The Centre has chose to merge three state-run banks - Bank of Baroda (BoB), Dena Bank and Vijaya Bank - which will create the third-largest lender in the country. Dena Bank, Vijaya Bank and Bank of Baroda will be merged to create the third largest bank in the country, as part of efforts to clean up the country's banking system, an official release said.
Finance minister Arun Jaitley said the merger will make the banks stronger and sustainable as well as increase their lending ability. The Bank of Baroda's bad loan ration now stands at 12.4 percent.
But these banks also account for the lion's share of more than $150 billion in sour assets plaguing the sector, and need billions of dollars in new capital in the next two years to meet global Basel III capital norms.
The three banks will continue to work independently post merger.
In October, the government set up an alternative mechanism comprising Jaitley, defence minister Nirmala Sitharaman and railways and coal minister Piyush Goyal, as an approval framework for proposals to merge state-run banks.
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Then, the government announced the merger of three state-run general insurers, while allowing LIC to acquire a majority stake in troubled lender IDBI Bank. The branch network of the combined entity will be almost 9,500.
Enumerating the benefits, Mr. Kumar added that the proposal entailed that the amalgamated entity would be the third largest in India. He further added that the merger of associate banks with SBI bore fruitful results and this led the government to take further steps to consolidate the three public sector lenders. "This amalgamated entity will increase banking operations", he said, of the merger of the three banks. The government had made a mention of consolidation of banks earlier, Jaitley said. The Vijaya Bank and Dena Bank now have more regional focus whereas Bank of Baroda has a widespread network across India.
He added,"No employee will face any service conditions which are adverse in nature".
"Over time, this (merger) will strengthen the global positioning of Indian banks, but there will be a considerable transition period for this", said Sujan Hajra, chief economist and head of research at Mumbai-based broker Anand Rathi. Rajiv Kumar, Department of Financial Services Secretary, announced that the decision was arrived at after meeting of the "alternative mechanism" which was set up during past year to consider consolidation of the Indian Banking Sector. After 2015, once the real picture was known through asset review by the RBI, both the govt and the RBI started taking corrective steps. The banking industry was saddled with bad loans - called non-performing assets in banking parlance - of Rs 8.50 lakh crore. Calling it unwarranted, they said it was the government's diversionary tactic to take the focus away from the huge levels of bad loans.