Bank of Baroda shares fell over 11 per cent after earlier losing as much as 11 per cent in Tuesday's trade after the government announced its merger with smaller peers Dena Bank and Vijaya Bank, both of which gained. NDTV reported that Financial Services secretary Rajiv Kumar said before any further action, the approval of the proposal by the three banks is absolutely necessary.
"Alternative mechanism under Finance Minister, Arun Jaitley suggests bankofbaroda, VijayaBankIndia & dena_bank to consider amalgamation; to create India's 3rd largest globally competitive bank", he tweeted on Monday evening.
This is the third major restructuring in the public sector banking space undertaken by this government. This effort is also going to increase the banks' lending ability.
The three banks will, however, continue to work independently post-merger.
The merger is a positive step towards the consolidation of state-run banks, and synergies from the merger will result in operational efficiencies and better customer service, CIMB analysts wrote in a note. However, he assured that no employee will face any service conditions which are adverse in nature and the best of the service conditions will apply to all of them.
The move follows top lender State Bank of India previous year merging with itself five of its subsidiary banks and taking over Bharatiya Mahila Bank, catapulting it to be among top 50 global lenders.
The decision to merge the three banks came at a meeting held under the "alternative mechanism" framework that was drawn up a year ago to consider consolidation in banking. "That took a toll on the economy".
The government owns majority stakes in 21 lenders, which account for more than two-thirds of banking assets in Asia's third biggest economy.
Cheered by the news, Dena Bank hit an upper circuit limit of 20 per cent in the opening deals while Vijaya Bank was trading flat at Rs 60.20 apiece on BSE, up 0.67 per cent. Corporate loan book constitutes 60 percent of the total loan book for Bank of Baroda and only 17 percent is constituted by the retail loan book. The government had only unearthed the NPAs which were sought to be brushed under the carpet, he added. The banking industry was saddled with bad loans - called non-performing assets in banking parlance - of Rs 8.50 lakh crore.
The Finance Minister further added "In the first step of consolidation, we consolidated the subsidiaries of SBI with the parent bank to create a mega global bank".