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Mega Merger!

Mega Merger!

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  • GS 3 || Economy || Banking & Financial Sector || Commercial Banking

 Why in news?

  • The Union Cabinet, chaired by Prime Minister Narendra Modi, on January 2, 2019 approved the ‘Scheme of Amalgamation’ for merger of Bank of Baroda, Vijaya Bank and Dena Bank.
  • The amalgamation will be the first-ever three-way consolidation of banks in India. The merger of Bank of Baroda, Dena Bank and Vijaya Bank was proposed by the Union Finance Ministry on September 17, 2018.

 About the merger :

  • The amalgamated entity will be India’s second largest Public Sector Bank and India’s third largest bank with a total business of more than Rs 14.82 lakh crore.
  • Post this merger, the number of PSU banks will come down to 19.
  • As per the Centre’s plan, all the businesses, assets, rights, titles, claims, licences, approvals and other privileges and all properties, borrowings, liabilities and obligations of Dena and Vijaya Bank will be transferred to BoB.

 Alternative mechanism

  • The merger of these three state-owned banks is a part of the government’s agenda of consolidation of public sector banks.
  • The amalgamation would be carried out under Alternative Mechanism. Finance Minister Arun Jaitley, who heads Alternative Mechanism, assured capital support to the merged entity.
  • Other members of Alternative Mechanism included Railway Minister Piyush Goyal and Defence Minister Nirmala Sitharaman.

 About the current situations of the banks

  • Dena Bank, which is presently under the Reserve Bank of India’s (RBI) prompt corrective action (PCA) framework is also expected to function as a regular bank after the merger.
  • The government’s plan also stated that every “regular and permanent” employee of the transferor bank will work in the same capacity in the post-merger bank as he/she was before the merger.

 Background

  • Dena Bank, which is presently under the Reserve Bank of India’s (RBI) prompt corrective action (PCA) framework is also expected to function as a regular bank after the merger.
  • The government’s plan also stated that every “regular and permanent” employee of the transferor bank will work in the same capacity in the post-merger bank as he/she was before the merger.

 Why do we need consolidation of banks?

  • Assocham Survey has found that size of Indian banks in terms of their assets stands very small to make optimal use of their capacities to raise funds at internationally competitive rates.
  • Indian banks are too small – Even as India is the second largest growth market for banking services after China in terms of the number of wealthy households, the ASSOCHAM Chief said, only two Indian banks, State Bank of India at the 64th position and ICICI Bank Ltd at 81st, figure among the global top 100 by tier I capital – a core measure of a bank’s financial strength that consists largely of shareholders’ capital.

 About swap ratio

  • The swap ratio for the proposed merger of PSU lenders Dena Bank, Vijaya Bank and Bank of Baroda (BoB) was announced on January 2.
  • Shareholders of Dena bank will receive 110 equity shares of BoB for every 1,000 shares they hold. Vijaya Bank shareholders will get 402 equity shares of BoB for every 1,000 shares they hold.

How these three banks will add value to each other?

  • Dena Bank, with gross NPA ratio of 22 percent, is currently under the Prompt Corrective Action (PCA) framework and has been restrained from further lending. Dena bank would no longer be covered under PCA after amalgamation.
  • Vijaya Bank is among the better performing public sector banks with a gross NPA ratio of 6.9 percent. The Bank of Baroda has a bad loan ratio of 12.4 percent.