'Merger of banks may cause short-term spurt in bad assets'

MUMBAI: The merger of Bank of Baroda, Vijaya Bank and Dena Bank by the government poses short-term chal

lenges like spurt in bad assets, but will be beneficial over a

longer term, a report said on Thursday.

Slippages may increase in the short-term as recognition of non-performing assets is harmonised and accelerated, India Ratings said in a note.

Stating that it may take appropriate rating actions after the merger proposed ear

lier this week gets a formal approval, it said the combined entity will require "significant bandwidth" in the management for business growth and NPA resolutions.

Dena Bank's lower capital buffers are offset by Vijaya Bank's higher capital buffers, it said, adding that the merged bank may need additional tier 1 capital depending on internal accruals for FY19.

However, from a longer term perspective, the merger will be positive with benefits

like reducing combined operating costs, lower funding cost and strengthened risk management practises, it said.

The asset-liability mismatch issues at smaller banks (Vijaya and Dena) can be better addressed at the consolidated

level, it said.

A successful merger can also impact the capital requirements for the government as internal accruals can go up with efficiencies, it said, pointing out that this may act as a roadmap for further consolidations in the public sector banking space. The product offerings of the three banks are "largely homogeneous" and 50 per cent of the combined entity advances are to the corporate segment, followed by 25 per cent to retail.