Vol. 05,Special Issue 02, (IC-IRSHEM-2020) February 2020, Available Online: www.ajeee.co.in/index.php/AJEEE RATIONALE BEHIND FIRST THREE WAY MERGER OF BANKS IN INDIA AND ITS RESULTS SO FAR: A STUDY OF MERGER OF VIJAYA BANK AND DENA BANK WITH
BANK OF BARODA
Ms. Isha Setia, Assistant Professor,
Department of Commerce, Surendera College, SGNR.
Abstract:- As we have all seen the recent trends in Banking sector particularly in Public sector Banks (PSBs) where either the banks are merging with its own subsidiaries or banks are being merged with other banks. This paper here deals with the reasons of such mergers, meaning of three way merger of banks, reason behind the three way merger of Bank of Baroda (Bob) with Vijaya Bank and Dena Bank and the results it has achieved so far.
Originally there were 27 Public sector banks in India in the year 2017 but only State bank of India(SBI) had global reach and to keep in pace with the present competitive scenario’s theme ―Survival of the fittest‖, the government of India resorted to consolidation of the Banking industry. At present we have 18 Public sector banks and as per the upcoming mergers planned for financial year 2020-2021 where 10 Public Sector banks will be amalgamated into four big banks, the number of public sector banks in India will be 12 as announced by the Finance Minister of India, NIRMALA SITHARAMAN. Apart from this the Government of India has also announced Rs 55,250 crore upfront capital infusion in the PSBs. Merger of banks leads to efficient management of resources, up gradation of services and revenues, optimum staff utilization, cost reduction, reduced level of Non Performing Assets(NPAs), closure of Extra branches, disposal of unwanted assets and premises, expanded clientele base and benefits of economies of scale. Moreover it improves the level of bank’s risk taking capacity, provides more funds in the form of capital and enhances profit margin available with banks. Banks derive the benefit of Synergy too.
Keywords:- Merger, Public Sector banks, Non Performing Assets, Economies of scale, Amalgamation, Capital Infusion, Synergy.
AIM:- The aim of this research paper here is to analyze whether the decisions made by the Central Government, together with the Finance minister of India - in the form of merger of Public Sector Banks to boost the economy actually derive the desired results.
1. INTRODUCTION
A merger is an arrangement where two existing companies agree to unite into one new company i.e. one new legal entity. Mergers and acquisitions are normally done to expand a company’s reach, tap new market segments, gain additional market share and expand customer base. There can be many different types of mergers possible as shown below –
A Bank merger specifically means a situation where two or more banks pool their assets and liabilities to become one bank. This pooling of resources gives banks benefits of economies of scale and also helps them overcome unnecessary wastage of valuable resources of the society.
2. LITERATURE REVIEW
Several studies have been conducted to review and examine the impact of mergers and acquisitions of banks in India. One of the recent study was conducted by Dr. Jyoti H.
Vol. 05,Special Issue 02, (IC-IRSHEM-2020) February 2020, Available Online: www.ajeee.co.in/index.php/AJEEE Sector‖ to study the impact of such mergers and acquisitions on April 4th, 2016. She concluded that the banking system in India has undoubtedly earned numerous outstanding achievements, in a comparatively short time, due to such merger and acquisitions.
On the contrary, Ishwarya J on September 25,2019 published, ―A Study on Mergers and Acquisition of Banks and A Case Study on SBI and its Associates‖ stating that that the pre and post-Mergers and Acquisitions of selected banks in India have no greater changes in profitability ratio and only a few banks are satisfactory during the study period.
Therefore, she is of the view that the Government and policy makers should be more cautious in promoting merger as a way to reap economies of scale and scope. Keeping is mind both the contrasting aspects, this paper here has been prepared.
3. OVERVIEW OF INDIAN PUBLIC SECTOR BANKS
Public sector banks are the major types of banks in India where majority of stake ie more than 50% is held by the Government of India. The Central Government entered the banking business with the nationalization of the Imperial Bank of India in 1955. A 60% stake was taken by the Reserve Bank of India and the new bank was named as the State Bank of India. The consolidation of SBI and associated banks started first by merging State Bank of Saurashtra to it.
The merger happened on 13 August 2008. Then after State Bank of Indore was acquired by State Bank of India on August 27, 2010. The remaining 27 nationalized banks were merged into 12 banks from 2017-19. The State Bank of Bikaner and Jaipur (SBBJ), State Bank of Hyderabad (SBH), State Bank of Mysore (SBM), State Bank of Patiala (SBP) and State Bank of Travancore (SBT), and Bharatiya Mahila Bank were merged with State Bank of India with effect from 1 April, 2017. Vijaya Bank and Dena Bank were merged into Bank of Baroda in 2018. IDBI Bank was categorized as a private bank with effect from January 2019.
On 30 August 2019, Finance Minister Nirmala Sitharaman announced the government's plan for further consolidation of public sector banks:-
1. Indian Bank is to be merged with Allahabad Bank where anchor bank will be Indian Bank.
2. PNB, OBC and United Bank are to be merged. Here PNB will be the anchor bank.
3. Union Bank of India, Andhra Bank and Corporation Bank are to be merged. Anchor bank will be - Union Bank of India.
4. Canara Bank and Syndicate Bank are to be merged. Canara Bank will take the responsibility of being an anchor bank.
What’s giving more fodder to the government to go ahead with the merger is the grand success SBI achieved by combining its five associate banks and Bhartiya Mahila Bank to form a single entity. By virtue of the merger, SBI got into the hall of fame by making an entry into the list of top 50 banks in terms of assets in the world. The merger has helped the bank take its customer count to 37 crores and add a vast network branches and ATMs that went up to 24,000 and 59,000, respectively.
4. METHOD AND MATERIAL
The Indian banking sector is one of the important sectors for our country’s economy. Every big and small policy changes planned or implemented here impacts the GDP of our country to a huge extent. Here in this research paper, I have conducted an analysis on the Bank of Baroda merger with Dena Bank and Vijaya bank to study the results of this first ever three way merger of banks.
For this, I have incorporated Bank of Baroda’s Quarterly Financial reports as published on 31st march, 2019 (i.e. for the 4th quarter before the merger) and its results have been compared with the quarterly reports published for the first quarter after the merger i.e. from April – June, 2019. To give this study an element of current and recent turn of events, I have also compared the before merger reports with the most recent Quarterly Reports published by Bank of Baroda for the third quarter to the merger i.e.
September – December,2019. The comparisons have been made on the basis of deviation between actual and estimated results, and also on the basis of pre and post merger
Vol. 05,Special Issue 02, (IC-IRSHEM-2020) February 2020, Available Online: www.ajeee.co.in/index.php/AJEEE 4.1 What Do You Mean By “Three Way Merger of Banks”
The thought behind THREE WAY MERGER OF BANKS is that two strong banks absorb a weak bank to create a MEGA BANK whose lending ability is higher and which will be able to expand its operations. In what is the first three-way merger for Indian banks, Bank of Baroda has merged Vijaya Bank and Dena Bank with itself. So India's much-hyped MEGA BANK finally came into picture. The government of India proposed the merger of Bank of Baroda, Dena Bank and Vijaya Bank to create India’s third-largest lender. This was decided at a meeting of a ministerial panel called Alternative Mechanism, as an approval framework for proposals to merge state-run banks.
The mega bank now has a balance sheet size of over Rs 15 lakh crore — with deposits worth of Rs 8.75 lakh crore and advances worth Rs 6.25 lakh crore. The combined entity boasts of 120 million customers, 85,000 employees, over 9,500 branches and 13,400 ATMs. Dena Bank will be the biggest immediate beneficiary of the merger. It has been the weakest among the three, with negative return on assets. Bank of Baroda, the strongest of the three, will on the other hand have to subsidize weak fund allocation of Dena Bank.
4.2 Advantages of Merger of Banks
The main benefits of merger of banks include:-
1. Too Big To Fail – Government of a country resorts to merger of public sector banks to make them too big an entity so that they don’t fail as their failure can have a cascade effect on the economy of the country. Most of the banks in India have a huge proportion of Non – Performing Assets ie assets which turn bad and there is a least possibility of receiving either the Principal amount or the Interest that should be paid on that principal amount to the lender. And so government resorts to merging of banks to make them BIG in terms of risk taking capacity and to avoid Chances of Bankruptcy.
2. Scale – A bank merger helps banks to scale up quickly and provides them a large number of new customers instantly. Not only does it give more capital to banks to work with when it comes to lending and investments, but it also provides a broader geographic footprint in which banks can operate on a large scale.
3. Efficiency – Every bank has infrastructure in place for compliance, risk management, accounting, operations and IT – and now that two banks have become one, they are able to more efficiently consolidate and administer those operational infrastructures leading to efficiency in operations.
4. Filling in of Gaps – Bank mergers and acquisitions empower businesses to fill product or technology gaps. Acquiring a smaller bank that offers a unique revenue model or financial product is sometimes easier than building that business unit from scratch. And, from a technology perspective, being acquired by a larger bank might allow smaller banks to upgrade its technology platform significantly as is happening in his case.
5. Up-to-date Employees – While not a factor on the balance sheet, every bank benefits from a merger or acquisition because of the increase in talent at leadership’s disposal. An acquisition presents the possibility of bolstering of sales team or strengthening the team of top managers, and this human element should not be ignored or downplayed as Human Resource is the most important resource of any business organization.
6. Economies of Scale – With the help of mergers and acquisitions in the banking sector, the banks can achieve significant growth in their operations and minimize their expenses to a considerable extent. Another important advantage behind this kind of merger is that in this process, competition is reduced because merger eliminates competitors from the banking industry.
7. Synergy – Implies a situation where the combined firm is more valuable than the sum of the individual combining firms. It refers to benefits other than those related to economies of scale. Operating economies are one form of synergy benefits. It works on the rule of
Vol. 05,Special Issue 02, (IC-IRSHEM-2020) February 2020, Available Online: www.ajeee.co.in/index.php/AJEEE 8. Reduced Bankruptcy chances – Managing Bankruptcy and organizational risks,
recent studies have established that if merger and acquisitions in banks if allowed in a controlled manner it would significantly reduce the bankruptcy risk of the merged entity. Obviously, mergers would also provide these benefits to banks in India reducing their bankruptcy concerns.
4.3 Reasons for This Three Way Merger
In compliance with the reason behind three way merger of banks, the Government of India agreed to this major merger. While Bank of Baroda and Vijaya Bank had reported better earnings, Dena Bank was under RBI’s prompt corrective action framework and was restrained from further lending. On September 2017, the Narendra Modi government announced plans to merge three public sector banks: Mumbai-based Dena Bank, Bengaluru’s Vijaya Bank, and Bank of Baroda (BoB) that has its head office in Vadodara, Gujarat. The merged entity, with total assets of over Rs14 lakh crore ($190 billion) was supposed to be India’s third-largest lender behind the State Bank of India and HDFC Bank.
With this, the government intended to throw a lifeline to Dena Bank, whose gross non-performing assets (NPA) ratio in the quarter ended June 30, 2018, stood at 22%, which was highest among the industry. Dena Bank was already under the Reserve Bank of India’s (RBI) supervision and in May it was barred from lending any further or recruiting new employees. Vijaya Bank and BoB were in better shape. In the April-June quarter of financial year 2019, Vijaya Bank posted a net profit of Rs144 crore, while BoB’s figure stood at Rs528 crore. In this period, Dena Bank posted a net loss of Rs721 crore.
One of the reasons for choosing these three banks was that the two stronger ones will be able to absorb the weaker entity, as explained by Jaitley the then Finance Minister.
The government of India announced the merger of Bank of Baroda, Vijaya Bank and Dena Bank on September 17, 2018 and the merger came into effect from 1 April, 2019. This amalgamation turned out to be the first-ever three-way consolidation of banks in the country. The merged entity will have a total business of 14.8 trillion, with capital adequacy rating at 12.25%, Tier-1 capital 9.32% and net non-performing assets at 5.71% on the loan book. The number of branches will be close to 9,500.
4.4 What Did the Merger Meant For the Customers It impacted the customers in the following way:-
1. All Dena Bank customers were allowed renewed access to credit facilities immediately. This access had remained curtailed while the bank was under the PCA framework.
2. Both Dena and Vijaya Bank customers will now be able to access BoB's global presence at 101 offices. Also, unique programmes of one bank will now be available to the customers of the other two banks also. For example, BoB and Dena customers can now access to exclusive Vijaya Bank schemes like plantation financing and SRTO funding.
3. The three banks will have a diverse and vast range of products. "The bouquet of products, substantial investments made in technology and Centre of Excellence on Analytics & AI and Technology will help in benefiting a wider customer base," as quoted by Baroda CEO - PS Jayakumar.
4. As per the agreement, Vijaya Bank shareholders got 402 equity shares of BoB for every 1,000 shares they had. Dena Bank shareholders received 110 BoB shares for every 1,000 shares.
4.5 Financial Position of Bank of Baroda Before the Big Merger Quarterly Reports (in Rs. Crore) as on 31st March, 2019.
Vol. 05,Special Issue 02, (IC-IRSHEM-2020) February 2020, Available Online: www.ajeee.co.in/index.php/AJEEE
4.6 Estimated Statistics For The Merged Entity
This is how the statistics of merged entity were supposed to be –
Vol. 05,Special Issue 02, (IC-IRSHEM-2020) February 2020, Available Online: www.ajeee.co.in/index.php/AJEEE After the merger this was how the country’s top three banks were supposed to be positioned–
4.7 Consolidated Quarterly Reports of the Merged Entity Obtained As On 30th June, 2019
These were the results obtained after the completion of the first quarter to the merger –
Vol. 05,Special Issue 02, (IC-IRSHEM-2020) February 2020, Available Online: www.ajeee.co.in/index.php/AJEEE 4.8 Points of Difference between Actual and Estimated Results after the First Quarter After the completion of the first quarter to the big merger the following results were obtained –
1. The first quarterly results of Bank of Baroda after its merger with Vijaya Bank and Dena Bank, reveals some tell-tale signs of stress on profitability and asset quality, which was expected as a fallout of merging with a weaker and under-capitalised bank ie in this case is Dena Bank.
2. Although Bank of Baroda posted a profit after its merger with Vijaya Bank and Dena Bank in the June quarter but failed to meet estimates. Net profit in the April-June period stood at Rs 710 crore compared to a net loss of Rs 49 crore in the year-ago period, as reported by an exchange filing. But the lender did miss the Rs 858-crore profit estimate made by the analysts.
3. Net interest income, or core income of the bank, rose to Rs 6,499 crore in the first quarter, in line with the Rs 6,393-crore estimate.
4. Net interest margin, however, declined to 2.73 percent in the quarter from 2.78 percent in the year-ago period.
5. The merged entity’s gross non-performing assets stood at Rs 69,714 crore in the June quarter. Gross NPA ratio was at 10.28 percent. Net NPA ratio rose 30 basis points sequentially to 3.95 percent in the first quarter.
6. The bank’s potential stressed assets amounted worth Rs 16,500 crore, which included 10,760 crore from Bank of Baroda alone, Rs 2,884 crore from Dena Bank, and Rs 2,856 crore from Vijaya Bank.
7. Slippages ratios elevated after the merger.
4.9 Comparison of Quarterly Reports before the Merger and After the First Quarter to the Merger
On comparison of Merged entity’s Quarterly reports obtained on 30th June, 2019 (i.e. after the first quarter) with Bank of Baroda’s Quarterly reports obtained on 31st March, 2019(i.e.
with the last quarter before the merger) we draw the following conclusions –
HERE, Net Interest income =
Int./Disc. on Adv/Bills + Income on Investment + Int. on balances With RBI + others - Interest Expended
Vol. 05,Special Issue 02, (IC-IRSHEM-2020) February 2020, Available Online: www.ajeee.co.in/index.php/AJEEE 4.10 Graphical Representation of the Comparison
4.11 Observation
This graphical representation clearly proves that although Net Interest income (NII) and Operation profit before provisions and contingencies increased after the merger but Loss before tax and Net loss for the period increased in the third quarter to the merger when compared with the last quarter before the big merger.
5. CONCLUSION
It can be concluded that after this Big merger of Bank of Baroda with Dena bank and Vijaya bank, the amalgamated entity has surely benefitted on some aspects but also had to suffer on some other parameters mainly because of the financial position in which Dena Bank was prior to the merger. But one thing that can be clearly stated is that banks have surely failed to achieve the planned and estimated statistics which were decided as benchmarks to measure the actual results. The central government together with the concerned authorities will have to take corrective measures to bring the merged entity on track and to bridge the gap between the actual and expected results.
Moreover, the results achieved by the merged entity were better in the first quarter to the merger i.e. for the period which ended on 30th June, 2019 rather than the one which ended on 31st December,2019 i.e. 3rd quarter to the merger which may be an outcome of many factors including increase in number of Non Performing Assets, high level of Slippages, loss of customer’s faith in the working of banks, problems in implementation of merger plans because of difference in technological base or because of return on assets variations amongst the banks. However, one will be in a position to clearly state the results with exact comparisons only when all the financial statements of Bank of Baroda after this merger will be published i.e. on 31st March,2020 when this merger will complete one year, which is yet to come.
REFRENCES
1. Devarajappa, S. (2012), ―Mergers in Indian banks:a study on mergers of HDFC Bank ltd and Centurion bank of Punjab ltd‖. Vol.1 issue 9, ISSN 2277 36.
2. Shrayas Madhu, ―MERGER AND ACQUISITIONS IN THE INDIAN BANKING SECTOR – A STUDY OF ICICI BANK Ltd. and STATE BANK OF INDIA‖.
3. Krishan A Goyal & Vijay Joshi (2011), ―MERGERS IN BANKING INDUSTRY OF INDIA: SOME EMERGING
Vol. 05,Special Issue 02, (IC-IRSHEM-2020) February 2020, Available Online: www.ajeee.co.in/index.php/AJEEE 5. Dr. Jyoti H. Lahoti, ―An Experiential Study of Mergers And Acquisitions in Indian Banking Sector‖ ,Vol.5 ,
Issue.4 , April 2016, ISSN - 2250-1991 , IF : 5.215 , IC Value : 77.65.
BIBLIOGRAPHY
1. www.In.finance.yahoo.com 2. https://www.bankofbaroda.in/
3. https://economictimes.indiatimes.com/
4. https://www.livemint.com/
5. https://www.moneycontrol.com/financials/denabank/balance-sheet/db 6. https://www.bloombergquint.com
7. https://evijaya.bankofbaroda.in/
8. https://edena.bankofbaroda.in
