Govt proposes merger of Bank of Baroda, Dena Bank and Vijaya Bank

"Stronger amalgamated bank will be better positioned to tap capital markets," said the statement.

During April-June quarter, Dena Bank reported gross non-performing asset (GNPA) of 22.69 percent of total advances while net NPA (NNPA) was 11.04 percent; Vijaya Bank's GNPA was 6.19 percent and NNPA 4.10 percent. Bank of Baroda's GNPA was 12.46 percent and NNPA was 5.4 percent.

At the end of March 2018, total NPAs in the banking sector was approximately Rs 10 lakh crore.

The proposal will now need to be passed by the boards of individual banks. The banks' boards will shortly meet and take up the decision, Finance Minister Arun Jaitley said after Kumar's statements.

Jaitley added, "While making this suggestion we have borne in mind that we don't have the amalgamation of weak banks...the amalgamated entity's lending ability will be higher."

The announcement to merge the three banks was made after the latest meeting on ‘alternative mechanism’. The meetings were initiated last year to consider consolidation in the banking sector.

The Modi government had announced the consolidation of public sector banks in 2016 owing to mounting non-performing assets. The plan was to cut down the number of PSBs by half from 21 to about 10-12 banks.

After the process, Dena Bank, which is under the Reserve Bank of India's (RBI) Prompt Corrective Action (PCA) framework, is expected to function as a regular bank.

"Dena bank would no longer be covered under PCA after amalgamation," said Bank of Baroda Managing Director, PS Jayakumar.

He said the process of amalgamation could take four to six months to complete.

Banks under PCA are prohibited from fresh lending, paying dividends and distributing profits. They are also required to keep an eye on provisioning on bad loans.

"The envisaged amalgamation will be the first-ever three-way consolidation of banks in India with a combined business of Rs 14.82 lakh crore, making it India’s third-largest bank," said a statement released by the ministry.

Until the amalgamation process is complete, the three banks will continue to work as independent banks, Rajeev Kumar said.

Jaitley pointed out the decision to merge these banks was the third step in the entire process of banking consolidation. "First we merged the State Bank of India with its five subsidiaries and then the life insurance corporation proposed to take over IDBI Bank... This is the third step now," he said.

He said the government considered the "capacity to subsume a relatively weaker bank into a merged entity" as the "principal factor" before selecting the three banks.

"One of the banks is under PCA. Therefore, we want to save all these banks. We want to ensure that the merged entity is stronger entity... We don’t want a merger of weak banks... Subsequent to this merger, the sustainable lending ability will be far higher. This amalgamated entity will increase banking operations,” Jaitley said. The merged bank will be "stronger, sustainable, greater banking operations and will have a better lending capacity," he added.

Reacting to the announcement, Ashvin Parekh, Managing Partner at Ashvin Parekh Advisory Services said, “I think this is a bold move. The synergies are only on paper. Good amount of efforts will be required by the banks to make the synergies work.”

Parekh said the merger process, if approved, will take at least 3-4 quarters to complete and given the quality of loan book and NPA being an issue for all banks, the merger will be a challenging task.

A former Bank of Baroda chairman said, “With the changing technology, clearly there is no need for more banks in the country given they are in the same business. I am happy with the selection of the banks as both Bank of Baroda and Vijaya Bank are relatively stronger banks. The weaker Dena Bank has a culture similar to Bank of Baroda, which can have some more business in the southern part of India.”