Centre merges Bank of Baroda, Vijaya Bank, Dena Bank

Dena Bank logo

Rajiv Kumar, Department of Financial Services Secretary, announced that the decision was arrived at after meeting of the "alternative mechanism" which was set up during past year to consider consolidation of the Indian Banking Sector. This will help the merged bank to scale up across the country.

While Bank of Baroda saw its steepest fall in over three years, shares of Dena Bank and Vijaya Bank rose sharply as the smaller peers are expected to benefit from the merger.

The merged entity which will be the third largest bank in the country after State Bank of India and HDFC Bank, will have a market share of about 6.8% by loans.

Arun Jaitley, Finance Minister of India briefed the media and said that the merger has been conceived in such a way that the combined lender will not end up being weaker than the existing individual entities. And now, 18 months hence, the Indian government is planning another merger. Many banks were in a fragile condition due to excessive lending and ballooning NPAs.

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"We don't think the merged entity comes off terribly worse-off, at least on paper, though a smooth three-way merger is always a tall ask", noted global brokerage Jefferies. "Meanwhile, given persistent structural challenges facing mid-sized banks, we continue to maintain our cautious stance (despite trading gains in the immediate term)", said Edelweiss Securities in a recent note to its investors.

Bank of Baroda has been given one strong in the form of Vijaya Bank and one weak bank in the form of Dena Bank. This is a first step towards it, he said of the announcement. Till then, the three banks will carry on functioning independently. "I don't see their operations anything but expanding", he said, citing the government's experience with State Bank of India (SBI). "The best of the service conditions will apply to all of them". In contrast, Dena Bank - the weakest of the lot - made huge gains in early trade and was up nearly 20 per cent at Rs 19.05.

However, FM did not talk about the name of the new entity and said that it will be revealed later.

Government owns a majority stake in 21 lenders, which account for more than two-thirds of banking assets. The Public Sector Banks will chalk out final contours and seek approval for the process from Group of Ministers. In addition to poor governance, their balance sheets are disproportionately burdened with bad loans when compared to their private sector counterparts. "The UPA had swept the NPAs under the carpet, he said". He alleged that banks undertook above-normal lending during 2008-2014 as "if there was no tomorrow" resulting in huge non-performing assets to the tune of Rs 8.5 lakh crore.

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