Govt likely to adopt Bank of Baroda-like model of merger for PSBs

The National Democratic Alliance (NDA) government, led by Prime Minister Narendra Modi, in its second stint may not go for a mega merger of public sector banks (PSBs) — a plan which was mooted during recent deliberations on consolidation.

Instead, the government may likely adopt the Bank of Baroda (BoB)-like model to merge two-three banks, people aware of the development said.

Sources said that earlier this month the Reserve Bank of India (RBI) Deputy Governor M K Jain had met Financial Services Secretary Rajiv Kumar and other finance ministry officials in Delhi to discuss the PSB merger plan informally. This was followed by another round of meetings between the officials and the RBI.

The central government has to consult the RBI before formulating a plan for PSB merger, according to the Banking Companies (Acquisition and Transfer of Undertakings) Acts of 1970 and 1980. During the meetings, various combinations for merger of PSBs were discussed, sources said. One of the proposals was to go for a mega merger by way of consolidation of eight to nine banks into two.

“However, the plan was dropped. We can expect at least two sets of mergers this fiscal year on the lines of BoB-like consolidation,” another person said.

Before announcing the three-way merger of BoB, Dena Bank, and Vijaya Bank in September last year, the government had sought the views of the RBI on possible combinations of PSBs “to achieve scale and synergy.” 

“The more the number of banks to be merged, the more difficult the integration process becomes and you lose sight of what happens where. A three-way merger is manageable as consensus building becomes easier,” Ashvin Parekh, managing partner at Ashvin Parekh Advisory, said. He, however, said that the merger has to be well-thought-out and the objectives should be “measurable and evolved.”

The government is working out various combinations for the merger of PSBs and Punjab National Bank (PNB) may be the first candidate which may subsume some other banks. One of the combinations discussed was the merger of Union Bank of India and Bank of India with PNB.

 For the first time, under the Modi government’s tenure, two mergers took place — One, five associate banks and Bharatiya Mahila Bank merged with State Bank of India, and two, Dena Bank, Vijaya Bank merged with BoB.

“India needs fewer, mega banks which are strong, because in every sense, from borrowing rates to optimum utilisation, the economies of scale as far as banking sector are concerned are of great help,” former finance minister Arun Jaitley had said earlier this year.

Source- PSU Bankers

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Punjab National Bank (PNB) likely to takeover two or three PSU banks

Punjab National Bank (PNB) is likely to takeover two to three smaller state-run banks -- Oriental Bank of Commerce (OBC), Andhra Bank and Allahabad Bank -- in the next three months, reports Reuters.

The government has been striving to revive the health of public sector banks. In February, it announced a recapitalisation tranche of Rs 48,239 crore for as many as 12 public sector banks in a bid to take them out of Reserve Bank of India’s (RBI) Prompt Corrective Action (PCA) framework. Their lending ability was constrained by RBI when they were put under this framework.

The 12 banks are Allahabad Bank, Corporation Bank of India, Bank of India, Bank of Maharashtra, Punjab National Bank, Union Bank of India, Andhra Bank, Syndicate Bank, Central Bank of India, United Bank of India, UCO Bank and Indian Overseas Bank.

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These Smaller banks to be merged with PNB & Canara bank in next round of consolidation

The consolidation of public sector banks is expected to get fresh impetus as a few mid-sized and small state-run lenders are being considered for mergers with Punjab National Bank (PNB) and Canara Bank, two senior finance ministry officials told.

The mid-sized lenders that have been identified for merger include Allahabad Bank, Andhra Bank, Bank of Maharashtra, Central Bank of India, Indian Overseas Bank, UCO Bank, United Bank of India and Union Bank of India, said one of the officials who didn’t wish to be named.

PNB and Canara Bank will separately lead the merger process with these banks, said the official.

With the Bank of Baroda merger with Vijaya Bank and Dena Bank already underway, the next phase of PSB consolidation is expected to begin early next year, said the second official who also spoke on condition of anonymity.

“The merger process of Bank of Baroda, Vijaya Bank and Dena Bank is going ahead smoothly and is expected to take another year to complete. The second phase of merger will be launched soon, irrespective of which party comes to power,” said the second official.

The official added that the next phase of merger could be taken up simultaneously and in a more aggressive manner.

However, the country’s largest lender State Bank of India, which has already taken its associate banks and Bharatiya Mahila Bank within its fold, is unlikely to be touched in the near future.

PNB’s merger efforts

Last year, Punjab National Bank was in talks with other government banks, with a strong presence in south India, for a possible merger.

However, it aborted the idea with its non-performing assets (NPA) rising to 18 per cent. Besides, the bank hit by the Nirav Modi scandal last year also ran into huge losses. Its NPA level is now down to about 16 per cent.

“It was deferred due to these pressing issues but now that bank has considerably recovered and the acquisition plan will be looked into,” said the first ministry official.

PNB was also in talks with Vijaya Bank for a possible merger.

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Round 2 of PSB merger: PNB, Union bank and BoI may get a call

The government is soon likely to invite select lenders for discussion on a second round of merger in public sector banks, according to a finance ministry official.

The lenders to be called may include Punjab National Bank (PNB), Union Bank of India and Bank of India (BoI).

We wouldn’t like to wait for too long,” said the official, indicating that some merger activity is on the cards around second or third quarter of the current fiscal year. “If the banks are not able to give options then the alternate mechanism (AM) group can make suggestions.”

In October 2018, the government had proposed the merger of three banks — Bank of Baroda, Vijaya Bank and Dena Bank — to create the country’s third-biggest lender through alternate mechanism. Both Vijaya and Dena were amalgamated with BoB on April 1, 2019.

“It need not be a tripartite merger again. We will be looking at various combinations. It has to be organic, besides we will like some of these large banks to further consolidate their balance sheets in the first two quarters,” the official said

Another government official, however, argued that it was not the opportune time for merger in state-run banks. “Bank of India has just come out of the Reserve Bank of India PCA (prompt corrective action) framework.

Union Bank of India and Punjab National Bank are also in early recovery stage,” he said.

In February 2019, the Reserve Bank of India had pulled out Bank of India, Oriental Bank of Commerce and Bank of Maharashtra from its PCA framework, which imposes certain lending restrictions on financially weak banks.

A senior executive with a PSU bank said smaller banks have begun consolidating their operations in the same geography by closing overlapping branches and focusing on niche areas.

“Merger is not the antidote for every banking woe. The government should not force mergers only to create toobig-to-fail structures,” he said.

In an interaction with ET last week, Punjab National Bank managing director and chief executive Sunil Mehta had said that his bank has now made a turnaround and can consider offers for acquiring other lenders. “It all depends on the offers,” he said.

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Bank of Baroda’s ‘one-sided’ contract riles Dena Bank, Vijaya Bank staff

With the merger of Dena Bank and Vijaya Bank with Bank of Baroda (BoB) coming into effect from April 1, the BoB management is reportedly forcing staff of the other two banks to sign an allegedly “one-sided” and “discriminatory” contract before March 16. Even as final negotiations regarding the wages are on, Dena Bank and Vijaya Bank employees have received a letter from BoB, asking them to sign the offer of employment or to opt for the Voluntary Retirement Scheme (VRS).

While the letter asked employees of both the banks to exercise either of the options before March 16, it did not specify the terms and conditions of employment. This would be decided later by the Board of Bank of Baroda, according to the letter. “You are hereby offered to hold office and service in Bank of Baroda, from the effective date i.e., April 1, 2019, on the terms and conditions as may be decided by the Board of Directors of Bank of Baroda,” said the offer letter, a copy of which is accessed by this publication.

The staff of both Dena Bank and Vijaya Bank called this “discriminatory”. “We were told that our interests will be protected, but the BoB is using indirect methods to force VRS on us. We cannot be forced into signing the consent letter without knowing the terms and conditions. As per the initial negotiation, our wages and promotional terms and conditions will not be at par with (that of) Bank of Baroda (staff), which is discriminatory,” a Vijaya Bank employee said told this paper. 

The employees are also bothered by the transfer policy. “There are many branches of Dena Bank and Bank of Baroda, which are overlapping. While the amalgamation process is still on, the staff fears mass transfer of Dena Bank employees. So, this is like blackmailing us into either working on unsaid terms and conditions or taking VRS,” said a Dena Bank employee.

Meanwhile, the banks’ union has already termed the whole process illegal. “The whole process of amalgamation is illegal, unethical and done in a hasty manner. There was no need for opting for Alternative Mechanism. And while the petition is already in the Supreme Court, they are forcing this contract on employees, just to show that employees are agreeing to the merger,” S Nagarajan, general secretary, All India Bank Officers’ Association said.

The All India Vijaya Bank Officers’ Union has said that the manner in which the merger is done is highly questionable. “This is totally pressure tactics and a highly questionable move. While those who are about to retire may opt for VRS, many young employees will go ahead and sign it to save their future jobs,” said K Srinivasarao, general secretary, All India Vijaya Bank Officers’ Union. The queries sent to Bank of Baroda by this correspondent remained unanswered.

A case in point

When merger of SBI came into effect, 4,000 employees at SBI and associates opted for VRS Till date, there is a difference in pay, perks and promotion policy that associate banks’ employees feel they are getting a step-motherly treatment, even in HR policy In July last year, 70,000 officers of the associate banks were asked to “return the compensation for extra work” during demonetisation

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Arun Jaitely says about Merger of Banks

Finance Minister Arun Jaitley on Monday said India needs fewer and mega banks to achieve economies of scale in the sector.

After the amalgamation of five associates and Bharatiya Mahila Bank with SBI in 2017, the government earlier this year approved the merger of Dena Bank and Vijaya Bank with Bank of Baroda.

“With the experience in the past really has been of SBI merger, now it is second one which is taking place,” Jaitley said after the customary post-budget address to the RBI board.

“India needs fewer and mega banks which are strong because in every sense, from borrowing rates to optimum utilisation, the economies of scale as far as banking sector is concerned are of great help,” he said. 

The Union Cabinet last month approved the merger of the three banks to create the country’s third-largest lender after SBI and ICICI Bank.

The amalgamation, the first-ever three-way consolidation of banks in India, would be effective from April 1, 2019.

After the merger, the number of public sector banks will come down to 18. In September 2018, the Alternative Mechanism, headed by Jaitley, gave in-principle approval for the merger of the three banks to create a global-sized lender.

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Modi govt may merge these three PSBs to create giant PSU lender

The government is weighing the possibility of the next phase of consolidation in the public sector banking space by amalgamating three lenders —Punjab National Bank (PNB), Oriental Bank of Commerce (OBC) and Punjab & Sind Bank (P&SB), sources told FE.

“An inter-ministerial group (called Alternative Mechanism) under Union minister Arun Jaitley will take a final call on this plan. The (merger) option is on the table but whether the government is going to bite the bullet ahead of polls and announce amalgamation or choose to wait is yet to be seen,” said one of the sources.

While the headquarters of PNB and Punjab & Sind Bank are in Delhi that of OBC is in Gurugram (Haryana).,

The amalgamation, if approved, will be a part of the government’s efforts to create a few but strong banks with much larger balance sheets to support the rising appetite for credit of the fast-growing economy and enable optimum utilisation of resources. Upon amalgamation, the merged entity will have a combined business of over Rs16.5 lakh crore, deposits of Rs9.6 lakh crore and advances of close to Rs7 lakh crore, said the sources.

It will pip Bank of Baroda (into which Vijaya Bank and Dena Bank have recently merged) to become the second biggest public sector bank.

The net NPA ratio of PNB and OBC stood at 8.22% and 7.15%, respectively, as of December quarter, having improved from 11.24% and 10.48% at the end of March 2018.

PNB surprised analysts by recording a 7% rise in net profit in the three months through December 2018 following losses in three previous quarters. The Reserve Bank of India (RBI) last week lifted various restrictions on OBC, which had been under the prompt corrective action (PCA) framework since October 2017. Although Punjab and Sind Bank has witnessed losses in the first two quarters of this fiscal, on top of the losses in the last fiscal, it hasn’t made into the central bank’s watch list and its net non-performing asset (NPA) ratio of 5.25% is relatively decent.

The successful experience of merging State Bank of India with five of its subsidiaries and Bharatiya Mahila Bank, and the amalgamation of Bank of Baroda, Vijaya Bank and Dena Bank have given the government confidence that another round of consolidation can be handled without hiccups. However, given that PNB, OBC and Punjab & Sind Bank, while witnessing an improvement in their finances are not out of the woods yet, the government may choose to wait until their recovery takes roots, said another source.

Presenting the Interim Budget 2019-20, finance minister Piyush Goyal said: “Amalgamation of banks has also been done to reap the benefits of economies of scale, improved access to capital and to cover a larger geographical spread.”

Source - The Financial Express

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Merger Of Dena Bank and Vijaya Bank With Bank of Baroda Challenged In Court

The proposed amalgamation of Bank of Baroda, Vijaya Bank and Dena Bank has seen a legal challenge with the Delhi High Court agreeing to hear a petition challenging the move, days after it was approved by the union cabinet.

The petition filed by the All India Bank Officers’ Confederation and the All India Vijaya Bank Officers’ Association has questioned the decision-making process behind the merger, calling it a “blatant circumvention and disregard for statutory procedures”. The petitioners argued that the step was taken under the direction of the government, accusing it of abuse of power as the majority shareholder.

While the law says that the scheme for amalgamation must be drawn by the government in consultations with the RBI, in this particular case it was sent to the board of the banks, the petitioners said. They claimed the decision taken by the boards of state-run banks is invalid due to the absence of directors on behalf of the employees, which is mandatory under the law.

The petitioners alleged there was lack of effective consultation with the RBI even as the government “repeatedly attempted to inaccurately describe” the events leading up to the decision of amalgamation. The decision to amalgamate, according to petitioners, was not a voluntary or an autonomous decision.

The union cabinet on Jan. 2, 2019 gave its approval for the merger. Addressing the media, Law Minister Ravi Shankar Prasad had said the merger will result in more lending powers to the merged entity, giving it a globally competitive identity.

The petitioners, however, questioned the economic reasoning behind the merger, calling it an irrational exercise by not considering the interests of various stakeholders such as the shareholders, employees and customers.

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What will happen to Employees, Bank Branches after merger of BoB,Dena and Vijaya Bank

The announcement of the merger of Bank of Baroda, Vijaya Bank, and Dena Bank has sent the fear of job loss to all the employees of the three banks. The shareholders were also confused. Recently, the banks have finalised their share-swap ratio. However, the employees have been protesting against the move. Minister of State for Finance Shiv Pratap Shukla in Rajya Sabha on Tuesday clarified about the rationalisation of staff and branches after the merger of the banks. In a written reply in the Upper House, Shukla stated that the government had approved a framework for proposals to amalgamate PSBs through an Alternative Mechanism (AM) with a view to facilitate consolidation among public sector banks to create strong and competitive banks.

After obtaining RBI inputs, the government has notified the scheme of amalgamation for Bank of Baroda, Vijaya Bank and Dena Bank. Shukla said that not even a single employee of any of the three banks will lose job.

"The scheme of amalgamation protects employee interests by providing that every serving employee of the amalgamating banks shall be an employee of the amalgamated bank and shall continue to work in accordance with Board-approved terms and conditions of service, and that the Board of the amalgamated bank shall ensure that the interests of all employees of the amalgamating banks are protected," said the minister.

Explaining the banks' turnaround plans, the minister said that out of the three aforesaid banks, turnaround plans were approved by the Board of Dena Bank in the second quarter of financial year 2017-18. 

The Banking Companies (Acquisition and Transfer of Undertakings) Acts of 1970 and 1980 empowers the Central Government, in consultation with the Reserve Bank of India (RBI), to make a scheme, inter alia, for the amalgamation of any nationalised bank with any other nationalised bank or any other banking institution. 

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No one will lose job after Bank of Baroda merger: Arun Jaitley

Finance minister Arun Jaitley on Friday said in Lok Sabha that there would be no loss of jobs due to merger of public sector banks. Earlier this week, the Cabinet approved merger of Vijaya Bank and Dena Bank with Bank of Baroda. Jaitley said that there would be no job losses due to merger of the banks and that the move would create a bigger entity like the State Bank of India (SBI).

The cost of lending could also become cheaper, he added. During the Question Hour, the minister said that out of the 21 public sector banks, 11 are under PAC (Prompt Corrective Action) framework. PAC is initiated against banks that have high levels of non-performing assets (NPAs).

Replying to a supplementary question, Jaitley said the curve of non-performing assets would go down and that the Insolvency and Bankruptcy Code has helped in bringing back around Rs 3 lakh crore into the system.

Jaitley said that the State Bank of India (SBI) and other public sector banks have been making operational profits. They incurred losses due to provisioning for non-performing assets, he added.

With regard to recapitalisation of Public Sector Banks (PSBs), the minister said that Rs 51,533 crore has been infused into them in the current financial year till December 31.

“In the budget estimates of FY 2018-19, Rs 65,000 crore has been allocated for recapitalisation of PSBs and an amount of Rs 51,533 crore has been infused in PSBs till December 31, 2018,” he said.

The minister also said that in recent past, Rs 90,000 crore was allocated in the Union Budget and infused in various PSBs by the government during financial year 2017-18.

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Cabinet approves amalgamation of Dena Bank, Vijaya Bank with BoB

The Union Cabinet on Wednesday approved the first-ever three-way merger in the history of Indian banking with the amalgamation of state-owned Vijaya Bank, Dena Bank and Bank of Baroda (BoB). 

"There will be no impact on the service conditions of the employees and there will be no retrenchment following the merger," Union law minister Ravi Shankar Prasad said. 

BoB also finalised the share swap ratio for merger of Vijaya Bank and Dena Bank with itself. 

As per the scheme of amalgamation, shareholders of Vijaya Bank will get 402 equity shares of BoB for every 1,000 shares held.

In case of Dena Bank, its shareholders will get 110 shares for every 1,000 shares of BoB.

The government in September last year had announced merger of Vijaya Bank and Dena Bank, with larger peer BoB. The merged bank will become the country's second largest public sector bank (after SBI) and will "help create a strong globally competitive bank", the government said in a statement.

The merger will come into force on April 1, the statement added.

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What you expect as an Employee, A/c holder, Borrower if your bank goes for a merger

While “mergers and acquisitions”are fairly commonplace in the corporate world, they rarely impact you on a daily basis. But what if your bank  undergoes a merger? The customers of Dena Bank, Vijaya Bank and Bank of Baroda are finding that out for themselves. On 10 September 2018, the government proposed to merge the three state-own banks. The merged entity will be India’s third-largest lender and the second-largest in terms of deposits. According to P.S. Jayakumar, chief executive officer of Bank of Baroda, the merger will take four to six months to complete. 

The banks’ merger is not the first. In 2016, the government decided to merge State Bank of India (SBI) with its five associate banks and Bharatiya Mahila Bank. As a result of the consolidation, there was a significant rise in SBI’s bad loans portfolio, which impacted the bank’s profits.

Bank mergers, however, may not be a bad thing for customers. “Bank mergers have become commonplace today. With institutions like banks falling in the ‘too big to fail’ category, one way to look at this is that your money is safer with a larger bank than a smaller one,” said Nikhil Kamath, co- founder, Zerodha.

Here’s what to expect if your bank is next in line for a major consolidation.

For account holders

Account holders are, perhaps, the ones who witness the most changes due to the merger of banks. Although you will remain an account holder in the merged entity, you will be issued new cheque books and debit or credit cards. “Your account number and customer IDs, as well as the associated IFSC codes may change,” said Adhil Shetty, chief executive officer, BankBazaar.

As a result, you will have to update IFSC and other details with the income tax department, insurance providers and for your mutual fund investments. You will need to give fresh mandates for your SIPs and EMIs, and will have to give fresh standing instructions for automated bill payments etc. all over again. 

If you have fixed deposits, the name of your bank might change but there’s no need to worry about interest rate changing. “Fixed deposits are contracts, and it is not possible for banks to change the rate mid-way. If you are locked into a fixed deposit, you can continue till maturity on the same interest rate even if the deposit rates of the merged entity are higher or lower,” said Shetty. However, the rate of interest you receive on your savings bank account might change. 

There might also be branch closures. Dena Bank is already in the process of selling the properties housing its branches. The merged entity will only retain one of the head offices of the three banks, doing away with all regional offices and transferring the employees.

A more immediate impact of the proposed merger is the inconvenience caused to customers owing to bank employees going on strike. Bank unions have called for a nationwide strike on 26 December to protest the merger, because it will result in employees being transferred or made redundant. 

For borrowers

If you have taken a loan from a bank that is on its way to a merger, you don’t need to worry about your interest rates shooting up. Like fixed deposits, loans qualify as contracts, so your interest rate will remain unchanged. “In case of MCLR-based loans, the interest would be reset at the end of the reset period selected by the borrower. If the loan is on base rate, the customers will get the option of switching to MCLR after the merger. Otherwise they will be reset to the base rate decided upon by the merged entity,” said Shetty. Your loan will simply be transferred to the merged entity and you will continue to pay EMIs as usual. 

However, at the end of the fixed rate tenure, your interest rate might be hiked, according to the rates fixed by the merged entity. In such a scenario, you could consider transferring your loan to a different lender. But keep in mind that doing so comes with its own expenses. For instance, if you want to port your home loan, the new lender might charge valuation fees, processing fees, etc. So, do your calculations beforehand, and if the refinanced loan counterbalances the extra charges, make the switch.

For shareholders

While technically shareholders don’t have to worry much when it comes to a merger, they also might not have much of a say. Although mergers need clearance from shareholders, in the case of the SBI merger, for instance, minority shareholders were unable to object, even if they wished to. To object, one needed to own at least 1% of the share capital in one of the banks or have the support of 100 shareholders. Needless to say, there were no objections.

But shareholders don’t stand to lose much if the merger does happen. “Technically there should be no impact on the share value. However, there can be a brief or extended period of loss in valuation,” said Rahul Jain, head, personal wealth advisory, Edelweiss. Indeed, following the announcement on 10 September, shares of Bank of Baroda plunged 13%. However, those of Dena Bank jumped 20% and Vijaya Bank gained 6%. “Experience suggests that smaller entities generally get a better value out of merger,” said Jain. 

The transition process itself should be fairly smooth for shareholders.

“The Indian equity markets have evolved tremendously and protect retail investors in multiple ways. Whenever such corporate actions take place, the onus of fulfilling all the regulatory and legal requirements along with issuance or adjustment of shares lie with the company. On a particular date, an investor receives new shares directly credited into their demat account while the existing shares are debited,” said Jain.

While it can be a confusing process, if handled well by the entities involved, a bank merger should not be too difficult for customers to navigate. Be prepared for small changes and trust your bank to communicate them to you when the time comes.

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The challenges behind BoB, Vijaya Bank & Dena Bank merger

When an experiment begins, the scientist hardly knows what the outcome will be. In a moment of adventure or necessity, the government put three men — PS Jayakumar, RA Sankara Narayanan and Karnam Sekar — in a boat and set them on sail into uncharted territory. 

These men who head Bank of Baroda, Vijaya Bank and Dena Bank may face many a storm and choppy waters in a journey that could in a few years make them either look like Christopher Columbus who found the new world, or land in no man’s land like Robinson Crusoe. 

When the numbers are put out on an Excel sheet, the easiest way to analytical glory, the merged entity is the second-largest by assets. But life on the integration ground is the opposite of what appears on the Microsoft Excel file. Mergers are probably the most glamorous in the world of business, but history is as much about bitter divorces like Chrysler-Daimler as they are about romantic rides like Procter & Gamble’s with Gillette. 

As with most marriage proposals, there’s optimism about this too. “I look at the merger positively,” says Aditya Puri, chief executive officer of HDFC Bank, the most valuable lender. “I think it will lead to cost, product and technology efficiencies. It is easier to manage.” 

MAMMOTH TASK

The task at hand for the three men is of monstrous proposition. In any merger, the biggest challenge is that of personnel. While in the private sector, the easiest action for the management is to lay off people to derive cost savings, that option does not exist for the three CEOs. There are 90,000 staff whose future has to be protected and concerns addressed.

“There are three top reasons for the failure of any merger, one of them is the way HR gets integrated,” says PS Jayakumar, CEO of Bank of Baroda, the biggest of the three. “We are very conscious of this. But there are some commonalities as well… like interview processes are similar, owner is similar, organisation structure is the same kind, so there are a lot of things that are common as well.” 

There are multiple data centres that handle more than 10 crore customers across three banks that need to converge. For the moment, the three banks operate on three different technology platforms which appear to be easy to integrate but difficult to execute. “Technology integration in theory is easy to achieve but in practice it will require a lot of hard work like just getting a new account code for all customers and communicating that will not be a simple thing,” says Jayakumar. 

“Replacement of cheque books will not be simple. RTGS, NEFT details and net banking interface will take time to change.” The merged entity will have about 9,489 domestic branches which looks like a great leap forward, but of this nearly 10%, or 941, branches are in the same pin code, which needs to be reduced without much staff resentment. 

THE SYNERGIES

One of oddities of Indian banking was a single owner, the government, dominated nearly 80% of the industry which is near monopoly, but the problem was it was spread over 21 different entities that neutralised the advantages, the dominance would have brought it. “Why do you need so many banks with the same parentage competing against each other, killing each other in terms of under cutting etc.?’’ says Ravneet Gill, CEO, Deutsche Bank, India. 

Because of the single owner, the incentive for different entities to compete strongly and innovate did not exist either. Whatever each bank achieved, it was more an enterprise of individuals rather than any institutional vision. While the mixture of personnel with different cultures from Dena, Vijaya and Baroda could cause some friction, the advantages that would flow are many. 

“It will give them more job opportunities so that there is no shortage,” says HDFC Bank’s Puri. “Given the retirement that is coming, there is going to be a shortage of manpower. If you merge these three, then you don’t have to have layoffs and it automatically brings in cost efficiency.” Handling of staff would determine whether they become an asset or a liability, but the existence of so many overlapping branches like BoB’s first Mumbai branch in Horniman Circle, a century old, that sits opposite sprawling Dena’s. 

These could be merged and allocate excess staff to suburbs, probably closer home. In Maharashtra alone, the merged entity’s branch network would rise by 400 to 950. Cost-cutting could be huge. In fact, BoB has already proven by reducing the number of auditors to just about 30 from nearly 1,400. In the merged entity, the procurement of technology, telecommunication could bring down costs. 

“We just need to ensure these synergies get captured,” says Jayakumar. “We have to have a clear plan on how to do it but also some patience. There may be short-term pain but the long-term gains will not take far long to manifest themselves.” State Bank of India’s merger of five associates with itself and ING Vysya’s merger with Kotak Mahindra Bank are recent examples that these three could draw from. 

While the size of integration of SBI associates was mammoth — almost merging ICICI Bank with SBI — the combination of ING Vysya with Kotak shows the challenges. A top Kotak executive involved with the integration then, Mohan Shenoi described the process best. “The merger process, according to me, was like servicing and upgrading an aircraft while it is flying,” Shenoi told ET in an interview last year. “So, we had to ensure that business as usual should go on, not on one side but on both sides.” 

Kotak faced issues of staff integration and had to create a bad bank to dispose off the defaulted loans. It also had to take a knock on pension provisions. 

DIFFERENT STROKES

It is a merger of banks from the same stable, but there are strengths and weaknesses that would play out and complicate as well. “A lot is riding on the success of this merger because a failure will mean that this whole consolidation process will be put on the back burner,” said Gopal Jain, managing partner at private equity fund Gaja Capital, which was one of the earliest backers of RBL Bank. 

Over the past three years, Jayakumar along with former chairman Ravi Venkatesan had initiated a lot of changes, including lateral hire, changes to human resources policies that prioritise merit. Its leadership programme focused on enabling technology absorption along with refurbishment of branches into paperless offices and ending the steel cupboard culture are a welcome relief to both staff and customers. 

“BoB has gone through a transformation,” says Vikramaditya Singh Khichi, executive director at BoB and a former Dena Bank executive. “The systems and procedures have been set to lay out a path going forward. This integration part is now going to move in only the direction BoB is moving.” Vijaya and Dena are small and saddled with bad loans, but they come with strengths too. Vijaya is retail focused and profitable and was the only state-run bank that paid dividends last fiscal. 

Dena though in Prompt Corrective Action with restricted lending, has a portfolio of small and medium enterprises that could be coveted. “Bank of Baroda will remain on course with the strategy set in the last three years… it’s working well and we have to do more to accomplish the goal,” says Jayakumar. “As we get our programmes together, there will be good success- transfer opportunities so that we will end up with an institution that is more than the sum of its parts.” The government’s experiment has just begun. 

Source - Economic Times

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BoB, Dena, Vijaya to decide on organizational structure of merger in next week

Chief executives of Bank of Baroda, Vijaya Bank and Dena Bank will meet next week to discuss a plan to increase the number of organizational layers in the entity resulting from their merger, said a senior banker aware of the talks. This, he said, will be done to accommodate the larger workforce of the merged bank. The three banks put together have 85,675 employees, 9,489 branches and generate a total business of ₹14.8 trillion.

One of the proposals to be discussed is to change the current two-tier structure of Dena Bank and Vijaya Bank to a three-tier structure of Bank of Baroda or even to a four-tier set-up that the State Bank of India (SBI) has, the banker said on condition of anonymity.

The banker explained that while Dena Bank and Vijaya Bank have a two-tier set-up of zonal offices and a head office, Bank of Baroda has regional offices, zonal offices and a head office. SBI has regional offices, zonal offices, local head offices and a corporate centre of its head office—a four-tier structure.

“We are weighing the pros and cons of this structure and while a leaner set-up accelerates decision-making, a more elaborate set-up will help an organization the size of the merged bank,” he said.

The person added that a central steering committee has been formedand it comprises three CEOs and the executive directors of the three banks. Fourteen functional groups have been formed, comprising general managers. Some of the functional groups include human resources, information technology, stressed assets, corporate advances and retail advances.

According to the person cited above, the banks plan to retain only one head office of the three they have currently, but plan to distribute some departments among the three of them. “The merged bank will not be able to retain all the regional offices as well and employees working there will be transferred to other locations. However, at present, there is no plan for a voluntary retirement scheme,” he added.

In September, the government decided to merge three banks it owns—Bank of Baroda, Dena Bank and Vijaya Bank—in a move expected to reduce the amount of capital it needs to pump into these lenders. The merged entity, comprising two relatively stronger banks and a weak one, will be the third-largest lender in India after State Bank of India and HDFC Bank. The bank merger will take 4-6 months to complete, BoB CEO P.S. Jayakumar had said on 17 September.

This is the third major restructuring in the public sector banking space undertaken by this government. The first was the merger of the five associate banks of SBI with itself. The merger had resulted in a sharp jump in the combined entity’s bad loans portfolio, crimping its profit. The associate banks reported a loss of ₹5,792 crore for the March quarter of 2016-17 and ₹10,243 crore for the entire year. This resulted in the consolidated net profit of SBI going down to a ₹241 crore when the stand-alone net profit was ₹10,484 crore.

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