Govt proposes to merge Dena Bank, Vijaya Bank and Bank of Baroda

• The Centre has proposed the amalgamation of state-owned Bank of Baroda, Dena Bank and Vijaya Bank to create India’s third largest bank as parts of reforms in the public sector banking segment.
• The proposal will now need the approval of the boards of these individual banks. The banks’ boards will shortly meet and take up the decision.

Analysis:

• Public sector banks have been reeling under huge non-performing assets in the last three years. In FY18, the banking system reported a net loss of Rs 40,000 crore because of the sharp rise in NPAs and the resulting increase in provisioning costs.
• In the previous fiscal, as much as Rs 5 lakh crore of bank loans slipped into the NPAs category, taking the total slippages in the past three fiscals to Rs 13.6 lakh crore.
• Dena Bank had reported net losses to Rs 721.71 crore for the first quarter ended June of the current fiscal against a net loss of Rs 132.65 crore in the April-June period of last fiscal, 2017-18. Its gross NPAs as a percentage of gross loans, spiked to 22.69 percent as of June 2018 compared with 17.37 percent a year ago. In value terms, they mounted to Rs 15,866.11 crore, up from Rs 12,994.16 crore.
• Bank of Baroda reported a more than two-fold jump in net profit at Rs 528.26 crore for the first quarter of 2018-19, against a net profit of Rs 203.39 crore a year ago. Its gross NPAs in value terms dropped to Rs 55,874.81 crore at June-end this year from Rs 56,480.39 crore at end-March, but were up compared to Rs 46,172.77 crore at the end of June 2017.
• Vijaya Bank posted a 43.3 per cent decline in net profit at Rs 144.34 crore for June quarter even though NPA ratio improved. In absolute terms, gross NPAs however rose to Rs 7,579.11 crore as on June 30, 2018 against Rs 6,812.21 crore a year ago.
• The merger benefits include getting economies of scale and reduction in the cost of doing business.
• Technical inefficiency is one of the main factors responsible for banking crisis. The scale of inefficiency is more in case of small banks. Hence, merger would be good.
• Mergers help small banks to gear up to international standards with innovative products and services with the accepted level of efficiency.
• Mergers help many PSBs, which are geographically concentrated, to expand their coverage beyond their outreach.
• A better and optimum size of the organization would help PSBs offer more and more products and services and help in integrated growth of the sector.
   

By: Vishal