Concerns with BoB, Dena Bank and Vijaya Bank Merger

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.