Govt weighs merger of Bank of Baroda, IDBI Bank, Oriental Bank, Central Bank
If the bank merger plan goes through, the resulting entity will become the second largest bank in the country after State Bank of India, with combined assets of ₹16.58 trillion.
The four banks that are being proposed to be merged are under pressure with combined losses of Rs 21,646.38 crore in the year ended March 31, 2018.
With the merger of Bank of Baroda, IDBI Bank, Oriental Bank of India and Central Bank of India, the government hopes to stem the rise in bad loans in their books.
This year on May 25, Bank of Baroda reported a net loss of Rs 3,102.34 crore in the Jan-March quarter due to a jump in provisions for bad loans. The bank’s provisions for non-performing assets for the quarter rose by 190 per cent year-on-year to Rs 7,052.53 crore in the last quarter of FY 2017-18.
After BoB, IDBI was the next to report net loss due to bad loans. IDBI Bank posted a net loss of Rs 5,662.76 crore in Q4 with gross NPA rising to 27.95 per cent of its loans at March 2018.
Except Bank of Baroda, all three banks – IDBI Bank Ltd, Oriental Bank of Commerce and Central Bank of India – are under the RBI’s Prompt Corrective Action (PCA) framework. The PCA framework is a mechanism to maintain sound financial health of the banks. It facilitates banks – in breach of risk thresholds for identified areas of monitoring such as capital and asset quality – to take corrective measures so that they are protected from going into financial.
Why government is planning this ?
The merger is an attempt by the government to help stem the rise in bad loans or non-performing assets (NPAs) in their books at a time when corporate demand is weak and banks are being cautious on further lending amid stricter central bank guidelines in case of a default.