After the merger of associate banks with the State Bank of India, the Government of India has come up with the announcement of the merger of three other public sector banks (PSBs) – Bank of Baroda, Vijaya Bank and Dena Bank. Next in line for the merger is said to be the troika of embattled Punjab National Bank (PNB), Oriental Bank of Commerce and Andhra Bank.
The last week’s announcement of the merger of a strong lender, Bank of Baroda (total business Rs. 10.29 lakh crore), with relatively smaller banks Vijaya Bank (Rs. 2.78 lakh crore) and Dena Bank ( Rs 1.72 lakh crore) has set the ball rolling for the boards of these banks to individually and collectively meet to form a new entity.
The Committee on consolidation of PSBs, consisting of Finance Minister Arun Jaitley, Defence Minister Nirmala Sitharaman and Railway Minister Piyush Goyal, has been doing a mix-and-match exercise for quite some time.
The Government had earlier proposed to merge Bank of Baroda, IDBI Bank, Oriental Bank of Commerce and Central Bank of India to create India’s second-largest bank with assets of Rs. 16.58 lakh crore. However, the combined losses of the four banks are pegged at Rs. 21,646.38 crore at the end of FY18. Somehow, this entity did not come to fruition, for obvious reasons: merging four weak banks, which posted losses, to create a “stronger bank” did not seem to be a reasonable proposition.
Combined entity to be the third largest
The combined entity of BoB, Vijaya and Dena Banks – supposed to be the third largest bank in India -- will have a total business of Rs. 14,82,235 crore; deposits of Rs. 8,41,830 crore; gross advances of Rs. 6,40,600 crore; an employee strength of 85,675, a total of 9,490 branches, the net NPAs coming to 5.71 per cent and CASA (current account-savings account) deposits, which are low cost ones, amounting to 34 per cent of the total deposits. The Capital Adequacy Ratio of the combined entity is 12.25 per cent, well above the 10.875 per cent mandated by the regulator. The government sees a possible credit growth.
In the wake of the announcement of merger of BoB, Vijaya and Dena banks, Rajnish Kumar, Chairman of the State Bank of India, said that India’s banking behemoth was immediately not prepared to absorb smaller banks with it any more in the near term. He cited the process of integration of the SBI with the merged associate banks, which began in April 2017, would take at least two to three years “for the synergies to manifest themselves.” With the merger, the SBI, whose NPAs stood at the highest, is finding it difficult, though not impossible, to carry the burden of the merged entities.
Initial slippages, long-term benefits
However, India’s premier rating agency, Ind-Ra (Indian Ratings & Research), in its report published after the announcement of the merger of the Bob-Vijaya-Dena, felt: “The move could bring about material operating efficiencies over time reducing combined operating costs, lower funding cost and strengthened risk management practices on a consolidated basis apart from increasing the scale and reach moderately.”
Associate Director and Analyst Jindal Haria of Ind-Ra felt that the mismatch between assets and liabilities of the smaller banks (Vijaya and Dena) could be better addressed in the combined entity. However, slippages could increase as recognition of NPAs is ‘harmonized and accelerated’ in the short term. The operational aspects such as business growth and resolution of large stock of delinquent assets requires significant management bandwidth.
“Further, the funding cost would decline given the lower need to raise substantial wholesale liabilities and lower funding gaps than on the standalone basis. The short-term funding gap as a percentage of total assets for Vijaya is 47%, Dena is 26% and BoB is 11.6%,” said Ind-Ra report.
G Chokkalingam, Chairman of Equinomics Research and Advisory, says: “Once accretion to NPAs tapers off (which is likely in the next 6 months) and the weakest banks are handled properly through consolidation, then this bitter story would be forgotten after a year or so.”
Kotak Securities, in its report, said that the proposed merger would be an acid test for the future of banking in India. If this merger proved to be smooth, the government could announce more mergers in the next 12-24 months. More mergers would add more muscle to the banking industry, as 21 PSBs were fighting one another for staking out a larger market share. “We feel it is a sustainable idea and the big bank — Bank of Baroda, in this case — is not likely to suffer much as Vijaya Bank’s strong footing could offset the losses brought about by the weaker Dena Bank.”
Employees unions oppose merger
General Secretary of All-India Bank Employees Association Ch Venkatachalam, who was in Hyderabad for a youth convention of the AP-Telangana chapter of the AIBEA, demanded that the amalgamation of banks must be stopped as it would end up pushing the banks into losses and affect their profitability. He cited the merger of SBI’s associate banks with the parent bank resulting in financial losses as a glaring example. The mergers were aimed at diverting public attention from the burgeoning bad loans in the PSBs.
While recovery and criminal prosecution of the defaulters should be the priority, the government was trying to push it under the proverbial carpet. Mr Venkatachalam pointed out that the 21 PSBs suffered a net loss of Rs. 85,000 crore in the last financial year in spite of their making an operating profit of Rs. 1.55 trillion owing to the provisioning of Rs. 2.70 trillion towards bad loans.