New Delhi: India plans to merge three state-run banks, Bank of Baroda, Dena Bank and Vijaya Bank as part of efforts to clean up the country’s banking system, financial services secretary Rajeev Kumar said Monday.
The government will continue to provide capital support to the merged bank, expected to be India’s third largest, he said. According to the financial services secretary, boards of the three banks will examine the amalgamation proposal. “The merger will help improve operational efficiency and customer services,” he added.
Finance Minister Arun Jaitley, while announcing the plan, said the merger will make the banks stronger and sustainable and also strengthen their lending ability. He said the merger was being considered in the context of weakening of bank lending, which is hurting corporate sector investments. Also, many banks were in a fragile condition due to excessive lending and ballooning NPAs, he said.
“This amalgamated entity will increase banking operations,” he added.
As was in case of SBI, no employee of the three banks would have service conditions that are adverse to their present one. “It is a major economic, commercial decision,” Jaitley said and added that the three banks will continue to work independently post merger.
“The Alternative Mechanism made the decision [Monday] and it has been proposed to the individual bank boards to take a decision. Boards would meet and after consultation take appropriate action,” Jaitley said.
“This will hopefully create another mega bank which will be sustainable. The amalgamated entity would increase banking operations and its ability to go for further consolidation.” Besides the Finance Minister, the Alternative Mechanism includes Defence Minister Nirmala Sitharaman and Railway Minister Piyush Goyal.
Noting that one of the banks proposed in this merger was under the Reserve Bank of India’s Prompt Corrective Action (PCA) framework on account of its massive accumulated non-performing assets (NPAs), or bad loans, Jaitley said: “The consolidated entity’s capacity to absorb a weaker bank guided our decision to propose this merger to the boards.”
Banking sector reforms are a major plank of Prime Minister Narendra Modi’s administration to revive credit growth, which has slowed to multi-decade lows as banks struggle with bad loans.
The Centre owns majority stakes in 21 lenders, which account for more than two-thirds of banking assets in Asia’s third-biggest economy.
But these banks also account for the lion’s share of more than $150 billion in sour assets plaguing the sector, and need billions of dollars in new capital in the next two years to meet global Basel III capital norms.
India’s decision to merge the three banks will first need to be approved by the board of directors of Bank of Baroda, Dena and Vijaya.
The government will then prepare an amalgamation scheme for the banks, which will need to be approved by the cabinet of ministers and the houses of parliament, Jaitley said, and added he expected the process to be completed in the current fiscal ending March 31, 2019.
The proposed merger follows a similar move by the government last February when it merged State Bank of India with its five subsidiary banks, helping the country’s largest lender by assets increase its scale and cut expenses through synergies.
Three public sector banks to be merged
