With PNB In The Ditch, Government Chooses BoB-Vijaya To Do The Dena Rescue Act

The main idea behind the proposed merger of Bank of Baroda, Vijaya Bank and Dena Bank is simple: one can talk scale, size, synergies, etc, as the rationale, but the real purpose of the merger is to put a bad loans eyesore like Dena Bank out of its misery.

For some time now, Dena Bank has been under the Reserve Bank’s Prompt Corrective Action (PCA) mode. PCA is a kind of sick ward where banks have to focus on resolving bad loans rather than grow their loan books. They can’t get out of the ward until they get more of their monies back, or the government pumps in more capital.

With gross non-performing assets (NPAs) of Rs 15,866 crore as at the end of June 2018 (23 per cent of its advances), Dena had no hope in hell of making it out of the PCA without a helping hand from the government. Bank of Baroda and Vijaya Bank have been chosen for this dubious honour.

The honour would probably have gone to Punjab National Bank (PNB), which is bigger than BoB, but PNB itself landed in the ditch when Nirav Modi and Mehul Choksi fled the coop after perpetrating loan frauds, leaving red stains on its balance-sheet and pink faces all around.

A BoB-Vijaya-Dena Bank merger gives the trio a very strong South-West presence, which means it was only the second-best option. PNB would have been a more logical fit for Dena, given the better geographical complementarities between the former’s Northern dominance and the latter’s retail presence in the West.

Of the three named for this shotgun wedding, Vijaya had the cleanest numbers, with gross NPAs of Rs 6,812 crore (7.3 per cent of advances), followed by a rapidly improving BoB, with gross NPAs of 12.46 per cent (or Rs 55,875 crore).

PNB, after its Nirav Modi fraud, is stuck with much higher gross NPAs of 18.26 per cent of advances, or Rs 57,807 crore in absolute terms. When it recovers, probably in the first two quarters of 2019-20, it will be blessed with the task of rescuing one or two other PCA cases.

Clearly, the government is in a hurry to get its high-ranking bad loan hosts out of sight.

But with just about two quarters to go before the fiscal year-end, keeping such rotten apples as standalone banks meant it would have had to inject more capital into them, possibly with poor chances of a real turnaround.

Another greater eyesore, IDBI Bank, with over 30 per cent of gross bad loans, was hawked to the Life Insurance Corporation (LIC) a couple of months ago. Luckily, despite the government’s shady reasons for selling that bank to LIC, it made for a good fit for the insurance behemoth. LIC may have paid a bit more than fair value for the pleasure of owning a full-fledged bank, but it can probably recoup the investments once it sells more insurance through bank channels.

With the BoB-Vijaya-Dena merger, which the government wants to process at top speed before the fiscal year ends, the Modi government is making up for lost time after it failed to act quickly to stem the bad loans problem at public sector banks. It is now shrinking the number of public sector banks through mergers and amalgamations – SBI started the trend, followed by LIC’s purchase of IDBI and now BoB, et al. More M&As could follow once the next government is formed in 2019.

India does not need 21 public sector banks, and privatisation ought to have been the preferred option for weak banks. Since that is not possible in an election year, the Modi government is doing the next best thing: hide the hideous banks in the folds of healthier ones in the hope that the more fundamental solutions can – like stake sales and privatisation – can be applied after 2019.