In contrast to net non performing assets (NPA) ratio of 11.04 per cent for Dena Bank, 5.40 per cent for Bank of Baroda and 4.10 per cent for Vijaya Bank, the combined entity will have net NPA ratio of 5.71 per cent, according to a presentation by Rajiv Kumar, Secretary, Department of Financial Services.
At a press conference after the announcement, Union Finance Minister Arun Jaitley said the "major economical banking decision" was taken to make weaker banks stronger with the merger. The banking sector needs reforms and the government is taking care of banks' capital needs.
"Two strong banks can absorb a third bank to create a globally competitive bank", the FM said adding that no employee will face any adverse service conditions after the amalgamation.
The boards of the three banks will examine the amalgamation proposal, said Kumar.More news: Bills' CB Vontae Davis leaves at halftime, then retires
Then, the government announced the merger of three state-run general insurers, while allowing LIC to acquire a majority stake in troubled lender IDBI Bank.
Dena Bank has been placed under the prompt corrective action framework by the Reserve Bank of India with restrictions on lending, while Vijaya Bank is among the only two lenders to have reported a profit in 2017-18. The government believes that the merger will improve the operational synergy of the three banks and is part of a plan to create larger Indian lenders instead of smaller entities vying for the same business.
Rumours had been rife in June that the loss-making Dena Bank would be merged with Baroda. The government had made a mention of consolidation of banks earlier, Jaitley said. Rajiv Kumar, Department of Financial Services Secretary, announced that the decision was arrived at after meeting of the "alternative mechanism" which was set up during a year ago to consider consolidation of the Indian Banking Sector. "On the contrary, the SBI experience has been that among the merging and new entities, the best of the service conditions continue to apply to all of them", the minister said. Therefore, our capacity to subsume that weaker bank into the merged entity, which will be a stronger bank, is the principal factor that weighs with the government. This was accompanied by another step which was really to sweep the NPAs below the carpet so that the real picture does not come out.
When asked about the timing of this merger amid falling value of Indian rupee, the Finance Minister said the business in government doesn't come to a standstill even if you have global challenge of high crude oil prices and strengthening of United States dollar. "The government is keen to take steps so that history isn't repeated as far as NPAs are concerned", he added.
As a backgrounder to the decision, Mr. Jaitley added that the PSBs were too many in number and bank lending stood at Rs. 55 lakh crore by 2014.