In early signs of the government’s ambitious plan for consolidation among state-run lenders to help them gain efficiency and scale, Vijaya Bank and Dena Bank have expressed interest in a merger and are reportedly in the initial stages of discussing synergies. A possible merger between the two relatively smaller state-run banks will lead to formation of a large mid-sized bank, ET Now reported citing unidentified sources.
The proposed merger between Vijaya Bank and Dena Bank is being considered based on both the lenders complimenting each other on their geographical reach, the report said, as Vijaya Bank has strong presence in southern India, while Dena Bank is well-positioned in the west. Shares of Vijaya Bank fell and were trading down 1.4% at Rs 58.9, while Dena Bank shares surged over 3.7% to Rs 32.05 on the news.
However, the capital requirements for the merged entity would likely increase, on account of Dena Bank’s high non-performing assets. In fact, to tackle the menace of the bad loans and state-run banks’ stressed balance sheets is one of the primary objectives behind the government’s plan for consolidation.
The report said that the merger between Vijaya Bank and Dena Bank could be completed by the end of this fiscal year if the proposal is approved by the government.
The government is pushing for consolidation among the state-run banks in order to help the lenders gain efficiency and scale, and operate without the support of repeated capital infusion to bolster their balance sheets. The government is reported to be mulling creating six large public sector banks of global scale, also with an aim to help the smaller banks with weaker balance sheets get support from the larger ones with strong finances.
The development comes close on the heels of State Bank of India’s move to merge its five associate banks and Bhartiya Mahila Bank with itself effective April 1. The merger will further expand the size of State Bank of India, which, with over 500 million customers now, would be counted among the top 50 banks in the world. The merged entity now has a deposit base of more than Rs 26 lakh crore and advances level of Rs 18.50 lakh crore.
Earlier last month, TV news channels ET Now and CNBC TV18 reported citing unidentified sources that the Union Cabinet has given an in-principle approval for alternative mechanism for PSU banks merger. The reports also said then that the public sector banks’ boards will themselves decide the final contours of the proposed amalgamation, and will then seek approval from the GoM (Group of Ministers).
Given that India’s PSU banks are reeling under the burden of massive stressed assets, it has now become imperative for the government to shore up these lenders finances and strengthen their balance sheets. The central government and the Reserve Bank of India are already working on a recapitalisation plan for public sectors banks. The proposed consolidation is also partly being seen in that direction.