Much-awaited consolidation of banks

The Indian government has taken a much-awaited decision to merge scam- and non-performing asset-hit pubic sector banks, which would be a trend, financial and banking sector observers hope.

The observers believe the merger of three banks will be helpful for the economy as India needs a strong banking sector, especially with its massive financing needs for businesses and infrastructure developments.

The infrastructure sector is heavily dependent on public sector banks as private financial institutions have shied away from funding projects due to unpredictable development phases and changing economic trends over the long-term, the observers pointed out.

Finance Minister Arun Jaitley and Cabinet Ministers Piyush Goyal and Nirmala Sitharaman decided that Bank of Baroda, Vijaya Bank and Dena Bank may consider amalgamation.

The envisaged amalgamation will be the First-ever three-way consolidation of banks in India, with a combined business of Rs. 14.82 lakh crore, making it India’s Third Largest Bank.

“The consolidation will help create a strong globally competitive bank with economies of scale and enable realisation of wide-ranging synergies,” said a release on the Public Information Bureau on 17 Sept 2018.

Leveraging of networks, low-cost deposits and subsidiaries of the three banks has the potential of yielding significant synergies for positioning the consolidated entity for substantial rise in customer base, market reach, operational efficiency, wider bouquet of products and services, and improved access for customers.

Some of the strengths of the envisaged amalgamated entity are:

Provision Coverage Ratio (PCR) at 67.5% is well above Public Sector Banks (PSBs) average (63.7%), and steadily increasing;

Net NPA ratio at 5.71% significantly better than PSB average (12.13%) and declining further;

Gross NPAs for the combined entity have started declining (decline of Rs. 1,048 crore in Q1);

Cost to income ratio of the combined entity at 48.94% better than the PSB average of 53.92%;

Dena Bank’s strength in MSME will further augment the strength of the other two to position the amalgamated bank for being an MSME Udyamimitra;

Capital Adequacy Ratio (CRAR) at 12.25% is significantly above the regulatory norm of 10.875%, and stronger amalgamated bank will be better positioned to tap capital markets;

Significant cost benefits from synergies: Larger distribution network will reduce operating and distribution costs with benefits for the amalgamated bank, its customers and their subsidiaries;

Global network strength of Bank of Baroda will be leveraged to enable customers of Dena Bank and Vijaya Bank to have global access;

Access improvement through amalgamation of networks;

Wider range of products and services through leveraging of bank subsidiaries and leveraging of a larger network for offering more value-added non-banking services and products. fiinews.com