The government on Monday unveiled the merger of three state-run banks - Bank of Baroda, Dena Bank and Vijaya Bank + - to create India's third largest lender, setting off consolidation in the nationalised banking space after years of discussion.
Making the announcement, Rajiv Kumar, Financial Services Secretary said, "We have chose to merge Dena Bank, Vijaya Bank and Bank of Baroda".
At a press conference after the announcement, Union Finance Minister Arun Jaitley said the "major economical banking decision" was taken to make weaker banks stronger with the merger. He said the present government has tried to cleanse the bad loan mess, with steps such as asset quality review of the banks, adequate provision against stressed assets and enactment of the Insolvency and Bankruptcy Code to address the logjam in the sector.
Also, many banks were in a fragile condition due to excessive lending and ballooning NPAs, he said.
Individual boards of each of the three banks will have to approve the merger.
The government will then prepare an amalgamation scheme for the banks which will need to be approved by the cabinet of ministers and the houses of parliament, Jaitley said, adding he expected the process to be completed in the current financial year ending March 31, 2019.
Last yera, top lender State Bank of India was merged with five of its subsidiary banks and taking over Bharatiya Mahila Bank, a niche state-run lender for women. Around 9,500 branches are likely to be closed during the merger.
"The amalgamated entity will have a net NPA ratio at 5.71 per cent, which is significantly better than PSB average of 12.13 per cent, and declining further", the government said.
"Under the mechanism, Jaitley has advised the boards of the three banks to consider the proposal", financial services secretary Rajeev Kumar said, adding that it was the next logical step in strengthening the banking system.
"No employee will face any service conditions which are adverse in nature".
S Nagarajan, General Secretary, All India Bank Officers' Association, said the argument that mergers will help tackle bad loans does not hold water.
Jaitley said while consolidation of banks was on agenda and was even announced in the Budget, the government was waiting for the non-performing assets (NPA) situation to take a turn for the better before going ahead.
"Over time, this (merger) will strengthen the global positioning of Indian banks, but there will be a considerable transition period for this", said Sujan Hajra, chief economist and head of research at Mumbai-based broker Anand Rathi. "Accordingly, it was chose to consolidate the three banks", said Rajiv Kumar, Secretary, Department of Financial Services.
"This was accompanied by sweeping the NPAs below the carpet so that the real picture doesn't come out", Jaitley added. He alleged that banks undertook above-normal lending during 2008-2014 as "if there was no tomorrow" resulting in huge non-performing assets to the tune of Rs 8.5 lakh crore. The bank had reported a net profit of Rs 203.39 crore in the same quarter of 2017-18.