Bank of Baroda, Vijaya Bank and Dena Bank merger announced

The government Monday said state-owned Bank of Baroda, Vijaya Bank and Dena Bank will be merged to create the country's third largest lender as part of efforts to revive credit and economic growth.

The move follows top lender State Bank of India last year merging with itself five of its subsidiary banks and taking over Bharatiya Mahila Bank, catapulting it to be among top 50 global lenders.

Announcing the plan, Finance Minister Arun Jaitley said consolidation was always part of the government's agenda and the merger of associate banks last year was a step in that direction.

The decision taken by 'Alternative Mechanism' to amalgamate three banks would create a mega lender which will be stronger and sustainable.

The envisaged amalgamation will be the first-ever three-way consolidation of banks in India, with a combined business of Rs 14.82 lakh crore, making it the third largest bank after SBI and ICICI Bank.

Post this merger, the number of PSU banks will come down to 19.

"The consolidation will help create a strong globally competitive bank with economies of scale and enable realisation of wide-ranging synergies," Jaitley said.

"Leveraging of networks, low-cost deposits and subsidiaries of the three banks have the potential of yielding significant synergies for positioning the consolidated entity for substantial rise in customer base, market reach, operational efficiency, wider bouquet of products and services, and improved access for customers," he said.

The merged entity will have better financial strength, Financial Service Secretary Rajiv Kumar said, adding that its net NPA ratio will be at 5.71 per cent, significantly better than public sector bank (PSB) average (12.13 per cent).

Besides, Kumar said, Provision Coverage Ratio (PCR) would be better at 67.5 per cent against average of 63.7 per cent and cost to income ratio of the combined entity would come down to 48.94 per cent as compared to average of 53.92 per cent.

Kumar further said the respective board would take approval in next 10-15 days and the entire merger process would be complete by the end of the current fiscal.

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"If you go by the past experience and processes, it would take 4-6 months. But it can be speeded up...The combined entity will benefit from better CASA ratio of Dena Bank...," BoB Managing Director P S Jayakumar said.

Jaitley further said the amalgamation would be through share swap which will be the part of scheme of merger.

"The scheme of amalgamation, which will be formed, will be laid before Parliament," he said, adding no change in the banking law is required.

Giving rationale for the proposed merger, he said, "We have borne in mind that we do not want merger of relatively weak banks. You can have two well performing banks absorbing a third one and hopefully creating a mega bank which will be sustainable, whose lending ability will be far higher."

Jaitley further said this amalgamated entity will increase banking operations and expansion is inevitable. The ministry has had discussions with the RBI on the proposed merger, he added.

The finance minister, who heads Alternative Mechanism, assured capital support to the merged entity. Other members of Alternative Mechanism included Railway Minister Piyush Goyal and Defence Minister Nirmala Sitharaman.

Jaitley also assured that no employees will face a service condition which is in any way adverse in nature to its present condition.

"On the contrary the SBI experience has been that amongst the merging entity and new entity, the best of service conditions continue to apply to all of them. So, the employee of relatively smaller banks will get an opportunity to improve working condition," he said.

Asked about the name of the new entity, he said it will be decided by scheme of amalgamation and regional identity will continue to expand.

Giving the context of the merger, he said bank lending was becoming weak, hurting corporate sector investments.

Also, many banks were in a fragile condition due to excessive lending and ballooning NPAs, he said.

Pointing out that indiscriminate lending during 2008-14 was the reason for the weak health of the banking sector, the finance minister said various steps taken by the government have started showing results.

Lending during the period increased from Rs 18 lakh crore to Rs 55 lakh crore and "the nature of lending was as if there was no tomorrow and that took toll on banks as well as on economy", he said.

Following the Asset Quality Review initiated by the RBI, he said both government and the apex bank took steps for cleaning up banks and put a check on "adventure lending".

"NPAs have now started taking a turn. The curve itself has started moving. Hopefully, we should look for each quarter as better than previous one," he said.

Commenting on the decision Dena Bank Executive Director Ramesh Singh said the government has been mooting consolidation in the banking sector to create world standard banks in India and this is a pragmatic step in that direction.

Vijaya Bank managing director and chief executive R A Sankara Narayanan said the government is determined to make stronger and bigger banks to ensure economies of scale.