Save Vijaya Bank - Stop Merger of Public Sector Banks

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                 Save Vijaya Bank - Stop Merger of Public Sector Banks

Recently Finance Minister announced merger/amalgamation of the Bank of Baroda, Vijaya Bank and Dena Bank. This move is a unilateral imposition from above which goes against the interests of the other stakeholders of the banks including customers and shareholders. Merger decision is not based on objective view of the implications of such a decision and is thrust from above by the Finance Ministry on the bank's business operations, financial health, morale of the officers and employees and the confidence of the bank customers as explained below:

 01)The Government has been nudging the state owned banks to go for merger so that there can be fewer stronger banks. We fail to understand the Government’s notion that fewer no. of PSBs will be efficient and stronger due to economy of scale. Does this hold water always when we have the global example of Lehman Brothers? As a matter of fact, keeping the financial crisis of September. 2008 in view, the prominent economists had prescribed that in the aftermath of the said crisis, we should have rather moved towards smaller banks instead of wasting the taxpayers’ money on merged giant entities.

 02)How come a merged entity will ensure operational efficiency only because of its size? Services extended by Vijaya Bank are far better than many stronger banks in the country. Can any one guarantee that a merged entity will be able to address the pressing problems more efficiently? Is there any magic stick? We have seen many major mergers elsewhere just failed. We have also seen that SBI suffered huge losses during post merger of SBI-subsidiaries. We sometimes forget that rosy prospect shown in the presentation prepared for such kind of proposal may not happen in reality. There are number of such evidences in the history.

 03)Over its past 87 years of glorious, meaningful and existence, Vijaya Bank has handheld many young and energetic entrepreneurs, agriculturists, professionals and students in their respective endeavours and career building at every nook and corner of the country.

 04)Performance of Vijaya Bank is excellent over the past few years and the bank has the distinction of achieving net profit for the last three years in a row whereas almost all the PSBs including SBI suffered net losses mainly due to higher provisioning for bad loans and we understand that NPA in Vijaya Bank is minimal as compared to other PSBs. As against bad loans of Bank of Baroda of 12.5% of the Total Advances and Dena Bank bad loans rate of 22.7%, Vijaya Bank is by far the best of the lot with an NPA rate of 6.2% as on June 30, 2018. Kudos to the management of Vijaya Bank. The work culture and ownership of the staff members are the contributing factors for such sterling performance.

 05)Dena Bank is one of the ten banks which have been put to ‘prompt correction action’ (PCA) by the Reserve Bank of India, limiting the lending activities and expansion of the bank for last few months. We understand that a few criteria or Trigger Points for PCA are: Capital to Risk Weighted Assets Ratio (CRAR), Net NPA and Return on assets (ROA). CRAR of Vijaya Bank is near 14% (BOB: 12.13% and Dena: 10.6%) – a parameter which is an achievement that even the big Banks could not reach as yet. Net NPA of VB is the least (4.1%). ROA of Vijaya Bank is well above the benchmark of 0.25% (0.32%) (BOB: 0.29%), while that of Dena bank is negative (-2.43%).

 What is the rationale of merging a bank with such fantastic parameters with others having relatively worse figures – particularly with one, which is placed under PCA by the Regulator?

 06)We strongly are of the opinion that before taking  a hasty and political decision of the aforesaid amalgamation, the Governement could have set a target for the largest of the three i.e. Bank of Baroda to bring down its NPA rate to mid single digit levels i.e. near to the level of that of Vijaya Bank.

 07)We strongly believe that merger of a stronger bank like Vijaya Bank with a weaker and undercapitalised bank like Dena Bank will be a setback, as it is one of the weakest banks in the country, whose asset quality and financials have deteriorated sharply over the past few years.

08)Vijaya Bank is the only one Public Sector Bank, which has paid dividend to its owners – Government of India for the financial year ended 31.03.2018.

 09)Consolidation through merger/amalgamation in the banking sector would hurt the social obligation of the PSBs. We apprehend that in the name of rationalisation, many branches will be closed. Guess the plight of the customers of the branches likely to be closed. Will they maintain their accounts despite all these odd things? What about thousands of ‘Jan Dhan’ accounts opened by Vijaya Bank across the country at the instance of the Central Government, the owner of the PSBs? 

 10)The most serious problem plaguing the banking system today is that of NPAs and the consequent losses being made by the public sector banks on account of loan loss provisioning. How does merger/amalgamation help in the recovery of NPAs? Amalgamation of balance sheets of the three banks will only alter the NPA and capital adequacy ratios through financial engineering, without helping in the process of actual NPA recovery. This will only favour the willful and skilful corporate defaulters rather than restoring the financial health of the banks. 

 11)In a recent note to the Parliamentary Estimates Committee on Bank NPAs, former RBI Governor Dr. RaghuramRajan has termed bank mergers as a “non-solution” to the NPA problem. He has noted that we need concentrated attention by a high level empowered and responsible group set up by government on cleaning up the banks. Otherwise the same non-solutions (bad bank, management teams to take over stressed assets, bank mergers, new infrastructure lending institution) keep coming up and nothing really moves. Public sector banks are losing market share as NBFCs, Fintech companies, Payment Banks, the private sector banks et al.

 Why is the Union Government going against such sane advice, which emphasises on NPA recovery, and proceeding with the merger of the three public sector banks?

 12)The Insolvency and Bankruptcy Code (IBC) process initiated by the Government has not yielded the desired results. As per the information disclosed by the Ministry of Corporate Affairs, out of the 26 cases that have been referred to National Company Law Tribunals (NCLTs), only 2 cases have been settled till date, leading to haircuts of around Rs. 28000 crore for the banks.  The legal regime has been tilted towards the corporate defaulters, while the interests of the public sector banks are being subverted. NPA recovery through other channels like the ARCs has also failed, and emphasis has been laid on NPA write-offs, which have led to burgeoning losses for the banks. What is required is an overhaul of the NPA recovery regime, which makes it more effective, speedy and transparent. Exemplary penal action must be initiated against the willful defaulters and fraudsters in order to send a clear message to all stakeholders. Unfortunately, the political will required to adopt this course appears to be absent in the Union Government.

 13)The organisational disruption caused in these banks through the merger/amalgamation would relegate every other activity to the backstage. Banks involved will have to do fire-fighting for the next few years, adversely affecting other banking activities in order to integrate people, processes, technological platforms and procedures. The outcome may well be higher losses on account of provisioning and NPA accumulation, which will outweigh any efficiency gain that is being projected. Moreover, cost cutting measures through staff and branch rationalization will be severely detrimental to the interests of the employees and will vitiate the industry climate.

 14)Lessons from Past:-Post banking reforms, there have been 32 mergers, all of them of private banks with the public sector banks. In 1993, however, RBI forced a merger between Punjab National Bank (PNB) and New Bank of India, as the latter had low liquidity rate. PNB suffered a net loss of Rs.96 crore in 1996, following the merger. It had to face several problems and litigation relating to absorbing the staff of New Bank of India in its stream. It reportedly took PNB five years and more to get over the merger effect.A similar fate was met by Oriental Bank of Commerce when Global Trust Bank (private Bank) was merged with the former in 2004.

 The recent merger of SBI and its associates last year to had similar results. Even though technically, it is an internal reorganisation than a merger, the bad loans of the associate banks hit SBI’s profit adversely. SBI’s operating profit came down from 124 Billion Q3FY17 to 118 Q3FY18, not to mention the first ever loss in over a decade after accounting for provisions. The merger was not only a commercial failure but according to Bloomberg it also resulted in closing down 1,805 branches, fall in staff count by 15,762 due to retirement (VRS included) despite the new addition of 3,211 and administrative hassles even though the merger was within associate banks.

 If we look at the hard lessons learnt from the mergers of the past, we would be moving towards making good banks than big banks.Mergers cannot resolve or clean up the balance sheets; rather the NPAs of the three merged entities would simply add up. The improvement in certain ratios, if any, would amount to mere financial engineering, without resolving the actual problem.

 In this backdrop, we urge upon the Government of India to withdraw this proposed merger plan and instead launch a comprehensive action plan for NPA recovery, including:

 1. Ensuring immediate and strict penal action against corporate fraudsters and wilful defaulters.

2. Making the bank-wise list of all corporate defaulters public.

3. Making the IBC process more transparent and effective in order to recover NPAs and stopping huge haircuts for the public sector banks.

4. Strengthening the public sector banks through recapitalization and implementation of the approved Turnaround Plans, without hampering normal banking operations through unreasonable restrictions under PCA.

 We believe that the citizens of this country have the inherent and collective strength to stop the Union Government in pushing through the proposed merger of the Bank of Baroda, Vijaya Bank and Dena Bank. We demand for immediate withdrawal of this regressive proposal and request you to join us.




Public Sector Banks belong to billions and billions of citizens of this country; and not to billionaires.

We the Members of All India Vijaya Bank Officers'  Association (AIVBOA) appeal to you to join us in our struggle to Save Vijaya Bank's identity.