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Economy will be strengthened by the merger of banks
Vijaya Bank and Dena Bank will merge into Bank of Baroda on April 1, 2019. First time, three banks in the country will be unified. The bank formed by this merger will be the country's second largest public sector bank (PSU) and the third largest bank in terms of asset allocation.

The State Bank of India (SBI) is the largest bank in the country while the HDFC Bank is in second place. The Union Cabinet approved the merger of Vijaya Bank and Dena Bank into Bank of Baroda on January 2, 2019. In a statement, the government said that Bank of Baroda would be a transferable bank while Vijaya Bank and Dena Bank would be the transfer bank. This means that small banks will be merged with a large bank and will maintain their identity. In this way the name of the bank is not likely to change.

By September, 2018, the combined assets of these three banks were Rs.10.44 Lakh Cr. Then, the total assets of SBI were Rs.34.86 Lakh Cr and HDFC Bank's Rs.11.70 Lakh Cr. According to June figures of last year, the total number of employees of Bank of Baroda, Dena Bank and Vijaya Bank is 85,675 and their number of branches is about 9,500. The government has assured that no employee will be removed from service, but some branches may be closed for rationalization of number braches & offices.

According to information provided to the Bombay Stock Exchange (BSE), investors will get 402 and 110 equity shares of Bank of Baroda, respectively, on 1000 shares of Vijaya Bank and Dena Bank. However, what would be the status of top management in the bank, formed after the merger is unclear. Head of Dena Bank is Mr. Karnam Shekhar, RA Shankar Narayanan of Vijaya Bank and Chief of Bank of Baroda is P S Jaya Kumar.

According to the closing price of January 2, 2019 the ratio of exchange of shares is in favor of the Bank of Baroda. According to Dena Bank's stock price, it will be 27 per cent loss, while Vijaya Bank will be in 6 per cent. Vijaya Bank is acquiring approximately 15 per cent of equity shares in comparison to its adjusted price. However, experts say that after the merger, due to Dena Bank, the asset quality of the new bank will be downgraded. It is also being said that due to the NPA of Dena Bank, the financial position of Bank of Baroda will be in bad condition in the initial phase of the merger. Also, due to changes in technology and potential provision requirements for NPAs, the profitability of the bank in the near future may be affected, though, these reasons would be temporary, can be expected. 

Earlier Attempts towards Bank's integration:

The integration of PSUs was considered several times after 2003, but no concrete strategy could be made. Human resource, technology, salary and allowances, systems, etc. not to be in uniformity was one of the major reasons. To unify the union for integration, adjusting human resources, arranging compensation in case of inconsistency, etc. were also important constraints in the matter. In connection with the integration, the committee formed under the chairmanship of Mr. R S Gujral had given the report to the government in January 2012, in which PSUs were recommended to form seven major banks. Roadmap for the integration of PSUs was prepared by the Bank Board Bureau and for this PSUs were divided into six groups.

The decision of the groups of banks was taken by making a basis for human resources, e-governance, internal audit, position of fraud, CBS (core banking solution). There are currently 7 large size banks in India, but the government believes that in order to remain competitive at the international level, there is a need for bigger banks in the country whose identities are world-class. It is worth mentioning that after the merger of associate banks and women banks, the State Bank of India has come in the category of 50 big banks in the world. 

Why integration is necessary:

In the current perspective, the integration of PSUs is the only option, because banks need huge capital for mounting NPA, pressure to meet the different standards of Basel III, strengthening the infrastructure of banks, etc. Also, providing better services and safe banking facilities to customers is also a major challenge for PSUs. In present circumstances, neither the banks are capable of meeting the growing needs of the banks nor the government.

The way NPAs and fraud graphs are increasing, small banks are facing difficulties in saving their existence. Gross NPA of all banks increased by 11.2 percent in the Financial Year (FY) 2017-18, which is in amount Rs.10.39 Lakh Cr., in which the NPA of PSUs were Rs.8.95 Lakh Cr., in per cent term that is 14.6. It is worth noting that in the FY 2016-17, the gross NPA of all the banks was 9.3 per cent, while the gross NPA of PSUs were 11.7 per cent. The report, named "Trendz and Progress of Banking in 2017-18" released by the Reserve Bank of India, has said that the process of conversion of restructured loans into NPAs has been completed. Also, process of identifying the hidden NPAs has also been completed. In the FY 2017-18, the gross NPA & total debt ratio reached to 14.6 percent, while the net NPA & total debt ratio was 8 per cent, which was 6.9 percent a year ago. However, the proportion of gross bank debt of private banks was 4.7 per cent during the corresponding period, which was 4.1 per cent a year ago. 

Attempts to solve the problems of banks:

The government will soon put a capital of Rs.28,615 Cr. through recapitalization bonds in 7 public sector Banks.

With this amount, the bank will be able to meet its regulatory capital requirement. Out of these 7 PSUs, Bank of India will get the maximum Rs.10,086 Cr. After this, Oriental Bank of Commerce will get Rs.5,500 Cr. and Bank of Maharashtra Rs4,498 Cr. UCO Bank will get Rs3,056 Cr. and United Bank of India Rs.2,159 Cr. Earlier, in the year 2018-19, the government had announced a capital infusion of Rs65,000 Cr. in PSUs. Out of this, 23,000 Cr. has been given to PSUs, while Rs.42,000 Cr. is still available to the banks. According to finance minister, Arun Jaitley, the government will pay Rs41,000 Cr. more to PSUs, which will be different from the earlier declared amount. By providing capital to PSUs, at least two or three banks will come out of the Prompt Corrective Action (PCA) till March, 2019. According to Finance Minister Arun Jaitley, this will increase the ability to lend of PSUs. The PCA is imposed on those banks which cannot follow certain important financial parameters. After being put into PCA, banks are banned to give loans and open new branches.

Previously Bank's unification:

There are already integration in the banking sector. The government has unified 19 regional rural banks (RRBs). Formerly the private sector Global Trust Bank (GTB) and United Western Bank (UWB) located in Hyderabad were also integrated into the Oriental Bank of Commerce and IDBI Bank respectively. State Bank of Saurashtra and State Bank of Indore merged with the State Bank of India in 2008 and 2010 respectively. Five associate banks and only Mahila bank merged with State Bank of India in the financial year 2017-18.

Advantage of Integration:

There is consensus among the banks that after the integration of banks, there will be reduction in operational costs and other expenses, increase in profits, ease of risk management, better performance, speed up in capital formation etc. It is likely to increase trained human resources, decrease in training costs, increase in the availability of capital and resources, reduction in fraud cases etc. In a large and diverse country like India, banking services cannot be turned away from rural areas. Providing banking facilities in rural areas is still a big challenge for the government. After the integration, their presence in the rural areas will further increase. The social, political and economic nature of India is favorable to the big banks, because big banks can provide equally superior customer facilities in such a large country. Having a global presence will help the customers of the banks to get uniform service both at home and abroad.


It can be said that ensuring the reduction in operating and other expenses will increase the profitability of the big banks. With availability of capital, they will be able to lend to customers at a cheaper rate. With the help of adequate human resources, large banks will be able to work better on the front of NPA and risk management, which will increase both their credibility and profitability.

At present, small banks are unable to meet international banking standards due to lack of capital. They are also not able to provide loans to customers at a cheaper rate. Even in NPA and risk management front, they are not performing well. In the absence of better technology & sufficient resources, their customer service is not good. In such a situation, the public sector banks will perform better on every front, can hopefully be expected.

About the author: Satish Singh is currently working as Chief Manager in State Bank of India's Economic Research Department, Corporate Centre, Mumbai, and has been writing mainly on financial and banking topics for the last 10 years.

Editorial NOTE: This article is categorized under Opinion Section. The views expressed in this article are solely those of the author and do not necessarily represent the views of In case you have a opposing view, please click here to share the same in the comments section.
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