THE banking crisis in India involving most state-owned lenders requires drastic changes, which no government — especially just a year before general elections — would dare carry out. But considering the dire situation,

the National Democratic Alliance (NDA) government had no choice but to push ahead with a few reforms, which it finally did last week.

An inter-ministerial panel headed by Finance Minister Arun Jaitley last week suggested the amalgamation of Bank of Baroda (BoB) with two smaller players — Vijaya Bank and Dena Bank. The board of the three banks will meet over the next few weeks to hammer out the merger.

Bank of Baroda is the second-largest public sector (PSU) bank in India in terms of market capitalisation, way behind the State Bank of India (SBI), the largest. Both Vijaya Bank and Dena Bank rank much lower in the list of PSU banks.

While BoB has a market cap of about Rs300 billion, Vijaya Bank’s market cap was just Rs73.5bn and Dena Bank’s a mere Rs43bn. The three banks have a combined business of nearly Rs15 trillion as on June 30 and more than 85,000 employees.

Dena Bank is among the worst performing banks in India. The Reserve Bank of India (RBI), the country’s central bank, has already brought it under the Prompt Corrective Action (PCA) plan because of its bad loans and negative return on assets.

The bank’s gross non-performing assets (GNPA) stood at 22.69 per cent as on June 30, making it the fifth-worst state-owned bank in terms of NPAs.

And since it is under the RBI’s PCA, the bank faces severe restrictions on lending and other deals including fresh recruitment. The bank’s woes continue in the current fiscal as well; while Dena Bank reported a loss of Rs1.33bn in the first quarter of 2017-18, losses shot up to Rs7.22bn in April-June this year.

Vijaya Bank, which is focused more in the south, is in a much better position; GNPAs were lower at 6.19pc as compared to 6.34pc last year in the April-June quarter.

Bank of Baroda of course is in a different league from the other two banks. Its GNPAs were higher at 12.46pc, but its profits doubled in the April-June quarter.

The government decided, about two years ago, to rope in private sector executives to head top state-owned banks including BoB and Canara Bank. It brought in Ravi Venkatesan, the former chairman of Microsoft India, as the chairman of BoB, and P.S. Jayakumar, a former Citibanker and also founder of some private ventures, as its managing director and CEO.

The 21 public sector banks in India, in which the government is a majority shareholder of more than 51pc, are also among the worst performers, having been overtaken by private sector lenders such as ICICI Bank and HDFC Bank.

The government is keen that the larger and stronger banks take over the smaller and weaker ones and shake up public-sector banking in the country

While PSU banks continue to account for more than two-thirds of the banking assets, they have a huge share of the non-performing assets (NPAs) in the sector.

The state-owned banks account for almost 90pc of NPAs and 11 of the 21 banks are under the watch of the RBI for bad financial health. Besides Dena Bank, they include Allahabad Bank, United Bank of India, Corporation Bank and IDBI Bank.

These 11 banks face severe restrictions imposed by the RBI including curbs on expanding their branch network, distributing dividends and even capping of remuneration of the top management.

Of course, the BJP-led NDA government and its ministers blame the previous United Progressive Alliance (UPA) government, led by the Congress, for destroying these banks by ordering them to give loans to their favourites.

FINANCE minister Jaitley cites the success of the merger of the SBI, five of its subsidiary banks and Bharatiya Mahila Bank for initiating the new merger of banks.

Jaitley cites the ‘adventurous’ lending of the previous UPA government between 2008 and 2014 for the problems confronting the sector in India. The NDA government last year announced a hefty Rs2.11tr plan to be injected over a two-year period to meet the new regulatory capital requirements.

Rajiv Kumar, secretary, financial services, says the proposed merger will not only improve operational efficiencies, but also lead to better customer service.

While the new lot of private sector banks in India has been at the forefront of transforming the sector by introducing the latest technology, their state-owned counterparts have been lackadaisical in launching new products and services.

Even today, it is not uncommon to come across long queues in many of the branches of state-owned banks while private sector banks are virtually dismantling brick-and-mortar branches and opting for automation of most services.

Banking analysts say that last week’s announcement of a merger of three banks is crucial for the future of state-owned banks in the country. The government is keen that the larger and stronger banks take over the smaller and weaker ones and shake up public sector banking in the country.

The mergers could result in the emergence of about half a dozen strong PSU banks, which could gradually boost their international presence as well.

Many public sector banks, especially SBI and BoB have strong overseas operations. BoB, for instance, set up its first international branch way back in 1953 in Mombassa, Kenya, home to a large number of Indian-origin people.

Today, it has a strong presence in more than a dozen countries including the US, the UK, the UAE, Australia, China and Singapore. It also has subsidiaries in eight countries, besides two joint ventures.

The merger of nationalised banks, however, is being opposed by the trade unions. “There is no evidence indicating that mergers would strengthen the banks or make them more efficient,” says C.H.Venkatachalam, general secretary, All India Bank Employees Association.

Citing the example of the previous banks’ merger with the SBI, he says it resulted in the closure of branches, rise in bad loans and reduction in staff and even business. “For the first time in 200 years, the SBI has reported a loss,” he adds.

Published in Dawn, The Business and Finance Weekly, September 24th, 2018