The government on Monday said that state-owned Bank of Baroda, Vijaya Bank and Dena Bank will be merged to create the country's third largest lender as part of efforts to revive credit and economic growth.
Capital support to the merged entity of Dena Bank, Vijaya Bank and BoB would be ensured, he said.
"Consolidation of banks was in our agenda and the first step has been announced", Finance Minister Arun Jaitley told reporters here on Monday.
Also, many banks were in a fragile condition due to excessive lending and ballooning NPAs, he said.
India's decision to merge the three banks will first need to be approved by each of their board of directors, Jaitley said, adding that the government will then prepare an amalgamation scheme.
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The amalgamated bank would be the third largest bank in India and will be strong competitive lender with economies of scale, he said adding the three would have synergies for network, low-priced deposits and subsidiaries.
Last year, top lender State Bank of India was also merged with five of its subsidiary banks. Around 9,500 branches are likely to be closed during the merger. The single unit will become the third largest public sector bank in the country. "While making this suggestion, we have borne in mind that we don't want a merger of what are relatively weak banks", Mr. Jaitley said, adding, "You can have two well-performing banks absorbing a weak one in the amalgamation process and hopefully, creating a mega bank which will be sustainable, whose lending ability will be far higher".
S Nagarajan, General Secretary, All India Bank Officers' Association, said the argument that mergers will help tackle bad loans does not hold water. Rajiv Kumar, Department of Financial Services Secretary, announced that the decision was arrived at after meeting of the "alternative mechanism" which was set up during previous year to consider consolidation of the Indian Banking Sector. Jaitley said that no employee on the combined entity will face any service conditions which are adverse in nature.
"This major decision was taken by [the] Alternative Mechanism today to amalgamate Bank of Baroda, Dena Bank and Vijaya Bank". Therefore, our capacity to subsume that weaker bank into the merged entity, which will be a stronger bank, is the principal factor that weighs with the government. He said the real picture of the NPA issue was known only in 2015. The government had only unearthed the NPAs which were sought to be brushed under the carpet, he added. The banking industry was saddled with bad loans - called non-performing assets in banking parlance - of Rs 8.50 lakh crore. "This is the government's assessment", he said, referring to the merger.
Pointing out that indiscriminate lending during 2008-14 was the reason for the weak health of the banking sector, the finance minister said various steps taken by the government have started showing results.