India eyes merger of 3 state banks to create country's third largest lender

Vijaya Bank, Dena Bank and Bank of Baroda will be consolidated.

India’s Finance Ministry has announced the merger of three state-ran banks as part of its dedicated effort to bring the debt-ridden sector back on its feet.

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Vijaya Bank, Dena Bank and Bank of Baroda (BOB) will be consolidated into an entity that will be the country’s third largest lender with a market share of around 6.8% by loans, according to a panel headed by Finance Minister Arun Jaitley.

The motivation behind the banks chosen for the merger was to put up one weak bank for consolidation, in this case Dena Bank, and merge it with two stronger lenders, Jaitley was quoted in Nikkei Asian Review.

"BOB and Vijaya have relatively better credit metrics than Dena in terms of asset quality, capitalisation and profitability," Alka Anbarasu, vice president, financial institutions group at Moody’s Investors Service said in a statement. "Nevertheless, we expect the merged entity will require capital support from the government, otherwise such a merger would not improve their capitalization profile."

India’s debt-ridden banking sector has long sparked calls for consolidation and privatisation after a staggering bad loan burden highlighted systemic flaws in banking structure, with government lenders holding an estimated 91% of the banking sector’s nonperforming loans.

“Mergers amongst the PSBs would be credit positive for them because they would give scale efficiencies to the remaining enlarged banks. They would also help improve corporate governance,” credit rating agency Moody’s said in an earlier report.

Also read: Bad loans bog down Indian state banks with $1.4b loss in Q4

There are a total of 21 public sector banks in India that hold around two-thirds of the country’s banking assets. However, the task of overseeing the bloated branch network has proven too wieldy for the government who has been unable to pay sufficient attention to other key issues.

Outgoing chief economic adviser (CEA) Arvind Subramanian earlier said that India should trim its banking network to three to five public sector banks.  "I think there should be more private sector banks and probably fewer banks. A healthy system is where we have three to five public sector banks, three to four private sector banks and one or two foreign banks," he added.

State lenders have also been working to reduce the number of their foreign branches with the goal of shutting down a third or around 70 of its overseas footholds by end-2018 with State Bank of India, Punjab National Bank, Indian Overseas Bank, IDBI Bank and Bank of India leading the downsizing initaitive.