How does merging bad banks with good ones help?

Dena Bank, Vijaya Bank and Bank of Baroda to be merged to form India's third largest bank

Bank of Baroda shares fell over 11 per cent after earlier losing as much as 11 per cent in Tuesday's trade after the government announced its merger with smaller peers Dena Bank and Vijaya Bank, both of which gained.

Rajeev Kumar, financial services secretary, said the merger plan was part of the effort to clean up the country's banking system.

The plan to merge the three banks was taken by a ministerial panel, led by Finance Minister Arun Jaitley Monday.

Banking sector reforms are a major plank of Prime Minister Narendra Modi's administration to revive credit growth, which has slowed to multi-decade lows as banks struggle with bad loans.

Other large PSU banks can also come under pressure, it said. Vijaya Bank, on the contrary, is among the better performing public sector banks with a gross NPA ratio of 6.9 per cent. Bank of Baroda, the largest of the three, has a bad loan ratio of 12.4 per cent.

The combined lending entity, which will be India's third-largest globally competitive bank, will be incrementally positive for Bank of Baroda in the long term only.




The merger is a positive step towards the consolidation of state-run banks, and synergies from the merger will result in operational efficiencies and better customer service, CIMB analysts wrote in a note.

The move follows top lender State Bank of India a year ago merging with itself five of its subsidiary banks and taking over Bharatiya Mahila Bank, catapulting it to be among top 50 global lenders. "After the government in principle makes this opinion, it suggests to the banks to consider it and we await the bank's consideration of it", he said.

He said the RBI's asset review in 2015 revealed the total NPAs were actually to the tunes of Rs 8.5 lakh crore, not Rs 2.5 lakh crore.

Government owns a majority stake in 21 lenders, which account for more than two-thirds of banking assets. Shares of Dena Bank, the weakest of the three and under prompt corrective action with its gross NPA at 22%, ended at ₹19.10, up 19.75%. The Bank of Baroda's bad loan ration now stands at 12.4 percent. "The government is keen to take steps so that history isn't repeated as far as NPAs are concerned", he added.

Lending during the period increased from Rs 18 lakh crore to Rs 55 lakh crore and "the nature of lending was as if there was no tomorrow, and that took toll on banks as well as on the economy", he said.

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