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Merger of banks: Mathematics of merger of banks is not easy

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Merger of banks is not easy

The Union Cabinet has approved the merger of Vijaya Bank and Dena Bank with Bank of Baroda. The bank formed by this merger will be the second largest government bank in the country in terms of assets and the third largest bank overall. The merger will be effective from April 1. This move of the government is a testament to its thinking that it feels that the public sector banks need to be strengthened. This merger is being seen as a cure for the problem of stuck debt. Vijaya Bank shareholders will get 402 shares of Bank of Baroda for every 1,000 shares. Similarly, shareholders of Dena Bank will get 110 shares of Bank of Baroda for every 1,000 shares. Dena Bank's share will be 27 per cent loss, while Vijaya Bank will lose six per cent. It can also be seen from the stock swap ratio that the high-quality Vijaya Bank is being acquired at about 15 per cent cheaper than its adjusted value.

Bank merger news 

The government says that the three banks will continue to operate independently even after the merger and the job of all employees is safe. This is the first time the government has taken the initiative to integrate the three banks. Earlier, the merger of State Bank of India and its five associate banks and Bharatiya Mahila Bank has been acquired by SBI. There are a total of 21 state-owned banks in the country, with the government holding the majority stake. After the merger of these three banks, there will be 19 government banks in the country. These state-owned banks hold more than two-thirds of the bank assets of Asia's third largest economy. However, these public banks also have a large stake in the stranded debt.

The government has taken this step at a time when the net NPA of Dena Bank, which is stuck in debt, has exceeded 11 percent and the Reserve Bank has put it in the prompt corrective action category. In such a situation many restrictions have been imposed on this bank. Finance Minister Arun Jaitley says that the growth in bank debt was impacting the investment in the corporate sector. Many banks reached a critical position due to increasing NPAs. Therefore, the bank which will be formed after the merger of three banks will improve the banking operation. In other words, the government believes that this bank merger decision will not only increase the lending capacity of banks, but will trigger the government's efforts to revamp the banking system and accelerate economic growth.

The government hopes that this merger will save Rs 10 billion annually by reducing the number of bank branches. Actually, there can be integration of branches in many places, which will lead to big savings.

Challenges in the path of merger 

The integration of the branches of the three banks and merging its processes will be a major challenge. Following the merger of five of its affiliated banks into SBI last year, the proposal for acquisition of IDBI Bank by LIC came to light this year. The real motivation behind this inclusion process was to deal with the problem of debt stuck in the system. It is necessary to go past to assess the utility of such mergers. The record of such mergers in the past is not very good.
 State Bank of Saurashtra and State Bank of Indore have been merged with SBI in 2008 and 2010 respectively. The government has also merged 19 regional rural banks in the past years. The merger of New Bank of India and Punjab National Bank and the merger of Global Trust Bank and Oriental Bank of Commerce clearly shows that it did no good to either the acquired and the acquirer. Indeed, the demand for consolidation of public sector banks is not new. In 1998, a panel led by former RBI Governor M Narasimhan spoke of a three-tier structure of Indian banks. 

   Banking structures cannot be arbitrarily dealt with in a market-based economy. Instead policy makers should let the market determine the size and shape of banks. The Reserve Bank has adopted a more liberal interpretation of bank licensing. In such a scenario, it does not make sense to give instructions by the government. Actually, the merger of banks is a short-term way of dealing with stuck debts, but the real problem is with their management and way of functioning. The government's interference in the functioning and appointments of public sector banks is worsening the situation.
The government claims that the merger will improve the operations of the three banks and is part of the plan to set up large banks in the country. 
   The government wants that there should be six big banks in the country so that there is no possibility of them failing. But even after integration, the pane of public sector banks will be smaller than foreign banks, such as the overall capital of eight banks of the US is 60 percent of its GDP, while the four banks of England and France have 300 percent of their country's GDP. Whereas, in India, the overall capital of the six major banks of the future will be just one third of the country's GDP. The capital of America's largest bank JP Morgan is almost eight times the capital of India's largest bank, State Bank of India. It is clear that even after integration, public sector banks will not be able to become big banks internationally.

Public sector banks merger 

Apart from this, the government also says that the customer base of the bank formed after the merger will increase rapidly. It is also said to improve its market reach, operations, economy and its products and services for consumers. But this is not necessarily the reality. Dena Bank's gross NPA is in the highest range of 22 percent. Vijaya Bank has a gross NPA of 6.9 percent and Bank of Baroda has 12.4 percent. The NPA of the bank formed after the merger will be around 13 percent. It will also be weaker than the current 12.4 percent level of Bank of Baroda. After all, what message does the government want to give to the shareholders of Bank of Baroda?

Dena Bank is among the weakest banks in the country while Bank of Baroda is among the strongest banks. Vijaya Bank is small but of average financial standing. In such a situation, Bank of Baroda will have to bear the financial burden of both banks. According to a report, the cost of funds and net interest margin ie Dena Bank's position on NIM scale is worse than the other two banks. Based on this, the financial health of the bank is determined. Dena Bank's NIM is 2.61 per cent, while Bank of Baroda has 2.92 per cent and Vijaya Bank has 3.12 per cent. There is a difference between the interest paid by the NIM bank and the interest charged. NIM over three percent is considered good. Similarly, Dena Bank's cost of fund is 5.59 per cent, while Vijaya Bank's 5.09 per cent and Bank of Baroda's 5.25 per cent. It is clear that such a merger also does not solve the real cause of the current financial crisis in the country.

Merger public sector banks

The best would be to merge strong banks, because they have the resources, their health and work culture are good and there is no obstacle except meeting the needs of the merger process. If we merge a sick bank with a healthy bank, then problems can arise for a healthy bank at the time of its merger. The current position of Dena Bank will also affect the capacity of the new bank formed after the merger. Weak or sick banks need to improve their health before merging.

In this light, better capital management, inclusion of quality in the evaluation of loan proposals, sincere efforts to recover the trapped debt, giving effective powers to the bank officials in the matter of recovery, control of corruption, more and more recruitment of skilled human resources. , Freedom from political interference can only lead the banking sector to better performance.

Bank merger list

After the merger of Vijaya Bank and Dena Bank with the merger of Bank of Baroda, the employees of the three banks will be involved. Bank of Baroda currently has around 56,361 employees, Vijaya Bank has 15,874 employees, Dena Bank has about 13,400 employees. The new bank will have 85,635 employees. Similarly, the total business of Bank of Baroda is Rs 10,29,811 crore, Vijaya Bank has a turnover of Rs 2,79,674 crore and Dena Bank has Rs 1,74,931 crore. In this way, the business of the new bank will be Rs 14,84,416 crore.
Bank of Baroda's net NPA is currently 5.4 per cent, Vijaya Bank's 4.1 per cent and Dena Bank's 11.4 per cent. In this way, after the merger of the three banks, its average will be 5.7 percent, which will be better than the average of 12.13 percent of the public banks. Similarly, the CASR ratio of these banks i.e. the ratio of current and savings account deposits in the three banks will be 34 percent. The cost-income ratio of these three banks will also be 48.94 percent while the average cost-income ratio of public banks is 53.92 percent. Similarly, the CRAR i.e. capital to risk asset ratio of the three banks will also be 12.25 percent whereas it should be 10.875 percent as per the prescribed rules.

Major technology bottleneck: 

Integration of technology is a major issue in the bank formed after the merger. Bank of Baroda has recently upgraded its core technology from Finacle 7 to Finacle 10. Now the challenge is to bring all three banks on the same platform. Matter of fact, merging only weak banks with relatively stronger banks may be a better move for the government, but nothing changes at the ground level.

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