Amal­ga­ma­tion of Banks

Post-merger, NPAs will be a prob­lem for all three banks with cu­mu­la­tive gross NPAs around `80,000 crore. This will also re­quire an in­creased fo­cus on clean-up process

The Day After - - CONTENT - By Asit Manohar

In a bid to push ahead bank­ing re­forms, the gov­ern­ment has de­cided to merge Dena Bank, Vi­jaya Bank and Bank of Bar­oda mak­ing it the third largest bank of the coun­try with a com­bined mar­ket cap of Rs 48,000 crore. The boards of the three banks will ex­am­ine the amal­ga­ma­tion proposal, and the gov­ern­ment of In­dia will con­tinue to pro­vide cap­i­tal sup­port to the merged bank.

Mak­ing the an­nounce­ment, Ra­jiv Ku­mar, Fi­nan­cial Ser­vices Sec­re­tary said, “We have de­cided to merge Dena Bank, Vi­jaya Bank and Bank of Bar­oda. The merger of the three banks will make this the third largest bank of the coun­try.” He said that post merger, the three banks will con­tinue to work in­de­pen­dently post merger.

The po­ten­tial merger of Bank of Bar­oda, Dena Bank and Vi­jaya Bank is a bold move by the gov­ern­ment ahead of the gen­eral elec­tions next year, but it comes with its own chal­lenges on busi­ness in­te­gra­tion, tech­nol­ogy, cul­ture and peo­ple man­age­ment in­clud­ing a pos­si­ble op­po­si­tion by trade unions.

Alka An­barasu, Vice Pres­i­dent, Fi­nan­cial In­sti­tu­tions Group, Moody’s In­vestors Ser­vice, said the plan will be credit pos­i­tive “as it will pro­vide ef­fi­cien­cies of scale and help im­prove the qual­ity of cor­po­rate gov­er­nance for the banks.”

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.

The merged en­tity will have a mar­ket share of about 6.8 per­cent by loans (Rs 6.40 lakh crore) – ac­cord­ing to data as of March 2018 -- mak­ing it the third largest bank af­ter State Bank of In­dia (SBI) and HDFC Bank.

How­ever, Ashvin Parekh, Man­ag­ing Part­ner at Ashvin Parekh Ad­vi­sory Ser­vices be­lieves, “The syn­er­gies are only on pa­per. Good amount of ef­forts will be re­quired by the banks to make the syn­er­gies work.”

Both Bank of Bar­oda and Vi­jaya Bank have rel­a­tively bet­ter credit met­rics than Dena in terms of as­set qual­ity, cap­i­tal­i­sa­tion and prof­itabil­ity, Moody’s pointed out.

Chiefs of the two banks have main­tained that their banks are well cap­i­talised and would re­quire cap­i­tal just for driv­ing growth.

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 cleanup process.

The two banks, other than Vi­jaya Bank, wit­nessed a dip in as­set qual­ity.

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, 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.

“We ex­pect the merged en­tity will re­quire cap­i­tal sup­port from the gov­ern­ment, oth­er­wise such a merger would not im­prove their cap­i­tal­i­sa­tion pro­file,” An­barasu said.

Unions and job loss fears

The merger proposal has un­set­tled the trade unions that have ex­pressed their dis­plea­sure.

“There is no ev­i­dence the merger of banks would strengthen or make them more ef­fi­cient. We have seen the ex­am­ple of 5 As­so­ciate Banks merging with SBI. No mir­a­cle has hap­pened. On the other hand, it has re­sulted in a clo­sure of branches, an in­crease in bad loans, re­duc­tion of staff, re­duc­tion in busi­ness, “said CH Venkat­acha­lam, Gen­eral Sec­re­tary, All In­dia Bank Em­ploy­ees’ As­so­ci­a­tion (AIBEA).

While SBI merger did not see any spe­cific job losses, around 3,500 em­ploy­ees took up a sweet­ened vol­un­tary re­tire­ment scheme (VRS) and the bank has not been fill­ing seats post re­tire­ments that took place over the last year. How­ever, the lender con­tin­ues to re­cruit pro­ba­tion­ary of­fi­cers through the gov­ern­men­tor­gan­ised en­trance test.

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. “The healthy ra­tios of amal­ga­mated banks is re­flected in a larger busi­ness base, strong de­posits, large global net­work, sig­nif­i­cant out­reach,” Jait­ley added.

Vish­was Utagi, Gen­eral Sec­re­tary Ma­ha­rash­tra State Bank Em­ploy­ees Fed­er­a­tion and Vice Pres­i­dent All In­dia Bank Em­ploy­ees As­so­ci­a­tion, said, “bank merg­ers at this junc­ture have not come as a sur­prise, but it’s a very un­for­tu­nate knee-jerk re­ac­tion. This is BJP’s po­lit­i­cal re­sponse to Congress and other op­po­si­tion par­ties who be­lieve in ob­jec­tives of Bank Na­tion­al­i­sa­tion.”

The three banks’ boards are ex­pected to meet within 10 days to dis­cuss the proposal. How­ever, the merger is al­most cer­tain given that the ma­jor­ity own­er­ship is with the gov­ern­ment.

Af­ter the an­nounce­ment on Septem­ber 17, Bank of Bar­oda MD and CEO PS Jayaku­mar said the merger would take four-six months and the share-swap ra­tio would be de­cided soon. But Parekh un­der­lines the merger process will take at least 3-4 quar­ters to com­plete and given the qual­ity of loan book and NPA be­ing an is­sue for all banks, the merger will be a chal­leng­ing task.

Fi­nan­cial Ser­vices Sec­re­tary Ra­jiv Ku­mar

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