Restoring lost bank stability

The pan-India bank strike staged by nine unions consisting of over a million employees went in vain as the Union Cabinet moved forward with its assent on the Dena-Vijaya-Bank of Baroda (BoB) merger which is likely to see BoB become the third-largest lender in the country. Following the footsteps of SBI, which merged five of its subsidiary banks and took over Bhartiya Mahila Bank to be included in the list of top 50 global lenders, BoB is set to have combined assets worth Rs 6.4 lakh crore and deposits worth Rs 8.41 lakh crore. While it boasts of a big asset pool, the combined gross NPA would be somewhere around 13 per cent as per government approximations. While the PSBs witnessed 2019's first financial overhaul, experts from the field hailed the merger as a losing game. Back in September, when the merger was announced, Alternate Mechanism, headed by finance minister Arun Jaitley, had forecasted the move to alleviate the banking sector plagued by NPAs and revive credit growth and lending capacity in the process. The now sanctioned merger had then resulted in a fall of shares for Dena Bank and Vijaya Bank, which was one of the reasons for the employee unions to strongly oppose the merger. Yet, the government's bid to clean the banking system and empower these banks by merging them was a far greater outcome when weighed against the share rates. Having a gross non-performing asset ratio of 22 per cent, the highest in the industry, Dena Bank was at the centre of Alternate Mechanism's innovative decision of this three-way merger. Being placed under RBI's prompt corrective action framework, which disables a lender's operational powers, the precariously functioning Dena Bank, in a nutshell, had to be rescued. And so, with a gross NPA ratio of 6.9 per cent, Vijaya Bank was chosen alongside BoB, having a bad loan ratio of 12.4 per cent, as two prime choices for the possible merger which would see the merged entity have a lesser stressed lending capacity as well as a far better asset pool. Indeed, the concoction was a productive step in the right direction. Except that the intricacies led down the government's ambitious merger. As per the share swap ratios unveiled by the government on Tuesday, there is no net profit to anyone and all three banks are deemed losers in the deal. For every 1,000 shares of Dena Bank worth Rs 10 each, Bank of Baroda will issue 110 shares of Rs 2 each. Also, Vijaya Bank's shareholders will get Bank of Baroda's 402 shares of Rs 2 each for every 1,000 shares of Rs 10. Going by the announcements, Morgan Stanley added that the announced swap ratios for BoB's amalgamation of Dena Bank and Vijaya Bank favours BoB and implies 27 per cent and 6 per cent lower valuation for Dena and Vijaya Bank versus their last closing prices. Not just the valuation, but the additional headache of the entire merging process is what is going to stress the three banks having a timeline of three months. In this triad chaos, it is important to note how BoB has to accommodate the poor balance sheet of Dena which has had no lending capacity since the past seven months. Though having performed better than Dena, Vijaya Bank still has to be subject to lower valuation due to the merger. As the banks cope with the merging process, its shareholders have to comply with the pitfall. Not just the shareholders but the employees across the three lenders too. Bank mergers are not everyday banking procedures. They include time and cost. Though mergers, in nature, are meant to have better synergy in terms of everything, this particular merger, through market analysis, proves otherwise. With a balance sheet of more than Rs 14 trillion and having approximately 10,000 branches across the country, the newly merged BoB is set to face the tedious process of merging before the next fiscal year. Shares of BoB rose over 2.5 per cent in early trade on January 3, whereas Dena plunged nearly 20 per cent and Vijaya dropped nearly 7 per cent post the Cabinet announcement of the merger. Ravi Shankar Prasad, at a cabinet briefing, said that the merger of the three banks will boost capital levels and lending ability. The strikes, however, had clearly expressed dissent towards such a merger, having taken the vulnerabilities and minuses into consideration. It was as if the government had turned a blind eye to the protests. Given how the country managed more painful processes such as demonetisation, the merger of banks is a mere cakewalk. Processes and outcomes do not matter as much as a financial merger decision does, especially one which has witnessed such strong voices of dissent.