Banking Sector Reforms- I

Merger of PSBs

Banking Sector Reforms
Banking Sector Reforms

The 1970 and 1980 Banking Companies (Acquisition and Transfer of Undertakings) Acts states that the Central Government in consultation with the RBI (Reserve Bank Of India) can make a scheme for merger of any nationalised bank with another nationalised bank or another banking institution. A number of committees, including Narasimhan Committee (1998) appointed by RBI, RBI Deputy Governor led Leeladhar Committee(2008) and Nayak Committee (2014) appointed by the RBI have advocated for amalgamation of Public Sector Banks (PSBs) given cardinal synergies/advantages. Considering potential advantages of amalgamation of banks beside public at large through intensified ingress to banking services with a view of facilitating amalgamation among PSBs to establish powerful and ambitious banks with improved risk profile to serve as catalysts for growth, government approved a framework of proposals to consolidate public sector banks through an Alternative Mechanism. On 17.09.2018, after consultation with the Reserve Bank of India, Alternative Mechanism approved that Dena Bank and Vijaya Bank may be consolidated with Bank of Baroda. Boards of Dena Bank, Vijaya Bank and Bank of Baroda after considering the recommendations gave principal approval thereafter.

Why Do We Need Consolidation?

Since there is no threat to financial stability and depositors do not bear the risk of losing money (as banks are backed by the government), the rationale behind consolidation should be cost reduction and acquiring efficiency. The weak banks will be required to sell their assets, shut down loss making branches and reduce overheads among others. Amalgamation could necessitate sale of real estate where branches are inessential. It will also offer voluntary retirement schemes to reduce headcounts and supplant younger, digital-savvy personnel. It will not be the technology to play the key role in merging because the working platform for most of the banks is administered by the same vendor. The passport to success will be managing in staff strength, exploring the correct business synergy and working environment and large-scale shutting down of branches in urban centres.

However, a critical point to ponder is- how much ability do our banks have to absorb the weaker peers? The following table will give brief idea about the financial condition of the banks.

Name Assets Gross NPAs % of net worth
Punjab National Bank Rs 7.21 trillion 12.53% 92
Bank of Baroda Rs 6.95 trillion 10.46% 49.23
Bank of India Rs 6.95 trillion 13.22% 90.42
Canara Bank Rs 5.8 trillion 10.56% 76.55%
Union Bank Rs 5.4 trillion 11.7% 88.02%


Cost-reduction, re-deployment and rationalization of branches are counted as main advantages. It is obvious that some of the branches will shut down as soon as amalgamation materialises.

Predominantly, post consolidation, the combined organization would be bias to relocate its branches and scope of operations from rural to urban and semi-urban areas as they are usually more remunerative.

Amalgamation May Not Be Productive

Consolidation of Bank of Baroda, Vijaya Bank and Dena Bank may not be productive. There are several reasons.

First, the decision to amalgamate the three PSBs was constituted in November 2017. The decision was taken through the Alternative Mechanism for consolidation of PSBs which comprised of three cabinet ministers. According to Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, the RBI must be consulted by the Central government before formulating such consolidation schemes for the banks. They are to be submitted before both the Houses of the Parliament for their approval.

Parliament has the ultimatum to decide on the amalgamation/merger. Decision making on bank unification through ministerial stratagem amounts to an imposition from the above. These diminishes the functional autonomy of the bank boards as well as have adverse impact on the bank’s business operations, morale of the employees & officers, financial health and confidence of the customers.

A Diverse Group

Bank of Baroda Dena Bank Vijaya Bank
Total Assets (Rs cr) 720000 120860 177632
Gross NPAs (Rs cr) 56480 16361 7526
Gross NPAs to gross advances (%) 13.2 24.9 6.5
Capital adequacy ratio (%) 12.1 11.1 13.9
Return on assets (%) -0.34 -1.59 0.44
% of share held by the government 64.03 80.74 68.77
Number of bank branches 5467 1872 2136
Number of employees 55000 13613 16079

Second, the concerned PSBs are quite heterogeneous in respect of business operations, size, financial performance and organisational structure. The total assets of Bank of Baroda in 2018 were Rs 7.2-lakh cr yet it is not in the pink of its health. Bank of Baroda had negative return on assets in 2017-18. It’s capital adequacy ratio was around 12% then and by the end of March 2019 it was 11.5 % earmarked by the RBI for alteration to the Basel III system.

Since last year Prompt Correction Action framework has been imposed on Dena Bank by the RBI due to its deteriorating financials. Restrictions have also been imposed on staff recruitment and fresh credit from this year.

Operating profits of all the three PSBs showed positive results but net losses were observed for Dena Bank and BoB as their provisions increased mainly because of NPA write-offs. Despite write-offs, there was continued growth on the NPAs of BoB & Dena Bank every year.

Vijaya Bank, on the other hand, was successful in maintaining NPA provisions and bad loan accumulations, thus, enabling it to register positive profits and leading to growth of deposits and credits. In contrast to this, there was negativity in credit growth and deposit in Dena Bank and BoB over the past couple of years.

In 2017-18, Vijaya Bank had positive return on assets but its GNPA was much lower to gross advances ratio in comparison to others. Though it had a comfortable adequacy ratio but how will it gain from merger agreement is incomprehensible.

Third, amalgamation of three PSB’s balance sheet will lead to alteration of capital adequacy ratios and NPA through financial engineering instead of actual NPA recuperation. According to the information available to the public, only 3 out of 26 cases which were cited to National Company Law Tribunals (NCLTs) have been settled so far.

Share-Swap Ratio

According to the proposed Amalgamation scheme, Vijaya Bank shareholders would get 402 equity shares of Bank of Barodaout of every 1000 shares possessed by the bank.

Shareholders of Dena Bank would get 110 shares of Bank of Baroda out every 1000 shares.

The combined capital of the three PSBs would be Rs 14.82 lakh crore. With this amalgamation, it would become the third largest bank in India after State Bank Of India and Industrial Credit and Investment Corporation of India (ICICI BANK). The consolidation would also produce the second-largest PSB.

There would be 18 PSBs after the merger is completed.

The merger of the three banks was approved by the former Union Minister Late Arun Jaitley on September 2018, through Alternative Mechanisms to create a global sized lender.

PSB Reforms Agenda for Reforming Banks:-

Reforms include—

  • For better management of consortium lending, number of lenders are restricted to minimum 10% in consortium.
  • For effective vigilance, loans above Rs 250cr will be monitored by specialised agencies.
  • Implementation of analytics and technology for to umbrella due diligence over data sources.
  • In depth analysis for all accounts above Rs 50cr that lead Non-Performing Assets for wilful default and fraud.
  • Stringent imposition of provisions of loan endorsement.
  • For timely recovery and effectively managing stressed accounts, Stressed Asset Management and Verticals has been initiated in the banks.
  • Borrowers for loans above Rs. 50 crore have to submit passport details.
  • Fugitive Economic Offenders Act, 2018 was enacted to intercept economic offenders from sidestepping the process of Indian law by staying outside from the sovereignty of Indian Courts.

Way Ahead

The centre’s decision to consolidate Vijaya Bank, Dena Bank and Bank of Baroda was opposed by the All India Bank Employees Association (AIBEA) citing that it would affect the interest of the employees, their job security and job opportunities in banking sector. AIBEA was supported by the United Forum of Bank Unions (UFBU) and a nation-wide strike was called on 26th December, 2018. AIBEA is a constituent of UFBU. While disagreeing with the government that merging would lead the banks to be stronger, consolidation of six banks of State Bank with their parent body, the State Bank of India, was cited. They argued that with the consolidation SBI has not expanded, rather its problems increased.  Many branches were closed leading to a surplus in the employees. Also after the consolidation, the NPAs increased substantially.

As the success in future cannot depend on past accomplishments, in the same way failure in the past can underpin an enduring success. To revamp its own stock, administration needs to focus on improvingits governance in PSBs, stop interfering in loan sanctions and pass a resolution in parliament that no party would interfere in loan unless there are severe natural calamities. Banking is concerned with financial intermediation. Society is at its epicentre, both behind and in front of the counters. The mores of the organization are intertwined with the mores of the religions. Both cultural issues and human resource have crippled the success of the consolidation across periods and nations. Hence, it is vital that big banks think wisely and then turn into unwieldy conglomerates. There should be no compromise in basic banking and customer services.


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The need for reform of Cooperative Banks


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