Explained: What was the need to merge Vijaya, Dena Bank with Bank of Baroda

The merged entity will become India's third largest bank after SBI and HDFC Bank

The Cabinet on Wednesday approved the merger of Vijaya and Dena Bank with the much larger Bank of Baroda, effective April 1. The boards of the three banks approved the swap ratio for this all-stock deal on the same day. For every 1,000 equity shares of Vijaya Bank and Dena Bank, investors will get 402 and 110 equity shares respectively of Bank of Baroda. This is the first three-way bank merger in the country and will pave the way for possibly more such mergers. Anup Roy explains the implications.

What was the need to merge Vijaya and Dena Bank with the much larger Bank of Baroda?

On the one hand, the government says the country doesn’t need so many banks, on the other, the Reserve Bank of India gave licences to two fully commercial banks and some other smaller/niche banks in 2014-15. The bank unions say the merger was not needed at all since all the banks have different cultures and their employees strongly associate themselves with their respective brands. Analysts, however, say, it doesn’t matter if a few banks are erased, considering that these banks, though different in terms of brand names, are homogenous in many ways.

Why was this called an ‘amalgamation’ and not a ‘merger’ by the government?

Amalgamation usually connotes a merger of equals to create a new entity. While the government continues to use the word ‘amalgamation’, it also denotes Vijaya and Dena as ‘transferor’ banks and Bank of Baroda as a ‘transferee’ bank. This means Vijaya and Dena are being subsumed by Bank of Baroda, which, in all likelihood, will continue to retain its identity. This could be a bit unsettling for career Vijaya and Dena bankers. There is always a fear that employees going under a new banner would be treated as second-class citizens, and employees of the entity that retains its brand name will get priority. They may be justified in thinking that way, given the history of such mergers. However, the government has clearly stated in its communication that that would not be the case and staff interest would be protected at all cost in the merged entity.

Is this ‘merger’ different from others before?

Yes. Mergers in India have been of three kinds — a) voluntary merger between private sector banks; b) compulsory merger of a private sector bank with a public sector one. For example, Global Trust Bank was merged with Oriental Bank of Commerce and United Western Bank with IDBI Bank. And c) merger between public sector banks. The merger of State Bank of India with its associates is an example of the third kind. 

The three banks being merged now were nowhere close to failure, even though Dena Bank was carrying high bad debts in its books.

Who gains and who loses in this merger/amalgamation?

Customers remain unaffected. In fact, they could be the eventual winners since the service standards is expected to improve after the merger. Employees of these banks also seem to be doing fine. Nobody will be retrenched, and all their interests would be protected, says the government. The government also is a winner, since its bank merger agenda is on course. 

There is now some uncertainty in the top management levels of these banks. Three banks on an average should have three chairmen, three managing directors and CEOs and six executive directors. The merged entity will have one chairman, one MD and CEO and possibly three EDs. The number of other directors would also reduce in proportion. These people won’t be fired for sure, but their contracts may not be renewed. There could be less scope for promotions in the senior positions after the merger, since there will be surplus talent for every role.

A big loser group, though, are some investors in Dena Bank. Vijaya Bank would also be a loser to some extent, since it was better managed, a good performer and one of the few exceptions among banks that is not under too much NPA stress.

Why did Dena Bank shares fall nearly 20 per cent after the merger announcement?

The market, for some reason, had expected that Dena Bank would be handsomely rewarded by the merger. They were expecting valuation gains in Dena Bank even as the lender is one of the most stressed, with about a quarter of its loans having turned sour. What the swap ratio showed is that the government has discounted 27 per cent of the share price for the merger. This came as a shock to many investors hoping for a less bumpy ride.

How big will be the merged bank?

It will become India’s third largest bank after SBI and HDFC Bank. The total assets of the three entities combined, as on September 2018, was Rs 10.44 trillion, after SBI’s Rs 34.86 trillion and Rs  11.70 trillion of HDFC Bank. The combined employee count would be 85,675, and the total number of branches would be nearly 9,500.