Bank Merger of Dena, Vijaya and Bank of Baroda – What does this move say about the future of the Indian Banking Sector?

September 11, 2018

Several banks, majorly owned by the government, doing the same business have been competing with each other. Naturally, it has resulted in a lower return of capital employed by the government. The well-needed consolidation process of private sector banks is finally taking place. Our central government recently announced the merger of Bank of Baroda, Dena Bank and Vijaya Bank. Together they will form the third largest bank in India with a business of ₹14.82 Lakh crore.

Benefits of This Merger

This merger can deliver several positive outcomes not just to these banks but also to the whole sector and indirectly to the Indian economy. Few of the direct benefits of this merger is listed below.

  • Financially the weakest of these three, Dena Bank is in urgent need of the capital infusion. By merging it with healthier banks ( BoB and Vijaya Bank), this urgent need can be eliminated.
  • A larger bank in place of three smaller ones means more efficient and resilient banking sector. The larger banks always offer better characteristics.
  • The governance challenge for the government is reduced. Two fewer CEOs to find, two fewer entities to audit and two fewer boards to appoint.
  • The financial inclusion and broadening geographical reach of the banking is achieved better.
  • The increased customer base and business will result in international recognition and better ratings.
  • Most importantly, the cost of operations can be reduced mainly by the merger.

However, all the problem-related with PSBs are not going to be solved with mergers. The NPA issues need fixing of more profound institutional vulnerabilities.

The Intention

The government of India has hinted about the future of the Indian banking sector through the recent actions. The merger of banks is aimed at growing a few large banks to cater the international needs. According to a recent discussion paper by RBI, the consolidation of commercial banks by voluntary initiatives are appreciated by the government.

The government’s intention to re-orient the banking structure is well reflected in these re-occurring mergers. The new orientation of banking structure comprises of four tiers. In the first tier, there would be three or four large banks with international and domestic presence. The second tier is for mid-sized banks including niche banks with extensive presence over the economy. In the third tier, you will find the Regional Rural banks and Old Private Sector Banks. The last tier is for the cooperative banks and small privately owned local banks. The merger of state-owned banks can be seen as the stepping stone to this reorienting process.

The Future

The government identifies this reorientation process of our banking structure as a view to addressing various issues. These targeted issues include enhancing competition in the banking sector, improving financial inclusion, financing higher growth and providing specialised services. The need for flexibility and dynamism in our current structure is recognised, and the new construction is expected to impart these qualities. However, all these changes should be made without hurting the current resilient feature of our system.

 

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