India is considering merging three state-run lenders as it seeks to strengthen its debt-laden banking system.
A panel headed by Indian Minister of Finance and Corporate Affairs Arun Jaitley recommended combining Vijaya Bank and Dena Bank with Bank of Baroda, Department of Financial Services Secretary Rajiv Kumar said at a briefing in New Delhi late on Monday.
The merged entity would become the third-largest bank by loans and the government would ensure there are no job losses, he said.
A larger, better-capitalized bank would be in a stronger position to negotiate with delinquent borrowers and would have more capacity to absorb losses as India accelerates its attempts to clean up more than US$210 billion of stressed debt on lenders’ balance sheets.
The combined entity would have outstanding loans of 6.4 trillion rupees (US$88.36 billion) and 9,489 branches, the second-highest among Indian banks.
India does not want a merger of weak banks, Jaitley told the news conference, adding that the ability of the merged entity to increase and expand would be “inevitable.”
The boards of the three banks are to meet to decide on the recommendation, he said.
Earlier in the year, he had said bank consolidation would happen after strengthening lenders.
Government-controlled lenders are estimated to hold 90 percent of non-performing loans, and 11 of the 21 are in an emergency program, supervised by the Reserve Bank of India, which restricts new lending. Dena Bank is one of the lenders in that program.
Almost 70 percent of new deposits went to private banks in the latest fiscal year and they are predicted to corner nearly 80 percent of incremental loans through 2020, as mounting bad debt erodes capital and constrains lending at state banks.
Weak balance sheets and laws that require the state to hold at least 51 percent of their shares have left public lenders dependent on the government for new capital.
Mergers might eventually reduce the number of Indian state lenders by more than half, said G. Chokkalingam, managing director at Equinomics Research & Advisory Pvt.
“The idea is to create national banks. Eventually, there would be seven or eight big state-run [lenders],” he said.
India last year merged five associates of State Bank of India — the nation’s biggest lender — into the parent. Bharatiya Mahila Bank was also merged into the State Bank of India.
The government in November last year formed a panel on an “alternative mechanism” for consolidating state-owned banks. The panel headed by Jaitley includes Indian Minister of Railways, Coal and Corporate Affairs Piyush Goyal and Minister of Defense Nirmala Sitharaman.
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