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The government of India is planning a mega-merger of four state-run banks, including Bank of Baroda, IDBI Bank Ltd, Oriental Bank of Commerce, and Central Bank of India.
The idea of bank mergers has been around since 1991 when former RBI governor ShriM. Narasimham recommended that the government merge banks into a three-tiered structure. Over the last year, the government has been indicating consolidation in the banking sector by reducing the number of banks by merging or closing down some of the loss-making smaller public sector banks.
In March last year, PTI (Press Trust of India) reported that the government wants to create 4-5 global sized lenders. Is this the second move by the Government in this direction?
The government has merged five associate banks and Bharatiya Mahila Bank with State Bank of India on April 1, 2017, to constitute the country’s largest lender which is among the top 50 banks in the world. The five associate banks included State Bank of Bikaner & Jaipur (SBBJ), State Bank of Hyderabad (SBH), State Bank of Travancore (SBT), State Bank of Patiala (SBP), and State Bank of Mysore (SBM).
If everything goes as per the plan, the merged entity will become the second-largest bank in the country after the State Bank of India with combined assets of ₹16.58 trillion.
The proposal of the merger was put in front of a three-member ministerial panel on PSU bank consolidation led by Finance Minister ShriArun Jaitley.This ministerial panel is referred to as Alternative Mechanism (AM). The other members of the panel are Railway and Coal Minister Shri Piyush Goyal and Defence Minister Shrimati Nirmala Sitharaman. The final schemes formulated will be approved by the central government and laid in both the Houses of Parliament.
After the merger buzz, Bank of Baroda was the worst hit followed by the stock of IDBI Bank. Bank of Baroda share price tumbled 4.48% to a day’s bottom of ₹131.25 while IDBI Bank share price shed 2.27% to a day’s low of ₹.62.45 on BSE. Shares of the Oriental Bank of Commerce fell 1.4% to ₹.77.25 whereas the stock of Central bank of India turned green after hitting a day’s low of ₹72.9 down by 0.14%.
The prime reason for creating large banks is to address the toxic loan issue. Over the past three years, banks have seen a large chunk of their loan books turning sour while demand for fresh loans has remained low. As a result, the share of bad loans as a percentage of total loans has been rising. The consolidation of struggling state-run banks which have a market share of about 70% and account for over 80% of bad loans in the Indian banking system aims to scale and strengthen their risk-taking ability.
The four banks that are being proposed to be merged are under pressure with combined losses of ₹21,646.38 crore. The merger will also allow the weak banks to sell assets, reduce overheads, and shut money-losing branches.
The Department of financial services, under the Finance Ministry, is also simultaneously considering a 51% stake sale in IDBI Bank to a strategic partner for ₹9,000-10,000 crore. IDBI Bank told the exchanges in a regulatory filing that a special resolution will be passed for increasing the bank’s authorized capital from the existing ₹4,500 crore to ₹8,000 crore.The increase in the authorized capital could facilitate the sale of 51% stake or more in the form of a preferential issue to investors.
The end result of the merger will be similar to that of the SBI mega-merger and will ultimately help to tackle the catastrophic problem of Non-Performing Assets.