Bank of Baroda, Vijaya Bank, Dena Bank merger: More pitfalls than opportunities?

Bank employee unions holding a strike against the merger of three public sector banks, including Bank of Baroda, Dena Bank and Vijaya Bank

In 2017, the State Bank of India absorbed six banks to become the largest banking conglomerate in India. Jury is still out on if it made it into a stronger and more infallible entity.

So, when 2019 began with the big announcement of the first ever tripartite merger in the public banking sector, it predictably drew mixed response.

While the government is going ahead full steam ahead under the assumption that Vijaya Bank and Dena Bank’s merger with Bank of Baroda would do good, critics feel otherwise. They are of the opinion that the move would just make Bank of Baroda the third largest lender in the country and second largest state-owned bank in India with respect to size. Beyond that, as per them, there is not much to cheer about in the merger that would be effective from April 1, 2019.

Below, we hear out both sides of the argument to find out what’s good and what’s not about the move.

What supporters say:

The biggest advantage of the consolidation, as projected by supporters, is the strengthening of the new public-sector entity. Instead of competing with one another for acquiring clients and growing business, which eats away at profits, they could tap into synergies. The rationale behind the SBI merger, for example, was to zap the cutthroat competition leading to cannibalisation of loans rates and deposits for corporate players.

In addition, post consolidation, the combined client base of the bank is expected to rise manifold, along with its revenue. This is because of the pan India presence of Vijaya Bank and Dena Bank. A much bigger Bank of Baroda with estimated businesses of Rs.15.4 trillion, will likely see its operational stability and profitability rise. It would also help diversify the product portfolio and expand their outreach. This, in turn, would give it the ammo to compete at the global level.

The three-way merger is also expected to help in dealing with problematic issues such as non-performing assets (NPAs) and loan defaults. Of the three banks in question, Mumbai-based Dena Bank is the weaker one. High net NPAs resulted in it being placed under prompt corrective action of the RBI in May 2017. Hence, there have been restrictions placed on its lending and other banking operations. But, the combined entity would have a manageable proportion of NPAs with Vijaya Bank and Bank of Baroda faring better on the bad loan problem so far.

And with the NPA problem under control, the government would need to infuse lesser amount of capital into the public sector bank to get it going smoothly. This would also give them more room to lend to corporate sector, thus fuelling economic growth.

What sceptics feel:

Detractors however have refused to buy into the simplistic NPA solution touted by the government. They feel NPAs will still continue to be a drag on the balance sheet of the new, larger bank. Bringing down their proportion wouldn’t exactly be a cakewalk. They argue their case with the SBI mega merger example, in which the level of NPA shot up after amalgamation.

In this case, just a day after the announcement of the merger, the stock of beleaguered Dena Bank jumped, while that of Bank of Baroda declined. Investors felt that Bank of Baroda’s asset quality would take a hit after the amalgamation.

Besides, many feel creating such large banks could also be a threat to the economy in case they fail. Already, an SBI, ICICI or HDFC is considered too big to fail, cause in case that happens they would take down the economy with them as well.

Another difficulty would be in retaining the large staff of the combined entity. Already employees have held protests against the merger fearing job losses.

Better ideas

With too many public-sector banks in India, consolidation is the way forward, feels the government.

A better solution, many experts feel, is privatization of banks. Private banks are far nimbler by dint of being well-governed. These has helped them escape the predicament of the bad loans that have badly affected performance of most PSU banks.

Yet another solution would be focusing more on retail banking than on corporate lending. The latter is the primary reason why the NPA problem arose in the first place.