In recent times, the banking sector has been abuzz with news of the merger between Bank of Baroda (BoB), Vijaya Bank and Dena Bank. This has a far reaching implication for the Indian banking landscape according to experts. This is the very first three-way banking merger in the country as per reports and the three banks have officially merged, making the combined entity a mega firm in the space.
Here are some key take-aways from this merger:
- The new banking entity is the second biggest public sector lender in India after the State Bank of India (SBI).
- It is also the third biggest banking firm in the country after State Bank of India (SBI) and HDFC Bank.
- The new bank now has more than Rs. 15 lakh crore as the size of its balance sheet.
- There are gargantuan deposits of around Rs. 8.75 lakh crore while advances are worth another Rs. 6.25 lakh crore according to reports.
- The new banking entity now has a whopping 120 million customers throughout the country while the combined employee count stands at 85,000 people.
- There are more than 9,500 banking branches along with an extensive network of 13,400 ATMs throughout the country.
- The public sector bank count in India now reduces to a total of 18 post this mega merger.
Experts feel that overall network will be boosted in south and west India including states like Gujarat, Maharashtra, Tamil Nadu, Kerala, Andhra Pradesh and Karnataka due to the complementary presence of branches in corresponding locations. The new banking entity is expected to attain 22% of overall market share in the Gujarat market while this should be anywhere between 8-10% overall in markets like Karnataka, Uttar Pradesh, Maharashtra and Rajasthan as per the official statement issued by Bank of Baroda.
Implications for the banks being merged
As per reports, the mega merger will be going a long way towards helping reduce funding and operational expenditure for the three banks. Additionally, overall risk management frameworks and procedures will be boosted for all of them. Operational efficiency levels are also expected to go up significantly as a result. Dena Bank is expected to benefit immensely from this merger since it has posted the weakest performance among all three banks and it has witnessed negative returns on its assets. For a long period of time, Dena Bank was stuck under the PCA (prompt corrective action) system of the Reserve Bank of India (RBI) and this meant lower funding access.
However, things will change dramatically for Dena Bank now while Bank of Baroda (BoB), which is the strongest performer amongst the three entities, will have to subsidize Dena Bank’s weaker allocation of funds. Industry experts feel that overall profitability of the new banking entity could turn out to be initially lower than the profitability levels shown by Bank of Baroda alone. Rather, in the initial phase post-merger, higher provisioning levels at Vijaya Bank and Dena Bank may lead to BoB seeing lower performance levels although this will rise again in the near future.
The Union Finance Ministry has reportedly stated 67.5% will be the combined PCR (provision coverage ratio) for the new banking entity which is higher than the 63.7% average posted by most public sector banks. The 12.25% capital adequacy ratio will also be higher than 10.875% which is the regulation and hence the bank can leverage capital markets better as per the Ministry. The new bank will have in excess of 34% of deposits (low-cost) made throughout India along with 12% of capital buffer according to reports. Total business size stands at around Rs. 10.29 lakh crore in case of Bank of Baroda (BoB) while Vijaya Bank and Dena Bank have business estimated at Rs. 2.79 lakh crore and Rs. 1.72 lakh crore respectively.
Impact of the merger on customers of these banks
All customers of Dena Bank will once again regain access to credit which was restricted while Dena Bank was placed under the RBI’s PCA system. Customers at Vijaya and Dena Bank will also be able to tap into the global market presence of Bank of Baroda which has 101 offices. The programmes and financial products offered by one bank will be accessible for customers of the two other banking institutions. There are several special schemes offered by each bank that will benefit customers across the other merged banks. The three banks will be offering varied financial products to customers post-merger and there will be major technological upgradation and investments in process as well. Customers will only benefit in the long run as per industry experts and customer service will be enhanced through superior efficiency levels. Shareholders in Vijaya Bank will be receiving 402 shares (equity) in Bank of Baroda for every 1,000 shares held in the former while shareholders of Dena Bank will be getting 110 shares (equity) in Bank of Baroda for every 1,000 shares held in Dena Bank.
The merger was declared by the Central Government back in September 2018 and this was one of the big ticket measures aimed at nurturing PSBs (public sector banks) back to better health and for making them increase overall competitiveness. A major chunk of loans disbursed by banks over the last few years have turned into NPAs and demand has been on the lower side for new loans. This merger is a big step towards addressing and combating issues like these. In case the merger turns out to be profitable in the long run, this could be a good way to nurse other ailing PSBs back to health. A lower tally of public sector banks will make it smoother for the Indian Government in terms of fund allocation and operation and performance tracking.