TOPIC

Impact of Merger of Vijaya Bank and Dena Bank into

Bank of Baroda and its Functioning.

(A perspective of potential operational synergies and

dysfunctionalities arising at the ground level due to
the phased amalgamation)

INTERNSHIP
Ankit Kumar

REPORT Integrated Programme in

Management, IIM Indore
Bank of Baroda, erstwhile Dena Bank and erstwhile Vijaya Bank came together to join their rich past and
legacy to forge a dynamic future. Their strong relationships with over 120 million happy customers are
proof of the transformed experience their amalgamation will bring. While they will continue to remain
focused on business growth, they will also use this opportunity to create one of the best banks in the
country for their employees, partners, and the most important stakeholder of all their customers.

With the first ever three-way merger, BoB has now become the second-largest public sector lender after
State Bank of India with over 9,500 branches, 13,400 ATMs, and 85,000 employees to serve 12 crore
customers. The maiden three-way amalgamation is considered as the major step in the consolidation of
the public sector banking industry recommended in 1991 by the Narasimham Committee report. With a
total business of about ₹15 trillion, the merged entity is now the third-largest lender in India. This is also
India's first-ever three-way consolidation of banks in India

On Sept. 17, 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), will be
India’s third-largest lender behind the State Bank of India and HDFC Bank.

“The government had announced in the budget (for the financial year 2019) that consolidating banks was
on their agenda and the first step had been announced” finance minister Arun Jaitley said in New Delhi.

With this, the government has thrown a lifeline to Dena Bank, whose gross non-performing assets (NPA)
ratio in the quarter ended June 30, 2018, stood at 22%, among the industry’s highest. It was already under
the Reserve Bank of India’s (RBI) supervision; in May it was barred from lending any further or
recruiting new employees. Vijaya Bank and BoB are 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. The merged bank will be a strong competitive bank with economies of scale, network
synergies, low-cost deposits and subsidiaries, and the possibility of greater outreach and expansion.

The plan was to create a few large banks by merging 2-3 banks together. The recent merger of Bank of
Baroda (BoB), Dena Bank and Vijaya Bank, which was effective from April, was the first off the block.
The merger is currently undergoing the integration process, where there are challenges such as
technology, people, culture etc. Ahead of the merger, the government has decided to infuse Rs 5,042
crore into the Bank of Baroda by way of preferential allotment of equity shares (special securities/bonds)
of the bank during FY2018-19, as government's investment. According to the Scheme of Amalgamation,
shareholders of Vijaya Bank will get 402 equity shares of BoB for every 1,000 shares held. In the case of
Dena Bank, its shareholders will get 110 shares for every 1,000 shares of BoB.

But such a big merger also throws up many challenges, which are likely to extend the balance sheet clean
up for a couple of years.

Challenges faced in the merger process:

Creating Clones

PSBs are basically corporate banks. They mirror each other. The biggest chunk in their portfolio is of
infrastructure (power, telecom, roads etc), iron and steel and textiles. Dena Bank, which has a very high
16.18 per cent exposure to infrastructure especially in power and telecom. Bank of Baroda, which is a
large bank, has 8.44 per cent exposure to infrastructure. PSBs have high exposure (top 5) to iron and steel,
textile and chemicals. This would certainly create more trouble for the combined entity as many of these
are stressed sectors.

The High Cost of Funds

The cost of funds plays a very important role in the competitive banking landscape. The weak entities that
are merging tend to have a higher cost of funds. BoB, which has a cost of deposit at 5.33 per cent as
against Vijaya Bank's 5.81 per cent. While the private banks are using the digitisation and also digital
modes to raise deposits and target new customers, the PSBs have this challenge of reducing the cost of the
deposit. At the same time, they have to deploy their resources to high yielding assets to earn high interest.
Most of the PSBs have a net interest margin of less than 3 per cent. This is one area where PSBs will face
challenges. Take for example, HDFC Bank, which has a net interest margin of 3.87 per cent.

Retail Banking Challenge

State-owned Bank of Baroda (BoB) is considering the option of rationalising 800-900 branches across the
country to improve operational efficiency, following its merger with Dena Bank and Vijaya Bank. It does
not make sense to have branches of Dena and Vijaya at the same location when both have been merged
into BoB. There are cases where branches of three banks are at one location or one building. So these
branches have to be either closed or rationalised as duplication is a drain on efficiency. After
comprehensive review, BoB has identified 800-900 branches which needs to be rationalised, the lender
could opt for re-location and in some cases closure. There is also need to close regional and zonal offices
of merged entities as they would not be required.

Effects on the customers

What could change?

1. New bank account numbers and customer IDs could be assigned to the customers.

2. Customers will have to update their banking details with entities like the Income Tax Department,
mutual funds, insurance companies, National Pension Scheme, etc, to incorporate the new
account numbers and IFSC codes.

3. Customers might have to fill new instruction forms for SIP and loan EMIs.

4. New cheque books, passbooks, credit cards and debit cards might be issued.

5. Some branches might be closed after consolidation. Customers of such branches are likely to be
transferred to a different branch of Bank of Baroda.

What will remain unchanged?

1. The interest rates for personal loans, home loans, auto loan, education loan, etc are not likely to
change.

2. The interest paid to customers on fixed deposits or recurring deposits is expected to remain
unchanged.

Plan of Action of the bank

Bank of Baroda has announced on its website that as of now, it is neither changing the location of any
branches nor closing any of them. “We don’t plan to close any branch. Should we decide to merge
branches, you will be notified well in advance," the bank said.

As far as ATMs are concerned, they can be used at ATMs of any of the three banks. No ATM transaction
charges will be levied in such cases. Online banking channels of all three banks will also continue to work
as usual.
Customers of Dena Bank and Vijaya Bank can continue to use their existing cheque books and ATM
cards until any further announcement. The existing account number, IFSC code, MICR code and other
identifiers of account and branch will continue, till a change is notified and announced.

In case of making NEFT/RTGS transaction from Bank of Baroda to Dena Bank or Vijay Bank, and vice
versa, charges will not apply. The bank branch will refund the charges to the account if deducted.

The existing account with Vijaya Bank and Dena Bank will continue, till otherwise communicated.
However, according to a communication by BoB, you are required to make cash and cheque deposits in
branches of your parent bank only.

Loan:

All customers of Dena Bank, which is under the prompt corrective action (PCA) framework of the RBI,
will have renewed access to credit facilities immediately. “There will be no immediate changes in any
terms and conditions of existing credit facilities. However, the facilities are to be governed by the
guidelines and policies of Bank of Baroda, post-amalgamation," BoB said.

What it means for the three banks

The merger will lower operational and funding costs, and also strengthen risk management practices for
each of the three banks. As a result, operational efficiencies for all three are likely to go up significantly.

Dena Bank will be the biggest immediate beneficiary of the merger. It has been the weakest among the
three, with the weakest among the three, with negative return on assets. For quite a while, the bank was
languishing under RBI’s prompt corrective action (PCA) framework, which essentially means severely
limited access to funding. The scenario will now change.

Bank of Baroda, the strongest of the three, will on the other hand have to subsidise weak fund allocation
of Dena Bank. Many analysts are of the view that the profitability of the combined entity will be just a
patch on that of BoB, going by recent financial track records of the three. High levels of provisioning at
Dena and Vijaya will inevitably mean that BoB’s consistent performance is now likely to be dragged
lower, at least for the time being.

What it means for banking landscape in General

The Government has announced the merger in September last year. It was among a hist of big bang
reforms aimed at making public banks healthier and more competitive.
In the last three years, banks have seen a large portion of loans turning bad, wjile demand for fresh loans
has remained low. Addressing the issue of such toxic loan was the big reason behinh creating such a mega
bank.

The merger, if successful will set a template for reviving other weak public sector banks. If, eventually,
PSBs become lesser in number, the government will have it much easier to monitor operations, allocate
funds and keep a tab on performance.