"This (proposed amalgamation) move will not address public sector banks' present problem of non-performing assets". The newly merged entity would be the third largest bank of the country, said Financial Services Secretary Rajiv Kumar.
The merger decision was taken by the "alternative mechanism", which met on Monday.
The government will then prepare an amalgamation scheme for the banks which will need to be approved by the cabinet of ministers and the houses of parliament, Jaitley said, adding he expected the process to be completed in the current financial year ending March 31, 2019. The meeting chaired by Jaitley was attended by Ministers Piyush Goyal and Nirmala Sitharaman.
Announcing Monday's decision, Finance Minister Arun Jaitley said the government did not want a merger of weak banks and has, therefore, suggested the idea of amalgamating one weak bank and two strong banks, in order to create an entity which is able to increase banking operations. The three banks will create the third largest bank in the country.
In this regard, Venkatachalam pointed out that State Bank of India's bad loan woes got exacerbated after it acquired five associate banks. Before, 2008, the total amount of bank lending stood at Rs. 18 lakh crore, he said. "And between 2008 and 2014, there was lending of nearly Rs 55 lakh crore", he said. "That took a toll on the economy". During the UPA regime, the banks had not reported NPAs of just Rs 2.50 lakh crore, thereby concealing the seriousness of the problem.
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Jaitley said the government took a series of steps to tackle the NPA challenge including the Insolvency and Bankruptcy Code "which was a defining moment in creditor-debtor relationship". "The consolidation will help in creating a strong globally competitive bank with economies of scale", said a finance ministry official. The merged entity will have a combined business of Rs 14.82 lakh crore, with 10,000 branches and around 85,000 employees.
In the short-term, however, there could be an impact on the share price of state-run banks as few would be ready to take long term bets on them, said Asutosh Mishra, banking sector analyst at Mumbai-based Reliance Securities.
It added that gross NPAs for the combined entity have started declining with a decline of Rs 1,048 crore in the first quarter this year.
Dena Bank has a gross NPA ratio of 22 per cent - among the highest across the industry.