The idea of creating big Indian banks with large national and global footprint was first considered by the Atal Bihari Vajpayee government over 15 years back. Then finance ministers Yashwant Sinha and later Jaswant Singh were amenable to the mergers and acquisitions in the banking sector to take on global banks. Some groundwork for creating a mega Indian bank was done during UPA-I under then prime minister Manmohan Singh. If North Block hawks are to be believed, the proposal never took off due to opposition from the left-of-centre political parties in the UPA coalition. In fact, these parties argued for nationalising banks on the lines that Indira Gandhi did in 1969 when 14 commercial banks were nationalised.
The rationale Indira Gandhi offered to take over private banks was that they were unreliable and too many had failed under private management during the first two decades of India’s independence. Today, the Narendra Modi government has kicked off another debate post-announcement on the merger of Bank of Baroda, Dena Bank and Vijaya Bank. This merger announcement has come in the wake of a build up in non-performing assets of state-run banks. Will this merger work and to whose advantage?
The joy associated with creating the third largest bank after State Bank of India (SBI) and HDFC Bank will last when we know how to deal with these non-performing assets. Arguments in favour and against apart, if merger were to work, the Centre will have to re-capitalise the new entity adequately. This can be done in phases with a firm announcement in the next Union budget.
Bank of Baroda, Vijaya Bank and Dena Bank merger has the potential to trigger a big churn in the banking industry. The merger has to work to the advantage of depositors, shareholders and other stakeholders in the three banks. And also bank employees. The All India Bank Employees’ Association has described the merger move as “unwarranted”. It has also said, “there is no evidence that merger of lenders would strengthen the banks or make it more efficient. We have seen the example of five associate banks merging with SBI. No miracle has happened. On the other hand, it has resulted in closure of branches, increase in bad loans, reduction of staff, reduction in business.” These are surely concerns that need to be addressed.
Finance minister Arun Jaitley has clearly stated none from these banks will lose jobs post-merger. That has to be shown on the ground and over time. In the whole process, Dena Bank, that is the weakest, is expected to derive advantage from relatively stronger Bank of Baroda and Vijaya Bank’s balance she
ets. Crumbling Dena Bank, with a big presence in Gujarat, seems to have got a lifeline.
As a logical extension of the merger moves, the Modi regime may consider diluting its stake below 51 per cent in state-run banks. A pilot project may be undertaken in this regard. Reforms need not be restricted to just state-run banks. In fact, such mergers and acquisitions can be attempted even in the cooperative banking sector where the volumes business would offer distinct advantages.