majority stake in all the banks. After the press meeting in New Delhi, CEO and MD of Bank of BPSda, P S Jayakumar, said the merger would take four to six months and the share-swap ratio would be decided soon.

Anjali Bansal, current non-executive chairman of Dena Bank, is likely to be the chairman of the merged entity. She has been a director on the several boards of leading companies after serving as a partner and MD at TPG Global and the founding MD at Spencer Stuart India.

The merged entity with assets worth Rs 10.19 trillion (as of March) will be the second-largest public sector bank and third-largest lender in the country (after SBI and HDFC).

Here’s what happened

Mumbai-based Dena Bank and Bengaluru-based Vijaya Bank will be integrated with the larger Bank of Baroda, as per recent directives laid down by the Reserve Bank of India.

The central bank has been compelled to adopt “concrete” measures to rectify the bad debt in Indian banks, after the asset quality review revealed it was deeper than what was initially thought. According to Business Standard, before the asset quality review, the bad debts declared by banks were Rs 2.5 trillion, however, they turned out to be Rs 8.5 trillion.

Reaction

Earlier this year, the government had merged State Bank of India’s subsidiary banks with the parent body, and greenlit Life Insurance Corporation’s takeover of the debt-ridden IDBI Bank. Bank unions all over the country are strongly opposed to such moves, and staged a nationwide demonstration on Tuesday.

However, many in the bank managements have supported the latest move. “Of the 21 banks in the system, this is the best combination,” said R A Sankara Narayanan, managing director and chief executive officer of Vijaya Bank.

BoB’s Jayakumar said the merger would be advantageous for the bank because lending diversifying into retail, small and medium enterprises can increase up the loan book size by 40%. “We would have more branches in states where we are grossly under-represented, such as Andhra Pradesh, Kerala and Karnataka. If you ask me what would be the benefit for Vijaya Bank, BoB brings a huge foreign currency position to the table, technology is there and a lot of things we are doing in our transformational journey which can be of value to them,” Jayakumar told the publication.

What is the government saying?

Finance Minister Arun Jaitley and Financial Services Secretary Rajiv Kumar announced this amalgamation at a surprise press conference, stating that the centre will be taking necessary steps to save banks under prompt corrective action (PCA), possibly by merging them in the same manner. “One of these banks is under PCA and we want to save all such banks,” Jaitley said, adding that the government had consulted the RBI on the matter.

Kumar further said, “It will be a strong competitive bank with economies of scale, network synergies, low-cost deposits and subsidiaries, and a possibility of greater outreach and expansion.”

Jaitley assured that existing employees will not face any “adverse” consequences due to the merger, adding that the move should be good news for the employees of Dena Bank in particular, which is under RBI’s PCA framework with a net non-performing asset (NPA) ratio of 11.04%. “They will probably stand to get conditions better than they have at present,” Jaitley said, about its merger with Vijaya Bank, which one of the best performers among public sector banks and the steadily performing BoB.

What are the experts saying?

V G Kannan of the Indian Banks’ Association believes that economies of scale and large players are positives for the banking system currently suffering from bad debts. “Three of them have the same core banking platform — Finacle of Infosys. It will make technology integration a smooth process. As for impact on employees, many are going to retire over the next few years. Fresh employee intake may slow in the integrated entity,” Kannan told BS.

Karthik Srinivasan, group head of financial sector ratings at ICRA also agrees that it is beneficial for the larger system and cash flow, but argues that the integration needs to be “managed well to gain business benefits.”

Prarthana Mitra is a staff writer at Qrius