Merger of Banks

Why in news?
=>The government has proposed the merger of Bank of Baroda, Dena Bank and Vijaya Bank to create India’s third-largest lender. The immediate reason for the government wanting to amalgamate is clearly to use precious resources smartly.
=>One can’t blame the government because it has been compelled to capitalise state-owned banks to keep them afloat although it didn’t create the non-performing assets (NPAs) problem.
=>Given the combined 16% stressed assets in Q1FY19, the common equity Tier I capital of 9.4% for the new entity would need to be beefed up, but, in the process, some capital will be saved on Dena Bank.

Rationale:
=>The rationale is two strong banks will absorb a weak bank to create a mega bank whose lending ability will be higher and which will be able to expand operations. While Bank of Baroda and Vijaya Bank have reported better earnings, Dena Bank is under RBI’s prompt corrective action framework and has been restrained from further lending.

How will the bank merger happen?
=>The bank merger process could happen gradually—first with the consolidation of business, followed by the integration of information technology structures. For instance, at the time of merger of ING Vysya with Kotak Mahindra Bank, corporate banking and treasury departments were merged before retail banking was integrated.
=>Individual boards of each of the three banks will have to approve of the merger. The merger has to go through parliamentary approval, which will be a critical factor, considering that general elections are slated for next year.

What will the merged entity look like?
=>It will have a total business of Rs. 14.8 trillion, with capital adequacy rating at 12.25%, Tier-1 capital 9.32% and net non-performing assets at 5.71% on the loan book. The number of branches will be close to 9,500.

What will be the impact of the bank merger on shareholders?
=>While the merger is positive for shareholders of Dena Bank, it is negative for Bank of Baroda and Vijaya Bank. The merger will be seen as a bailout of the weak lender, which has accumulated a net loss of more than Rs. 10,500 crore over the last two fiscals.

What will be the challenges?
=>Financials, process integration, branch rationalization, management bandwidth and human resources will be the key challenges. Analysts expect a jump in non-performing loans post the merger, as BoB’s asset quality recognition policies are stricter than those of other banks.
=>It will put Bank of Baroda’s business strategy at risk. It had just begun reaping the benefits of the strategy. Analysts say the focus will shift from growth and clean-up of these banks to employees figuring out what to do for themselves.

Way Forward:
=>By 2020, a large chunk of employees almost all general managers retires from PSU banks. By then, the government must usher in HR reforms to both infuse fresh blood into PSU banks and introduce performance-driven remuneration. Although these have been discussed, nothing has been done about it.
=>While the government could consider other merger options in the PSU space, the real problem is there is no strong bank other than State Bank of India around to be able to absorb a weak one. BoB was the last such candidate, and it would not be wise to hurt SBI’s balance sheet at this point.
=>Unfortunately, even if the hits from loan losses at state-owned banks are expected to be much smaller in the next couple of years, one can’t see the emergence of a lender strong enough to take a weak one into its fold without hurting itself.
=>The BoB-Vijaya-Dena amalgamation should be supported and made a success so that more mergers can be initiated, if nothing else, with the aim of bringing down costs.
=>Consolidation in the PSU banking space is inevitable, and the sooner the trade unions recognise that the job losses will be higher if they stall the mergers, the better. There is no way the government is going to be able to revive a dozen PCA banks and it shouldn’t attempt to do so.
=>Indeed, if the employee headcount can be brought down, private sector banks may want to buy into some PSUs since they have valuable customer franchises.

Pic courtesy:The Economic Times