Bank of Baroda, Vijaya stocks end in red, Dena Bank up 20%

Bank of Baroda, Vijaya stocks end in red, Dena Bank up 20%

The newly merged entity would be the third largest bank of the country, said Financial Services Secretary Rajiv Kumar. In the previous such mega merger, five associate banks and the Bharatiya Mahila Bank became part of the state-run State Bank of India on April 1, 2017, making the country's largest lender among the world's top 50 banks. "No employee will face any service conditions which are adverse in nature".

Banking sector reforms are a major plank of Prime Minister Narendra Modi's administration to revive credit growth, which has slowed to multi-decade lows as banks struggle with bad loans.

Now what?The respective boards of each bank will now vote on the merger and if approved, will commence preparations on a plan for the amalgamation of the three entities and decide on a share-swap ratio.

The plan to merge the three banks was taken by a ministerial panel, led by Finance Minister Arun Jaitley Monday.

The decision to merge the three banks came at a meeting held under the "alternative mechanism" framework that was drawn up past year to consider consolidation in banking. "We have made a decision to merge Dena Bank, Vijaya Bank and Bank of Baroda. Meanwhile, given persistent structural challenges facing mid-sized banks, we continue to maintain our cautious stance (despite trading gains in the immediate term)", said Edelweiss Securities in a recent note to its investors. "And therefore, now the alternative mechanism has gone ahead and taken this decision today", Jaitley said. "The best of the service conditions will apply to all of them".


Besides, Kumar said, Provision Coverage Ratio (PCR) would be better at 67.5 percent against average of 63.7 percent and cost to income ratio of the combined entity would come down to 48.94 percent as compared to average of 53.92 percent.

Since the government is a majority owner in all three banks, it seems more likely than not that the merger will be approved.

The government's Monday announcement signaled that this alternative approach may be tried out in the future too as a step to address the weakness in the banking system which is saddled with almost Rs 9 lakh crore of bad loans.

This is not the first time a bank amalgamation process has taken place. Jaitley laid the blame on the UPA for the banking sector non-performing asset (NPA) issue.

"This was accompanied by sweeping the NPAs below the carpet so that the real picture doesn't come out", Jaitley added.

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