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Dena Bank merger and the challenges that lie ahead

Dena Bank has been placed under 'prompt corrective action framework' by the RBI due to its poor loan ratio

The government proposed merger of 3 pubic sector banks on Monday- Vijaya Bank, Dena Bank and Bank of Baroda (BoB). The amalgamation was to enhance economic activity since low corporate sector investments and ₹10.3 trillion non performing assets (NPA) have weakened credit in the banking sector.

Challenges ahead

Dena Bank has been placed under ‘prompt corrective action framework‘ by the RBI due to its poor loan ratio. This means that the regulator has constrained the bank’s lending. The merger might thus lead to cutting down on human resources for better governance on bad loans issue.

Speculations are that this merger is bailing out weak bank (Dena Bank) by fairly stronger ones under the garb of enhancing growth. So it is not welcomed by many analysts. In fact, Dena Bank has a bad loan ratio at 22% while Vijaya Bank has an NPA ratio close to 7%. BoB has NPA ratio at 12.4%. By merging the three banks the NPA ratio will raise to 13% and put the onus on the bigger BoB.

‘We would like to highlight that NPA coverage of these banks (Dena Bank and Vijaya Bank) is much lower than that of BoB and a merger brings about uncertainty relating to recognition of NPAs. A combination of the asset quality uncertainty, higher provisions to ramp up coverage and potential B/S consolidation will be negative for BoB in the near term,’ Nomura Research in a note said.

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