Merger Of Public Sector Banks’: Road To Consolidation

The government has virtually set in motion the much-talked about  consolidation of the public sector banks (PSBs), when it announced the amalgamation of Bank of Baroda (BoB), Vijaya Bank and Dena Bank. This will put in place the country’s third largest bank with a business turnover of Rupees 14.82 lakh crore and over 9,500 branches pan-India. Besides, signaling India’s capacity to create globally stronger financial institutions in sync with its growing clout as the emerging economic power and the world’s fifth largest economy by next year to overtake Britain.

It was well-nigh three decades ago, that a Committee headed by the former Reserve Bank of India Governor, Maidavolu Narasimham had pitched for pruning the number of government or state-owned banks by consolidation of a few and putting an end to fragmentation. Following this, there was the merger of the subsidiaries of the State Bank of India (SBI) only last year with the parent bank and this was followed by a proposal to make the Life Insurance Corporation of India (LIC) acquire majority stake in the IDBI bank.

Justifying the merger move, Union Finance Minister Arun Jaitley, who headed the Alternative Mechanism (AM) panel to oversee merger proposals of state-owned banks, drew attention to the fact that the government was not keen on the merger of the relatively weak banks. That is the reason why it was decided to amalgamate the Dena Bank, placed under RBI’s ‘Prompt Corrective Action’ scanner, with the relatively better performing Vijaya Bank and BoB.

Providing the context of the crucial decision, the government has maintained that bank lending was becoming weak, hurting corporate sector and investments to ramp up growth in the real sectors of the economy. Besides, many banks were in a fragile form due to excessive lending and the consequent bulging of non-performing assets (NPAs) in the system. It was also made crystal clear that after amalgamation, the merged entities would be a robust “competitive bank with economies of scale, enhanced customer base, market reach and operational efficiency”. The move is also likely to make available a bouquet of products and services through leveraging of banks’ subsidiaries and their vast network for offering more value-added non-banking services and products.

A point to note is that, this proposal entails no payment of money.  The banks’ boards would formally approve and finalize the procedure with the new entity likely to be in place in a year’s time. As the scheme involves three listed banks, all formalities such as open offer for minority shareholders would be duly complied with. Post-merger, the number of PSBs in the country would come down to 19 from the existing 21.

Rating agency Moody’s Investors hailed India’s decision on the amalgamation of three PSBs as “credit positive” which would improve their efficiency and governance. The merged entity will command a market share of about 6.8 per cent by loans, according to data as of March 2018. One way of managing the problem of NPA’s  is the merger of banks; so that the collective might of the merged entity would enable it to handle business with better focus on several fronts through efficient functioning. Analysts have hailed the move by focusing on the choice of banks to be merged. They say that government has taken a prudent decision to merge weaker banks with relatively robust ones so that the emerging entity is not hobbled by liabilities and weaknesses. In sum, the new entity created out of the three working banks would require lower capital infusions from the government but will command the ability and capacity of a large bank, to lend more on the implicit strength of its higher capital base. It would be a win-win situation for all stakeholders.

Script: G.Srinivasan, Senior Economic Journalist