Big bank merger: remedy worse than the malady

The union cabinet has given its approval to the proposed merger of Vijaya Bank (VB) and Dena Bank (DB) with the Bank of Baroda (BoB). The merger process is to be completed by April 1, 2019. Once amalgamated, the ‘big bank’ will be the second largest public sector bank (PSB) after the State Bank of India (SBI) and the third largest (Rs 10.44 lakh crore) in terms of assets after SBI (Rs 34.86 lakh crore) and the private HDFC Bank (Rs 11.7 lakh crore).

The cabinet approval follows the government’s announcement and commitment in September last year with respect to the said merger, which is a significant action from the banking sector ‘reforms’ standpoint. All three entities being PSBs with ‘shares’ held by the public, government, Foreign Institutional Investors (FIIs) and Financial Institutions (FIs), the ‘share swap ratio’ has been freezed.

Since the merger process is amongst the good (BoB), better (VB) and the ugly (DB), the shareholders of VB and DB will get 402 and 110 equity shares respectively for every 1,000 shares of BoB they hold. This would translate, based on Thursday’s closing of the Sensex, one share of BoB for every 9.1 shares of DB and 2.5 shares of VB. Most hurt will be the shareholders of DB, who will lose almost Rs 5 per share on account of the merger; VB shareholders may lose Rs 3 per share.

In the whole ‘circus’, DB gets rescued as it is the worst performing PSB. The bank is already under the prompt corrective action (PCA) — restrained from lending loans and recruitment by the RBI on account of high level of NPAs and negative return on assets (RoA).

The NPA levels of DB are the highest in the banking sector. Its gross NPA was almost 24% and it has incurred a loss of Rs 1,138 crore as of September 2018. The net NPA was at 11.7% as against a healthier 3.8% of VB and 4.9% of BoB. In the whole process, 13,440 staff of DB get a fresh lease of life from the merger.

The amalgamation proposal, as per the ‘alternative mechanism’ under Finance Minister Arun Jaitley with the two other members being Nirmala Sitharaman and Piyush Goyal, has grandiose aspirations that the new merged entity will lead to economies of scale, huge customer base, 9,489 branches, 87,675 staff, and make it a strong globally competitive bank with a bouquet of attractive loan and cost-effective deposit products and services.

However, the aspirations will only lead to perspiration, frustration, suffocation and may not lead to the realisation of the envisaged goals for the following reasons:

• The merged bank will end up with gross NPA of Rs 78,819 crore -- 13% of the total loan advances. The ‘cancer’ of bad loans will spread to the good bank also, thus making resolution and recoveries tough – a self-inflicted pain that will be a drag on the performance of the merged entity.

• IT integration of the merged entity will be a big challenge and can take more than an year to stabilise.

• Leadership issues will be critical as there is uncertainty in the continuation of MD & CEO of BoB P S Jayakumar after the merger. His extended tenure ends in October 2019. The fate of MDs and CEOs and other senior executives of VB and DB is in suspended animation.

• The shareholders of both DB and VB will be the worst losers.

• Though the government and the respective boards of the three banks have assured that there will be no ‘service issues’ for the staff, it is only wishful thinking and on paper. Mergers cause emotional issues, ratios are for analysts. There will be a huge ‘culture shock’ as the ethos and work culture of the three banks are different and staff will be from different backgrounds, age groups and skill sets. Staff morale will be shattered, and frustration will radiate into customer service — all for bailing out one bad bank, Dena Bank.

• BoB, in its new ‘avatar’, will definitely prune the ‘extra flab’ in staff, and close unviable and multiple branches located in the same area. Many ATMs, too, will be closed.

• Once the merger process gathers full steam, the focus on recoveries, NPA redressal, SARFAESI, court actions and business development will take a back seat.

• The focus will be on procedural and administrative issues of merger and not on core aspects of banking -- putting the cart before the horse.

• Staff will also adopt ‘wait and watch’ approach as they will be more worried about their future prospects, job security, allocation of work in the new entity, possible ‘punishment transfers’ to force resignations or opt for voluntary retirement scheme (VRS).

• Recovery of bad loans will be ‘nobody’s baby since there will be no accountability in the transition period of the merger process. All the three banks will suffer, leading to “consolidated bleeding” of the big bank’s balance sheet.

• All India Bank Employees’ Association (AIBEA) has also opposed the merger, as there will be no tangible benefits to any of the stakeholders.

Former RBI governor Raghuram Rajan had expressed concern on mergers of weak banks with strong ones when he said that “if we merge an unhealthy bank with a large healthy bank, it might cause problems for the large healthy bank at the time of consolidation”.

Similar sentiments were expressed by former deputy governor of RBI S S Mundra, who said that “just to merge because some bank is a weak bank and another is a strong bank…rather than supporting the weak bank, you may end up making the strong bank a weak bank”.

In sum, the merger decision is a regressive step, a remedy worse than the malady.

(The writer is a Bengaluru-based banker)