Moody’s: Merger of BoB, Vijaya Bank, Dena Bank to improve efficiency, governance

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On September 17th, Finance Minister Arun Jaitley proposed the consolidation of Bank of Baroda (BoB), Vijaya Bank and Dena Bank.

Mumbai: Shares of Bank of Baroda slide after the government announced its merger with Vijaya Bank and Dena Bank as analysts expect the merger will create a sharp jump in bad loans for BoB at a time when it is already reporting huge losses from higher provisioning.

"The proposed merger between the three banks - Bank of Baroda, Vijaya Bank and Dena Bank is a step in the right direction to sustain the competitiveness of the public sector banks".

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Making the announcement, Rajiv Kumar, Financial Services Secretary said, "We have made a decision to merge Dena Bank, Vijaya Bank and Bank of Baroda. Only Dena Bank is weakest but its share in total business of these banks is just around 1/10th, so it is unlikely to pull down the performance of combined entity in any significant manner", said Chokkalingam. Besides Jaitley, the alternative mechanism includes defence minister Nirmala Sitharaman and railway minister Piyush Goyal.

"Given the increasing size and growing market share of the Indian private sector banks, such a merger and the consequent economies and synergies will strengthen the competitiveness of PSBs as a whole", said Suman Chowdhury, President - Ratings, Acuite Ratings & Research Limited.

He added,"No employee will face any service conditions which are adverse in nature".

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"Prior to 2008, loans worth Rs 18 lakh crore were given".

Besides, Kumar said, Provision Coverage Ratio (PCR) would be better at 67.5 percent against average of 63.7 percent and cost to income ratio of the combined entity would come down to 48.94 percent as compared to average of 53.92 percent. "Real picture of Non Performing Assets (NPAs) was only known in 2015, the UPA had swept NPAs under the carpet".

Arun Jaitley further added, "Restructuring and evergreening of loans led to a rise in NPAs".

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Jaitley said that the government was making a conscious decision not to merge the operations of weak lenders. He referred to the government's announcement in the budget where it had said consolidation of banks was on their agenda. The single unit will become the third largest public sector bank in the country. In contrast, Dena Bank - the weakest of the lot - made huge gains in early trade and was up nearly 20 per cent at Rs 19.05. The gross Non -Performing Assets ratio will be around 13 percent with gross non- performing assets to be approximately around Rs 80,000 crores.