Government has proposed merger of three public sector banks out of total twenty one. The plan is to merge Dena Bank and Vijaya Bank with Bank of Baroda. As per the proposed plan, merger will take four to six months. New merged entity will be the third largest bank after SBI and HDFC in most of the important parameters. Recently, the government has asked RBI to prepare a plan for merger among 21 public sector banks. The task was to identify which bank could be merged with other with minimum collateral damage. Finance minister gave reason behind these three banks being merged “Two strong banks can absorb a third bank to create a globally competitive bank, no employee will face any adverse service conditions after the amalgamation,” said Jaitley. Another reason behind merger of these three could be that all three use the same core banking system—Finacle from Infosys—making the task of merging the technology platforms and back-ends relatively easier.
Of the total 21 public sector banks, 11(Dena Bank, Central Bank of India, Bank of Maharashtra, UCO Bank, IDBI Bank, Oriental Bank of Commerce, Indian Overseas Bank, Corporation Bank, Bank of India, Allahabad Bank and United Bank of India) are under the Prompt Corrective Action (PCA) framework of RBI to maintain financial health of these banks. The public sector banks are losing market share to private banks because their service is bad and they are struggling with Non Performing Assets (NPAs). The big depositors no longer trust public sector banks due to their inefficiency. In the last fiscal year private sector banks accounted for 70 percent of total deposits. The public sector banks are also losing their edge in providing loans due to constraints by RBI on new lending. Private Banks are expected to corner 80 percent of incremental loans by 2020. Therefore, government took many steps to revive public sector banking in the country. NPA recovery through IBC, capital infusion, merging plan are some of the important aspects of them.
On restructuring management of the banks, this is third major step by the government. First was to merge 5 associate banks {State Bank of Bikaner and Jaipur (SBBJ), State Bank of Hyderabad (SBH), State Bank of Mysore (SBM), State Bank of Patiala (SBP) and State Bank of Travancore (SBT),} with SBI. The financial health of RBI worsened in post merger period but being such a big entity, SBI has been able to absorb the shock and the government got rid of these inefficient associate banks. Second big decision in restructuring process was to sell majority of its stake in IDBI to LIC. This looked like a business between two independent entities but government being owner of both must have been involved in it.
The newly merged entity will have a pan-India presence and third largest lender in the country. While Bank of Baroda is already very strong in north and west India, Vijaya is more focused in South India and Dena has very good network in western India. The merger will create healthy banks with an advances base of Rs 6.4 lakh crore, a deposit base of Rs 8.41 lakh crore, and the gross nonperforming assets will be at roughly Rs 80,000 crore. Dena bank, which has worse financial condition among the three, will get a new life through this merger.