Dinesh Kamath's Editorial 'Is it right to merge banks?' that was published in Newsband

Is it right to merge banks?

There has been a move to merge banks but without consulting shareholders. Healthy banks are being made to take over weak banks to handle the bad loans crisis. The Union government proposed the merger of three public sector banks — Bank of Baroda, Dena Bank and Vijaya Bank to consolidate the banking industry and to overcome the bad loan crisis.

Forced mergers such as the current one make little business sense for the stronger banks. They are also unlikely to solve the bad loan crisis. Such a move might end up creating an entity that is weaker than the original pre-merger strong bank.

There are too many public sector banks in India. But ideally, mergers ought to be between strong banks. Merging the weak Dena Bank with the stronger Bank of Baroda and Vijaya Bank sends out rather poor signals. The government is dictating critical moves that impact the minority shareholders, who are left with no say in the matter. There should be focus on remove the NPAs and make strict law so that recovery of loan will be easy.

Merging of the banks is not the solution of recovering bad loans. It has many negative impact. The branches will be reduced. Upcoming vacancies of banks will be decreased. Due to merging, strong bank will be affected and by merging with weak bank, share will be reduced.

Smaller banks have narrow capital base. Weaker banks can't raise funds from the market given the stringent terms that have to be meted out for capital. Continuous capital support from Centre for such banks would rather be a difficult task given the mounting losses and huge provisions they make on account of increasing NPA. Bank's merger whether it would pave way for NPA issue is a million dollar question as the recovery of bad loans depends on several factors.

Technologically, the present proposal of merger of Dena Bank and Vijaya Bank with Bank of Baroda will be easier as all the three have a common banking software and there may not be much practical issues in amalgamating books of accounts of all the three.

If synergy is the goal there has to be strict observation of stricter banking norms. The cardinal principle should be to allow the banks be run by competent professionals not the lackeys of scheming personalities who are behind all the rot that has crept in.