Banks being the financial backbone of an economy affect the country’s monetary and fiscal policies. With the advent of globalization, more and more foreign banks coming down to India and vice versa, and banks are now exposed to a number of risks. Therefore, the entire banking system and its operations require close scrutiny and control.
Banks by the very nature of their business attract several types of risks, viz., credit risk, market risk (which includes interest rate risk, foreign exchange risk, and liquidity risk), operational risk, reputational risk, business risk, strategic risk, and systemic risk to cite a few. Banks are exposed to these risks because of the business of banking which they undertake, 'banking' means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order o otherwise. 'banking company' means any company which transacts the business of banking in India. This is also called the process of intermediation.
1. Introduction to case
The government announced the amalgamation of three banks — Bank of Baroda, Vijaya Bank, and Dena Bank — aimed at creating the country’s third largest bank with a business of Rs 14.82 lakh crore and over 9,600 branches across the country.
It has been recognized that having several banks that are majority-owned by the government, virtually doing the same business, and competing for the same pie of customers wasn’t a sensible strategy. It also meant a lower return on the capital employed by the government which has competing demands for funds, and growing competition. The government and banking regulator RBI have also emphasized the changing face of banking marked by technological changes; challenges to raising capital that the owner (the government) has to provide periodically; the need for consolidation in the sector and putting an end to fragmentation.
On a standalone basis, Vijaya Bank had strength in the South while Bank of Baroda and Dena Bank had a stronger base in Western India. That would mean wider access for both the proposed new entity and its customers. From the government’s and regulator’s point of view, the move will lead to a lower NPA (non-performing assets) ratio for the new bank compared to the NPA ratios of 11.04 % for Dena Bank, 5.40 % for Bank of Baroda and 4.10% for Vijaya Bank. What this could mean down the line is lower requirements of capital from the government and also the ability of a large bank, like the one proposed, to lend more on the strength of its higher capital base (12.25 %) and to expand the business, rather than being dragged down because of weak financials and being forced not to lend.
2. Introduction of banks
1.1 Bank of Baroda
Bank of Baroda (BoB) is an Indian multinational, public sector banking and financial services company. It is owned by the Government of India and headquartered in Vadodara, Gujarat. It has a corporate office in Mumbai, Maharashtra.
Based on 2017 data, it is ranked 1145 on the Forbes Global 2000 list. BoB has total assets in excess of ₹ 3.58 trillion (making it India’s 2nd biggest bank by assets), a network of 5538 branches in India and abroad, and 10441 ATMs as of July 2017.The government of India announced the merger of Bank of Baroda, Vijaya Bank and Dena Bank on September 17, 2018 to create the country's third-largest lender. The envisaged amalgamation will be the first-ever three-way consolidation of banks in the country, with a combined business of Rs 14.82 lakh crore, making it the third largest bank after the State Bank of India (SBI) and ICICI Bank.
The bank was founded by the Maharaja of Baroda, Maharaja Sayajirao Gaekwad III on 20 July 1908 in the Princely State of Baroda, in Gujarat. The bank, along with 13 other major commercial banks of India, was nationalized on 19 July 1969, by the Government of India and has been designated as a profit-making public sector undertaking (PSU). As many as 10 banks have been merged with Bank of Baroda during its journey so far.
1.2 Dena Bank
Dena Bank was founded on 26 May 1938 by the family of Devkaran Nanjee, under the name Devkaran Nanjee Banking Company. It adopted its new name, Dena(Devkaran Nanjee) Bank, when it was incorporated as a public company in December 1939.
In July 1969 the Government of India nationalized Dena Bank, along with thirteen other major banks. It is now a Public Sector bank constituted under the Banking Companies (Acquisition & Transfer of Undertakings) Act, 1970. Under the provisions of the Banking Regulations Act 1949, in addition to the business of banking, the Bank can undertake other business as specified in Section 6 of the Banking Regulations Act, 1949.
On 17 September 2018, The Finance Ministry of the Government of India proposed to merge three state-run banks — Vijaya Bank, Bank of Baroda, and Dena Bank — into a single bank. The amalgamated bank is to become the third biggest bank in India with a total business of more than ₹1,482,000,000,000 (US$21 billion). The boards of the three banks are to meet to consider the proposal. The agenda behind the merger of the banks is to lower Non-performing assets. The Gross NPA OF the Bank of Baroda, Vijaya Bank, and Dena Bank is 12.4%, 6.9% and 22% respectively. The Dena Bank is currently operating under the Prompt Corrective Action (PCA) framework due to non-performing loans.
1.3 Vijaya Bank
Vijaya Bank is a public sector bank with its corporate office in Bengaluru, Karnataka, India. It is one of the nationalized banks in India. The bank offers a wide range of financial products and services to customers through its various delivery channels. The bank has a network of 2031 branches (as of March 2017) throughout the country and over 4000 customer touchpoints including 2001 ATMs.
Vijaya Bank was established by a group of farmers led by A. B. Shetty on 23 October 1931 in Mangaluru in Dakshina Kannada District of Karnataka State. Since it was established on the auspicious Vijayadashami Day, it was named 'Vijaya Bank'.
During the economic chaos created by the Great Depression of 1927–30, Shetty approached leading Bunt personalities to start a bank with the objective of extending credit facilities at a lower rate of interest to enable the farmers to cultivate their lands and prevent them from falling into the clutches of money lenders. Accordingly, Shetty involved 14 Bunts and established Vijaya Bank on 23 October 1931. In the beginning, the bank had an authorized capital of ₹5 lakh and an issued capital of ₹2 lakh. The paid-up capital was ₹8,670.
3. Share Ratio in Merger
The share swap ratio of a three-way bank merger of Dena Bank and Vijaya Bank with Bank of Baroda (BoB) was announced on Tuesday, as they took a step closer to becoming the third-largest lender in India. Bob, the largest of the three banks, on Wednesday, said that shareholders of Vijaya Bank and Dena Bank could get 402 and 110 equity shares of BoB for every 1,000 shares they held.
The share swap ratio will hurt Dena Bank shareholders the most as they lose ₹ 4.80 per share because of the merger, followed by Vijaya Bank shareholders, who will lose ₹ 3 per share. The calculations are based on the closing market price on Wednesday. While BoB closed at ₹119.4 per share, Vijaya Bank and Dena Bank closed at ₹ 51.05 and ₹ 17.95, respectively.
The government owns 68.77% of Vijaya Bank, 80.74% of Dena Bank, and 63.74% of Bank of Baroda Foreign portfolio investors. (FPIs) hold 1.29% in Dena Bank, 4.91% in Vijaya Bank, and 10.35% in BoB. After the merger, the government will own 65.74% of the merged entity.
The share swap ratio is negative for both Vijaya Bank and Dena Bank. There could be a marginal negative reaction to both the stock prices now. On a net worth basis, it is more a negative ratio for Vijaya Bank,' a banking analyst said on condition of anonymity. “Also, the share swap ratio for Vijaya Bank is lower than street estimates. However, it is definitely beneficial for the Bank of Baroda.'
4. Problem statement
The primary objective of this amalgamation is aimed at improving the customer base, consolidating the public-sector banking, and enabling the merged entity to compete at the global banking level. Amongst all the highlights, the deal is also likely to face certain hurdles in relation to its implementation process, employee retention, etc. Further, it will also have to integrate data of more than 100 million customers as well. With such a mammoth task at hand, the implementation phase of the merger may pose, for some, initial teething issues for the merged bank and the government. Further, multiple nationwide strikes have been organized by bank employee associations such as All India Bank Officers' Confederation (AIBOC), All India Bank Employees Association (AIBEA), and Bank Employees Federation of India (BEFI).
A written petition is also pending with the Delhi high court, challenging the merger and alleging violations of banking regulations. Amidst such opposition, the Finance Minister and have recently asserted that pursuant to the merger, there will be no retrenchment and there will be no impact on the service conditions of the employees as well. The sporadic strikes are not only affecting the smooth operational functioning of the banks but are also impacting other industries as well. However, in light of the government's assurances, the fate of such opposition needs to be seen. This amalgamation will present the Bank of Baroda as the global conglomerate in the banking sector aiming to achieve higher working efficiency, financial stability, and wider operationality. It will not only facilitate national and global outreach but will also integrate the public banking sector in India. Having said that, the realization of such an aim -- the success and the efficacy of the consolidation will largely be contingent on the effective and smooth implementation of the merger.
5. Alternatives / Solution
Such massive consolidation is also expected to reduce the lending cost, the number of NPAs and increase the merged bank's operational stability and profitability. The central government had, previously in 2017 as well, merged six banks into the State Bank of India, making it the largest banking conglomerate.
Post-consolidation, the Bank of Baroda will have a business of around Rs 15.4 trillion and advances and deposits market share of 6.9% and 7.4%, respectively. Further, considering the regional widespread presence of Vijaya Banka and Dena Bank, the Bank of Baroda will have pan India presence.
Dena Bank's strength lies in its relatively higher access to low-cost current account saving account (CASA) deposits, while Vijaya Bank has good profitability and availability of capital for growth. Extensive reach and global network and offerings of BoB will translate into advantages in terms of market reach, operational efficiencies and the ability to support a wider offering of products and services, the statement says.
Every permanent and regular officer or employee of Vijaya Bank and Dena Bank will become an officer or employee and will hold his office or service in BoB such that the pay and allowance offered to the employees and officers of both the merging lenders should not be less favorable as compared to what they would have drawn in the current employer banks.
The task at hand for the three men is a monstrous proposition. In any merger, the biggest challenge is that of personnel. While in the private sector, the easiest action for the management is to lay off people to derive cost savings that option does not exist for the three CEOs. There is 90,000 staff whose future has to be protected and concerns addressed. Integration of technology platforms and cultures of these organizations. Aligning the distribution of professionals in the merged bank and handling of human resources. As issues on seniority are structured and important in a public sector set-up, ensuring that there is harmony would be a challenge.
Rationalization of physical infrastructure. Dena Bank came under prompt corrective action of the RBI in May 2017 in view of its high Net NPA and negative RoA (return on assets). Bank of Baroda is the largest among the three and will take a hit on its asset quality. The other challenge is customer retention which we saw in SBI’s recent merger with its associate banks. For the banking system as a whole, things cannot change as the capital remains unchanged. The quantum of Gross NPA (GNPA) cannot change and will still have to be addressed. Mergers are not the panacea in the context of PSBs.
Without addressing the governance issues in the banks, merging two or three public sector banks may not change the architecture. Unless there is a change in the operating structures, mergers may not deliver the desired results in the long run. Giving the PSBs autonomy along with accountability.
Merged entities will require capital support from the government; otherwise, such a merger would not improve their capitalization profile. The merger will yield the desired results if these banks rationalized their branches, looked to reduce costs, and handled people issues well. RBI should continue to give banking licenses for more small finance banks as well as universal banks along with bank mergers.