OCTOBER 8, 2018INDIA TODAY 7F
inance minister Arun Jaitley
believes the merger of three
public sector banks—Bank of
Baroda, Vijaya Bank and Dena Bank—
will create a strong entity and boost the
weakest among them (Dena Bank), but
not everyone is convinced. According
to him, the government did not favour
a merger of weak banks, and so came
up with the idea of merging two strong
banks with a weak one to create India’s
third largest bank with a total business
of Rs 14.82 lakh crore.
Dena Bank is one of the 11 public
sector banks put under the Prompt
Corrective Action (PCA) framework of
the Reserve Bank of India (RBI). Banks
are put under PCA when they breach
key regulatory requirements relating
to capital adequacy ratio (a measure of
a bank’s available capital expressed as
a percentage of its credit exposures),
return on assets and non-performing
assets (NPAs). Banks under PCA are
restricted from issuing fresh loans,
expanding branches or recruiting
more staff. In April last year, five of the
State Bank of India’s subsidiaries were
merged into the parent bank.
The concern for some experts is
that the present merger changes noth-
ing—capital, net worth or assets of the
banks. Although the combined numbers
look impressive, they do precious little
to improve the overall performance of
these banks. “The banks will continue
to be under government ownership and
become channels to roll out government
schemes. There will be no change in the
way they function,” says Madan Sabna-
vis, chief economist with Care Ratings.
“In the end, what we have is a horizontal
summation of balance sheets. That is a
very short-term solution to addressing
the problems of state-owned banks.”
Although Dena Bank has a net NPA
ratio of over 11 per cent, the combined
net NPA ratio would be at 5.71 per cent,
making it look healthier.
There are no larger benefits of
synergies being discussed nor any clear
plans to cut costs highlighted. Instead,
the government has assured bank em-
ployees of no job cuts post-merger. The
merger comes at a time when public
sector banks are straddled with bad
loans to the tune of around Rs 9 lakh
crore as on March 2018.
The Narendra Modi government
has been advocating consolidation of
the public sector banking space. While
experts have long mooted the concept of
fewer, larger banks, some have warned
that mergers for the sake of size willonly sweep the muck under the car-
pet. Former RBI governor Raghuram
Rajan said in September last year that
public sector bank mergers should be
done only after the balance sheets have
been cleaned up. “I would say restore
the banks to health, get an active board
composed of professionals. There has
been a steady attempt to professionalise
banks and remove political hacks. Once
we have done that, I think there will be
an ideal situation for merger,” he said.
The All India Bank Employees’ As-
sociation has said there is no evidence
that mergers strengthen banks or bring
efficiency. Some argue that the merger
will reduce the capital burden for the
government over the long term and en-
able better management of a smaller set
of large nationalised banks.
With fewer such banks, capital
allocation, performance milestones
and monitoring will become easier.
Krishnan Sitaraman, senior director,
Crisil Ratings, says: “Such consolida-
tion will engender economies of scale
and can structurally improve operating
efficiencies and governance. It will also
help the merged entity to participate in
credit growth opportunities and defend
turf.” In the past f ive years, public sec-
tor banks have ceded around 10 per
cent market share of banking assets to
private banks, and could lose another
10 per cent over the next three years if
capital constraints continue, adds Sita-
raman. Arresting this would be crucial,
but the big question is whether such
mergers alone will help. ■^
—M.G. ArunBIG MERGER,
SMALL GAINS
BANKING14.
LAKH CRORE
Total business of the entity formed
by the merger of Bank of Baroda,
Vijaya Bank and Dena BankIllustrations by TANMOY CHAKRABORTY