The government’s decision on Monday to merge three banks it owns—Bank of Baroda, Dena Bank and Vijaya Bank. It is expected to reduce the amount of capital it needs to pump into these lenders and help clean their balance sheets.
The merged entity will be the third-largest lender in India after State Bank of India and HDFC Bank Ltd. The total business of it is more than ₹14.82 trillion.
Finance minister Arun Jaitley said the government had been careful in not merging weak banks. “Two strong banks can absorb a third bank to create a globally competitive bank, he said. “No employee will face any adverse service conditions after the amalgamation.”
In October, the government set up an alternative mechanism comprising Jaitley, defense minister Nirmala Sitharaman and railways and coal minister Piyush Goyal, as an approval framework for proposals to merge state-run banks.
Financial services secretary Rajeev Kumar said, “Under the mechanism, Jaitley has advised the boards of the three banks to consider the proposal,” adding that it was the next logical step in strengthening the banking system.
One of the reasons behind the choice of these banks was perhaps the fact 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.
The government is now looking to offload its majority stake in IDBI Bank to Life Insurance Corp. of India. The transaction is in the process of obtaining approvals from regulators and other authorities.
Individual boards of each of the three banks will have to approve the merger. The name of the merged entity is also likely to be decided later.
Ashutosh Mishra, an analyst at Reliance Securities Ltd said, “This merger is negative for Bank of Baroda and Vijaya Bank. The merger has to go through parliamentary approval, which will be a critical factor considering general elections are slated for next year”.
P.S. Jayakumar, managing director and CEO of Bank of Baroda, said the merger would result in greater presence in the four southern states. “Dena Bank customers will no longer be covered under PCA as the consolidated entity has adequate capital to scale its business. But before all this, there is a need for a board approval. There are also a number of legal steps to be done,” he said.
He also said, “On the timeframe, I do not know how long it will take but if you go by past practices and the experiences that are there, it would probably take 4-6 months”.