What is the issue?
- The Union government recently proposed the merger of Bank of Baroda, Dena Bank and Vijaya Bank.
- However, the grounds for the merger, at the time of banks' weakening trend, have raised serious concerns.
What are the concerns highlighted?
- Implication - After the merger announcement, shares of Bank of Baroda and Vijaya Bank fell significantly.
- On the other hand, Dena Bank gained sharply.
- Notably, Dena Bank is the bank in the worst financial situation among the three entities.
- It is currently under the Reserve Bank of India’s prompt corrective action framework.
- Unlike the other two banks, its shareholders are set to gain from being part of a new bank with greater financial strength.
- But the weaker banks would make an unhealthy impact on the operations of the stronger one.
- Clearly, forced mergers such as the current one make little business sense for the stronger banks.
- Bad loans - The merger is part of the government’s efforts to consolidate the banking industry to overcome the bad loan crisis.
- Asking healthy banks to take over weak banks appears to be the strategy to handle the bad loans crisis.
- But they are less likely to solve the bad loan crisis that has gripped the banking system as a whole.
- Shareholders - A dominant shareholder in the form of the government is dictating critical moves.
- This impacts the minority shareholders as they are left with no say in the matter.
- A merger as significant as this one should have been first discussed and approved in the board rooms of the banks concerned.
What could be a cautious move?
- Undeniably, there are too many public sector banks in India and so consolidation is a good idea in principle.
- But ideally, mergers ought to be between strong banks.
- It is important to ensure that such mergers do not end up creating an entity that is weaker than the original pre-merger strong bank.
- Certainly, mergers are just one way of managing the problem and therefore cannot be discounted totally.
- However, the trick lies in ensuring that the merger fallout is managed prudently.
- Identifying synergies and exploiting scale efficiencies will be crucial here.
Source: The Hindu
Quick Fact
Prompt Corrective Action (PCA)
- PCA is primarily to take appropriate corrective action on weak and troubled banks.
- The RBI has put in place some trigger points to assess, monitor and control banks.
- The trigger points are on the basis of CRAR (a metric to measure balance sheet strength), NPA and ROA (return on assets).
- Based on each trigger point, the banks have to follow a mandatory action plan.
- It prohibits them from undertaking fresh business activities such as opening branches, recruiting talent or lending to risky companies.
- RBI could take discretionary action plans too apart from these.
