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Economy will be strengthened by integration of Banks

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Vijaya Bank and Dena Bank will merge in Bank of Baroda on April 1, 2019. The first time, three banks in the country will be unified. The bank formed by this merger will be the country’s second largest public sector bank (PSU) and the third largest bank in terms of asset allocation. State Bank of India (SBI) is the largest bank in the country while the HDFC Bank is in second place. The Union Cabinet approved the merger of Vijaya Bank and Dena Bank in Bank of Baroda on January 2, 2019. In a statement, the government said that Bank of Baroda would be a transferable bank while Vijaya Bank and Dena Bank would be the transfer bank. This means that small banks will be merged with a large bank and will maintain their identity. In this way, the name of the bank is not likely to change. By September 2018, the combined assets of these three banks were Rs 10.44 lakh crore. Then, the total assets of SBI were Rs 34.86 lakh crore and HDFC Bank’s Rs 11.70 lakh crore. According to the June figures of last year, the total number of employees of Bank of Baroda, Dena Bank, and Vijaya Bank is 85,675 and their number of branches is about 9,500. The government has assured that no employee will be removed from service, but some branches may be closed for rationalization of number branches and offices.

According to information provided to the Bombay Stock Exchange (BSE), investors will get 402 and 110 equity shares of Bank of Baroda, respectively, on 1,000 shares of Vijaya Bank and Dena Bank. However, what would be the status of top management in the bank, formed after the merger is unclear. Head of Dena Bank is Karnam Shekhar, RA Shankar Narayanan of Vijaya Bank, and Chief of Bank of Baroda is PS Jaya Kumar.

According to the closing price of January 2, 2019, the ratio of exchange of shares is in favor of the Bank of Baroda. According to Dena Bank’s stock price, it will be 27 per cent loss, while Vijaya Bank will be in 6 per cent. Vijaya Bank is acquiring approximately 15 per cent of equity shares in comparison to its adjusted price. However, experts say that after the merger, due to Dena Bank, the asset quality of the new bank will be downgraded. It is also being said that due to the NPA of Dena Bank, the financial position of Bank of Baroda will be in bad condition in the initial phase of the merger. Also, due to changes in technology and potential provision requirements for NPAs, the profitability of the bank in the near future may be affected, though, these reasons would be temporary, can be expected.


Earlier Attempts towards Bank’s integration

The integration of PSUs was considered several times after 2003, but no concrete strategy could be made. Human resource, technology, salary and allowances, systems, etc. not to be in uniformity was one of the major reasons. To unify the union for integration, adjusting human resources, arranging compensation in case of inconsistency, etc. were also important constraints in the matter. In connection with the integration, the committee formed under the chairmanship of RS Gujral had given the report to the government in January 2012, in which PSUs were recommended to form seven major banks. Roadmap for the integration of PSUs was prepared by the Bank Board Bureau and for this; PSUs were divided into six groups. The decision of the groups of banks was taken by making a basis for human resources, e-governance, internal audit, the position of fraud, CBS (core banking solution). There are currently seven large size banks in India, but the government believes that in order to remain competitive at the international level, there is a need for bigger banks in the country whose identities are world-class. It is worth mentioning that after the merger of associate banks and women banks, the State Bank of India has come in the category of 50 big banks in the world.


Why integration is necessary

In the current perspective, the integration of PSUs is the only option, because banks need huge capital for mounting NPA, the pressure to meet the different standards of Basel III, strengthening the infrastructure of banks, etc. Also, providing better services and safe banking facilities to customers is also a major challenge for PSUs. In present circumstances, neither the banks are capable of meeting the growing needs of neither the banks nor the government. The way NPAs and fraud graphs are increasing, the small banks are facing difficulties in saving their existence. Gross NPA of all banks increased by 11.2 per cent in the Financial Year (FY) 2017-18, which is in amount Rs 10.39 lakh crore, in which the NPA of PSUs were Rs 8.95 lakh crore in per cent term that is 14.6. It is worth noting that in the FY 2016-17, the gross NPA of all the banks was 9.3 per cent, while the gross NPA of PSUs was 11.7 per cent. The report, named “Trendz and Progress of Banking in 2017-18” released by the Reserve Bank of India, has said that the process of conversion of restructured loans into NPAs has been completed. Also, the process of identifying the hidden NPAs has also been completed. In the FY 2017-18, the gross NPA and total debt ratio reached to 14.6 per cent, while the net NPA and total debt ratio was 8 per cent, which was 6.9 per cent a year ago. However, the proportion of gross bank debt of private banks was 4.7 per cent during the corresponding period, which was 4.1 per cent a year ago.


Attempts to solve the problems of banks

The government will soon put a capital of Rs 28,615 crore through recapitalisation bonds in seven public sector Banks.

With this amount, the bank will be able to meet its regulatory capital requirement. Out of these seven PSUs, Bank of India will get the maximum Rs 10,086 crore. After this, Oriental Bank of Commerce will get Rs 5,500 crore and Bank of Maharashtra Rs 4,498 crore. The UCO Bank will get Rs 3,056 crore and United Bank of India Rs 2,159 crore. Earlier, in the year 2018-19, the government had announced a capital infusion of Rs 65,000 crore in PSUs. Out of this, Rs 23,000 crore has been given to the PSUs, while Rs 42,000 crore is still available to the banks. According to Finance Minister Arun Jaitley, the government will pay Rs 41,000 crore more to the PSUs, which will be different from the earlier declared amount. By providing capital to PSUs, at least two or three banks will come out of the Prompt Corrective Action (PCA) till March 2019. According to Finance Minister Arun Jaitley, this will increase the ability to lend of PSUs. The PCA is imposed on those banks which cannot follow certain important financial parameters. After being put into PCA, banks are banned to give loans and open new branches.


Advantage of Integration

There is a consensus among the banks that after the integration of banks, there will be a reduction in operational costs and other expenses, increase in profits, ease of risk management, better performance, speed up in capital formation etc. It is likely to increase trained human resources, decrease in training costs, an increase in the availability of capital and resources, reduction in fraud cases etc. In a large and diverse country like India, banking services cannot be turned away from rural areas. Providing banking facilities in rural areas is still a big challenge for the government. After the integration, their presence in the rural areas will further increase. The social, political and economic nature of India is favorable to the big banks because big banks can provide equally superior customer facilities in such a large country. Having a global presence will help the customers of the banks to get uniform service both at home and abroad.



It can be said that ensuring the reduction in operating and other expenses will increase the profitability of the big banks. With the availability of capital, they will be able to lend to customers at a cheaper rate. With the help of adequate human resources, large banks will be able to work better on the front of NPA and risk management, which will increase both their credibility and profitability.

At present, small banks are unable to meet international banking standards due to lack of capital. They are also not able to provide loans to customers at a cheaper rate. Even in NPA and risk management front, they are not performing well. In the absence of better technology & sufficient resources, their customer service is not good. In such a situation, the public sector banks will perform better on every front can hopefully be expected.

Satish Singh

(Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of AFTERNOON VOICE and AFTERNOON VOICE does not assume any responsibility or liability for the same.)
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