Being faced by the challenges posed by the dynamism in the economy, variation in the governmental policies and ever-growing competition leads to the changes in the circumstances for the business entities in the market which may opt for corporate restructuring. In order to accelerate the growth and aim to maximize the profitability, two or more enterprises may join hands and work together not only having joint liabilities, responsibilities and assets but also joint business objectives. Merger of the corporates may be attributable to many reasons such as joint acquisition of technologies, access to sectors/markets, etc. In the process, generally, the merging entities would cease to be in existence and a unified merged entity comes into existence.

Government proposes merger

The Government on September 17, 2018, proposed the merger of state-owned Bank of Baroda, Vijaya Bank and Dena Bank to create the country’s third largest lender as part of efforts to revive credit and economic growth.[1] The merged entity, comprising two relatively stronger banks (Bank of Baroda and Vijaya Bank) and a weak one (Dena Bank), will be the third-largest lender in India after State Bank of India and HDFC Bank Ltd, with a total business of more than ₹14.82 trillion.

Objective

This comes in furtherance of the Government’s efforts for reforming the banking sector which is already facing the threat posed by the non-performing assets (hereinafter referred to as “NPA”). NPAs are the assets or account of a borrower, which has been classified by a bank or financial institution as sub-standard doubtful or loss asset. The Government has proposed the aforesaid merger with a view to save all the existing banking entities and to wipe out the raising mountain of bad loans in India, the banking sector has suffered substantial losses.

While Dena Bank has already been placed under the prompt corrective action framework by the Reserve Bank of India imposing restrictions on its lending, the Vijaya Bank on the other hand has reported profits in the year 2017-18.

Expected impact

The proposed consolidation which is yet to receive the response from the merging banks and approval from the Parliament, is expected to create a strong global competitive market with economies of scale and enable realization of wide-ranging synergies. The Government is of the opinion that this merger will lead to the formation of a mega bank which will be sustainable, whose lending authority will be far higher. It has also been specified that the merger would lead to increase in the banking operations, customer services and accord protection to the employees, preservation of brand equity. Also, capital support may be provided to the new entity. 

On the similar footings of a previously authorized unification of all associate banks of State Bank of India (hereinafter referred to as “SBI) and Bhartiya Mahila Bank into a single entity – SBI, the Government is in the process of amalgamating Dena Bank, Vijaya Bank and Bank of Baroda. Speculations rise regarding the fulfilment of the purpose of the merger which is to reduce the implications of bad loans by strengthening the banking system and maintaining their business without altering the existing staff.