The government on Monday proposed the amalgamation of state-owned Bank of Baroda (BoB), Dena Bank and Vijaya Bank to create India’s third-largest bank. The move is part of the reforms initiated in the public sector banking segment.
The decision was taken at a meeting of a ministerial panel (called Alternative Mechanism), headed by Finance Minister Arun Jaitley, that oversees merger proposals of state-owned banks. The other members of the panel include Railways Minister Piyush Goyal and Defence Minister Nirmala Sitharaman.
“This major decision was taken by [the] Alternative Mechanism today to amalgamate Bank of Baroda, Dena Bank and Vijaya Bank. While making this suggestion, we have borne in mind that we don’t want a merger of what are relatively weak banks,” Mr. Jaitley said, adding, “You can have two well-performing banks absorbing a weak one in the amalgamation process and hopefully, creating a mega bank which will be sustainable, whose lending ability will be far higher.”
The decision on amalgamating the three government banks follows the merger of the five associate banks of State Bank of India with itself. The government had also moved to offload its majority stake in IDBI Bank to Life Insurance Corporation of India.
Dena Bank under PCA
Asked about the choice of banks, Mr. Jaitley said this was the government’s assessment because one of the banks [Dena Bank] had been placed under the prompt corrective action framework.
“We want to save all the banks. When you make a merger, you want to make sure that the merged entity is a stronger entity. Therefore, our capacity to subsume that weaker bank into the merged entity, which will be a stronger bank, is the principal factor that weighs with the government. Of course, we see the all India expanse and so on…”
He added that the government would now await the response of the banks to the proposal.
“The Alternative Mechanism took the view that aspirations of the fastest-growing economy have to be supported by stronger and globally competitive banks with increased choices to the stakeholders. Accordingly, it was decided to consolidate the three banks,” said Rajiv Kumar, Secretary, Department of Financial Services.
Enumerating the benefits, Mr. Kumar added that the proposal entailed that the amalgamated entity would be the third largest in India. “It would be a strong competitive bank with economies of scale. The entity would also be positioned for a substantial rise in customer base, market reach and operational efficiency.”
The Secretary added that the employee interests would be protected and brand equity preserved. “Capital support, if any, to make it a big and global bank will be ensured,” he added.
As a backgrounder to the decision, Mr. Jaitley added that the PSBs were too many in number and bank lending stood at ₹55 lakh crore by 2014. Before, 2008, the total amount of bank lending stood at ₹18 lakh crore, he said.
“The nature of the lending was as if there was no tomorrow,” the Minister said. “The banks have to be emptied before 2014. And that took its toll on the economy. This was accompanied by another step which was really to sweep the NPAs below the carpet so that the real picture does not come out. NPAs worth ₹8.5 lakh crore were shown to be ₹2 lakh crore,” the Minister claimed.
Asked about the increasing fuel prices coupled with declining value of the rupee against the dollar, Mr. Jaitley said, “These are impacts of a very significant global phenomenon that are going on. You have at least three [factors], if not more, globally coming on the nature of things happening.
Squeeze on oil output
“One is the squeeze which has been put on oil production, upsetting the demand-supply ratio which is increasing the crude oil prices.
“The second is the trade war and we don’t know when we are going to see the end of it. It impacts a major country in our region — China, and that, of course, creates an upheaval in this region. The third is the internal economic decisions of the U.S., which are leading to further strengthening of the dollar,” he added.
