The merged entity will have a combined business of Rs 14.82 lakh crore and a market share of about 6.8 percent by loans.
In an attempt to clean up the NPA mess in the banking sector, the Modi government on September 17 announced a proposal to merge three public sector lenders - Bank of Baroda, Dena Bank and Vijaya Bank.
The combined lending entity will be India's third largest globally competitive bank, Rajeev Kumar, Secretary - Department of Financial Services, Ministry of Finance, told reporters in a press conference.
The merged entity will have a combined business of Rs 14.82 lakh crore and a market share of about 6.8 percent by loans, according to data as of March 2018, making it the third largest bank in the system, according to a Moody's report.
According to the government's estimates, net non-performing assets (NNPA) ratio of the combined entity will be at 5.71 percent, which will be significantly better than public sector banks (PSBs) average of 12.13 percent. Also, Capital Adequacy Ratio (CRAR) will be at 12.25 percent, which will be "significantly" above the regulatory norm of 10.875 percent.
In terms of deposits, the new entity will have deposits worth Rs 8.54 lakh crore if we look at the annual deposits with the three lenders as of March 2018.
If we combine the assets of these three banks, the asset worth of the new entity will be Rs 10.18 lakh crore. In terms of penetration, the newly merged entity will have the second highest number of branches with a total of 9,475 branches across the country.
State Bank of India (SBI) has the highest number of branches at 22,414.
The employee strength of the new entity would jump to over 84,000 after the merger if the three lenders retain their existing employees as of March 2018.
The merged entity will, however, require capital support from the government to improve their capitalisation profile, Moody's Investors Service VP (Financial Institutions Group) Alka Anbarasu said.
Moody's said Bank of Baroda and Vijaya Bank have relatively better credit metrics than Dena Bank in terms of asset quality, capitalisation and profitability.
While the potential merger is a bold move by the government ahead of the general elections next year, it comes with its own set of challenges. The merged entity may face challenges on business integration, technology, culture and people management and a possible opposition by trade unions.
Brokerage firms believe that the first key challenge will be the management of employees where Bank of Baroda has been hiring professionals from outside the organisation. But there are some key positives for the merged entity including likely steady asset quality ratios post-merger, unlikely compromise on capital position for the merged entity, expected improvement in market share among others.The move follows top lender State Bank of India last year merging with itself five of its subsidiary banks and taking over Bharatiya Mahila Bank, a niche state-run lender for women.