Merger of BoB, Vijaya, Dena Bank to improve efficiency, governance: Moody’s

Dena Bank, Vijaya Bank and Bank of Baroda to be merged to form India's third largest bank

Bank of Baroda shares fell over 11 per cent after earlier losing as much as 11 per cent in Tuesday's trade after the government announced its merger with smaller peers Dena Bank and Vijaya Bank, both of which gained. 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 a year ago to consider consolidation of the Indian Banking Sector.

Reacting on the proposal of merger, the FM said that the government had announced in the Union Budget that consolidation of banks will be on the agenda of the government.

Banking sector reforms are a major plank of Prime Minister Narendra Modi's administration to revive credit growth, which has slowed to multi-decade lows as banks struggle with bad loans. Many in the market believe that the stressed lender could be merged with banks in the South. India's decision to merge the three banks will first need to be approved by the board of directors of Bank of Baroda, Dena and Vijaya.

Bank of Baroda shares saw their steepest fall in over three years, according to a report by news agency Reuters.

Notably, this would be the second big merger in the banking sector after the merger of SBI associate banks with the SBI.

"No employee would face adverse service conditions due to the merger", he added.

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He said the NPA curve was now taking a turn and the time was opportune to go ahead with consolidation of banks. "After the government in principle makes this opinion, it suggests to the banks to consider it and we await the bank's consideration of it", he said.

However, FM did not talk about the name of the new entity and said that it will be revealed later. BoB shares declined 10% to Rs 122 while Vijaya Bank's stock rose 3.3% and Dena Bank surged 20% to Rs 19.10.

Since the government is a majority owner in all three banks, it seems more likely than not that the merger will be approved. As a result, the share of bad loans as a percentage to total loans has been rising. "Banks should be made strong and it will depend on process", he said.

Allahabad Bank reported Rs 4,674 crore net loss for FY18 with the ratio of gross non-performing assets being at 15.96%.

The Minister added that this indiscriminate lending of nature "as if there was no tomorrow" took a toll on the economy, which was followed by evergreening of loans and brushing the NPAs under the carpet.

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