The proposed merger of three public sector banks, Bank of Baroda, Vijaya Bank and Dena Bank, is expected to result in better operating efficiency in the long run but there could be an increase in slippages in the short-term, India Ratings said on Thursday.
The rating agency said the merged entity may see reduced operating costs, lower funding cost and strengthened risk management practices apart from increasing the scale and reach moderately.
“However, in the short-term, the slippages could increase as recognition of non-performing assets is harmonised and accelerated,” it said.
Management bandwidth
India Ratings said the proposed merger would require significant bandwidth of management along with deft handling so that operational aspects such as business growth and resolution of large stock of delinquent assets continue receiving adequate attention. It also said the asset-liability mismatch of the smaller banks (Vijaya and Dena Banks) can be better addressed at the consolidated level.
“The success of the proposed merger could impact the incremental capital ask from the government as efficiencies improve, resulting in stronger internal accruals and may act as a roadmap for further consolidations in the public sector banking space,” India Ratings said.
India Ratings further said the consolidated entity’s core equity tier 1 capital is about 9.3% and that Dena Bank’s lower capital buffers are offset by Vijaya’s higher capital buffers.
