"The Government of India's plan to merge three public sector banks, Bank of Baroda, Vijaya Bank and Dena Bank, will be credit positive as it will provide efficiencies of scale and help improve the quality of corporate governance for the banks", Alka Anbarasu, vice president, Financial Institutions Group, Moody's Investors Service, said in a statement.
Finance minister Arun Jaitley said the government had been careful in not merging weak banks. The three banks will continue to work independently post merger.
Financial Services Secretary Rajiv Kumar said bank boards of the three banks will examine the amalgamation proposal.
Kumar said there was no need to amend the Bank Nationalisation Act, and the scheme of amalgamation would be tabled in Parliament. Besides Jaitley, the alternative mechanism includes defence minister Nirmala Sitharaman and railway minister Piyush Goyal.
This is the second such exercise in the last 18 months.
He added,"No employee will face any service conditions which are adverse in nature". The merged entity will have a combined business of Rs 14.82 lakh crore, with 10,000 branches and around 85,000 employees.
"This was accompanied by sweeping the NPAs below the carpet so that the real picture doesn't come out", Jaitley added. He alleged that banks undertook above-normal lending during 2008-2014 as "if there was no tomorrow" resulting in huge non-performing assets to the tune of Rs 8.5 lakh crore. "The government is keen to take steps so that history isn't repeated as far as NPAs are concerned", he added.
However, FM did not talk about the name of the new entity and said that it will be revealed later. Rather, the merger of two strong banks and one weak bank seemed to be a more viable option, keeping in the mind the long-term sustainability of the merged entity and the potential for expansion. Over the past three years, banks have seen a large chunk of their loan books turning sour, while demand for fresh loans has remained low.
Dena Bank has a gross NPA ratio of 22 per cent - among the highest across the industry. The gross Non -Performing Assets ratio will be around 13 percent with gross non- performing assets to be approximately around Rs 80,000 crores.
"Capital Adequacy Ratio (of the amalgamated bank) at 12.25 per cent is significantly above the regulatory norm of 10.875 per cent and the stronger amalgamated bank will be better positioned to tap capital markets", the government said.