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India is trying to have fewer but healthier lenders.
On 17 September, Narendra Modi's government announced plans to merge three public sector banks: Bombay-based Dena Bank, Vijaya Bank in Bangalore, and Bank of Baroda (BoB), headquartered in Vadodara, Gujarat. . The merged entity, with total assets of more than 14,000,000 rupees ($ 190 billion), will be the third largest lender in India behind the State Bank of India and HDFC Bank.
"The government announced in the budget (for the 2019 fiscal year) that the consolidation of banks was on the agenda and the first step was announced," said Finance Minister Arun Jaitley, in New Delhi.
With this, the government has thrown a lifeline to Dena Bank, whose ratio of gross non-performing assets (NPA) during the quarter ended June 30, 2018, was 22%, among the highest in the sector. He is already under the supervision of the Reserve Bank of India (RBI); in May, he was banned from lending more or recruiting new employees.
Vijaya Bank and BoB are in better shape. In the April-to-June quarter of fiscal 2019, Vijaya Bank reported a net profit of Rs. 144 billion, while the BoB figure was Rs. 528 billion. During this period, Dena Bank recorded a net loss of Rs721 crore.
One of the reasons for choosing these three banks is that the stronger two will be able to absorb the weaker entity, explained Jaitley.
"The merged bank will be a strong and competitive bank with economies of scale, network synergies, low-cost deposits and subsidiaries, and a greater opportunity for expansion and expansion," said Rajiv Kumar, secretary government financial services.
The proposed merger will first have to be approved by the board of directors of the three banks. Then the government will prepare a plan that will be reviewed by the government and both houses of parliament. The process can last up to a year, said Asutosh Kumar Mishra, a bank analyst at Reliance Securities.
Here is what the merged entity might look like:
| Settings | Bank of Baroda | Vijaya Bank | Dena Bank | Merged bank |
|---|---|---|---|---|
| Total business (Rs lakh cr) | 10.29 | 2.79 | 1.72 | 14.82 |
| Gross advances (Rs lakh cr) | 4.48 | 1.22 | 0.69 | 6.4 |
| Total deposits (Rs lakh cr) | 5.81 | 1.57 | 1.03 | 8.41 |
| Presence of branch | 5,502 | 2,129 | 1,858 | 9,489 |
| Return on assets (%) | 0.29 | 0.32 | -2.43 | -0.02 |
| Common Equity Tier-1 (CET) (%) | 9.27 | 10.35 | 8.15 | 9.32 |
| Weighted Capital / Risk Ratio (CRAR) (%) | 12.13 | 13.91 | 10.6 | 12:25 |
| Net NPA | 5.4 | 4.1 | 11.04 | 5.71 |
| Employees | 56.361 | 15,874 | 13,440 | 85,675 |
After the merger, this is how the first three banks in the country will be positioned:
| Settings | SBI | HDFC Bank | Merged bank |
|---|---|---|---|
| Total business (Rs lakh crore) | 47 | 15.13 | 14.82 |
| Gross advances (Rs lakh crore) | 20 | 7.08 | 6.4 |
| Total deposits (Rs lakh crore) | 27 | 8.05 | 8.41 |
| Presence of branch | 22,428 | 4,808 | 9,489 |
| Return on assets (%) | -0.57 | 0.44 | -0.02 |
| Tier-1 CET (%) | 10.53 | 13.1 | 9.32 |
| CRAR (%) | 12.83 | 14.6 | 12:25 |
| Net NPA | 5.29 | 0.4 | 5.71 |
| Employees | 2,59,980 | 88,000 | 85,675 |
Here is an overview of how the merged bank will compare to other public banks:
| Settings | Merged bank | SBI | Bank of India | Punjab National Bank |
|---|---|---|---|---|
| Total business (Rs lakh crore) | 14.82 | 47.37 | 8.78 | 10.84 |
| Gross advances (Rs lakh crore) | 6.4 | 19.9 | 3.63 | 4.53 |
| Total deposits (Rs lakh crore) | 8.41 | 27.47 | 5.14 | 6.36 |
| Presence of branch | 9,489 | 22,428 | 5,106 | 6,940 |
| Return on assets (%) | -0.02 | -0.57 | 0.06 | Negative |
| Tier-1 CET (%) | 9.32 | 10.53 | 8.01 | 7.33 |
| CRAR (%) | 12:25 | 12.83 | 11.43 | 9.62 |
| Net NPA | 5.71 | 5.29 | 8.45 | 10.58 |
| Employees | 85,675 | 2,59,980 | 48,680 | 74,897 |
While the government has assured that there will be no job losses, the bank unions are at war. Several of them will demonstrate across the country against the merger plan. Even the shareholders of BoB and Vijaya Bank are unlikely to be happy because their capital could be diluted by the absorption of Dena Bank.
"These banks will have to compensate for the poor quality of Dena Bank's assets and it is likely that they will be very unhappy with this decision, which could also lead to problems in the merger process," said Mishra of Reliance Securities.
Meanwhile, a similar plan could be planned for other troubled public lenders.
At the end of March 2018, the sector's gross NPAs had reached 11.6% of total assets, compared with 10.2% in September 2017. NPAs are loans against which repayments have not been made and there are risks of failure. It's unlikely the situation will improve quickly – in fact, it could get worse, the RBI warned.
Mergers have therefore been seen as a tool to solve the problem. In 2017, the largest Indian lender, SBI, merged with five associated banks and Bharatiya Mahila Bank to enter the world's leading position. Recently, the government has authorized the national insurer Life Insurance Corporation in terms of bad loans.
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