A ministerial panel known as the Alternative Mechanism has revealed a proposal for the amalgamation of Bank of Baroda, Dena Bank and Vijaya Bank. The decision to merge these three institutions was influenced by the potential for the more robust banks to absorb the weaker entity successfully.
The Rationale Behind the Amalgamation
One of the primary catalysts for this amalgamation is an initiative by the government to strengthen the banking industry and address the ongoing non-performing assets (NPA) crisis. This issue has resulted in a reported net loss of Rs 40,000 crore in FY18 due to the significantly increased NPAs.
The amalgamation is part of India’s commitment to adhere to the Global Basel III capital norms by March 2019. It also aligns with the Narasimham Committee’s (1998) structural reform recommendations, advocating for Indian bank mergers that will have a cascade effect on the economy.
Formation of the ‘New Bank’
The proposed amalgamated entity, referred to as the ‘New Bank,’ will have a total business worth approximately ₹14.8 trillion and a capital adequacy rating of 12.25%. It will also have net non-performing loans at 5.71%. The institution is projected to have over 85,000 employees and nearly 9,500 branches.
Expected Impact of the Merger
The merger is poised to consolidate and enhance the banking industry, creating the country’s third-largest bank after the State Bank of India and ICICI. It will leverage the strong regional presences of the merging banks, avoiding duplication of work and easing account merging. Given these banks operate on the same core banking platform, Finacle, technology integration will also be greatly simplified.
Challenges Accompanying the Merger
While the creation of larger banks is necessary for economic growth, it poses potential risks. Dena Bank, one of the merging entities, is currently under the RBI’s Prompt Corrective Action framework due to its high level of bad loans and weak financial ratios. There is also a risk that merging with underperforming banks could disrupt recovery efforts and negatively affect shareholder interests.
Concerns Over Employee Interests
The amalgamation has sparked concerns among employees about potential branch rationalization, which could lead to redundancies. Many branches currently operate in close proximity and the merger may lead to some closures.
Reforms Needed Alongside the Amalgamation
While the creation of larger banks can stimulate economic growth, addressing governance issues is critical. The government could consider implementing recommendations from the PJ Nayak Committee, 2014 on Governance of PSB, which advocates restricted government interference in bank administration.
Key Terms
- Basel III norms: These aim to increase capital intensity in most banking activities and promote a resilient banking system by focusing on four key parameters – capital, leverage, funding and liquidity.
- Narasimham Committee, 1998: Advocated for the merger of major banks, improvement of the Indian banking system’s strength, and professional corporate strategy adoption.
- PJ Nayak Committee, 2014: Recommended conversion of PSBs into Companies as per the Companies Act, formation of a Bank Investment Company (BIC), and reduction of government shareholding to 40%.
- Capital Adequacy Ratio (CAR): The ratio of a bank’s capital in relation to its risk-weighted assets and current liabilities.
- Tier 1 Capital: Core measure of a bank’s financial strength from a regulator’s point of view, composed primarily of common stock and disclosed reserves.