After the amalgamation of two erstwhile public sector banks (PSBs), Vijaya Bank and Dena Bank into Bank of Baroda (BoB), the BoB is now the second largest PSB of the country. It now has 9,500 branches and 85,000 employees with a business mix of more than Rs. 15 lakh crore. It is reported that the BoB will protect the interest of the all employees and customers. “The consolidation offers cost and revenue synergies. The realisable revenue synergies arise from wider product offering, improved cross selling, deeper micro market penetration inter-alia on account of potential for branch relocations, improvement in fees income, etc.”- a press release of the BoB pointed out.
Historically, experience of bank mergers or amalgamations in India is mixed. In most cases, improvement wasn't much. Even the recent amalgamation of associated banks of SBI into the SBI has not been very satisfactory. A bank has to do its business in an complex environment where domestic and international economic factors influence it. Even political interference is not absent. Now private and public sector banks are doing business in a common market. Practically, these two categories do not do their jobs in the same way. Therefore, the BoB faces several challenges in the days to come.
Amalgamation cannot be an end in itself. Some of the challenges are internal to the bank and some are external to it. Some of the internal challenges, as pointed out by Rajat Dasgupta who had been in a high position in SBI, are first, Dena Bank and BoB had a similar background and culture which can be taken as the old Gujarati culture. But Vijaya Bank came from a different milieu. So some cultural shock in human resources development is expected. Second, Dena Bank and Vijaya Bank had a huge baggage of NPA. Third, Dena Bank and Vijaya Bank had a large exposure to trade finance. In this sector asset recovery is more difficult. Fourth, amalgamation may not give any geographical advantage as these three banks have narrow coverage in India’s north and east. Fifth, BoB’s systems and governance are considered to be more robust than Dena Bank and Vijaya Bank. There may be systemic conflict.
Overall challenges before the banking industry
There are several challenges before the banking industry. They impact BoB. Sanjoy Basu, Associate Professor, National Institute of Bank Management, Pune, pointed out some of the points that the banking industry in India should take care of in running its business. These are discussed below:
It is known that banks are not always proficient in managing risks. It is not that one bank has to follow the RBI guidelines only. Before disbursing loans a bank must study the financial conditions of the business unit. The financial condition varies with time. Therefore, banks must keep vigil on the changing financial condition of the business units.
Banks must examine capability of the loan takers about the repayment capability of loans. Even the global financial crisis emerged due to the subprime crisis. Huge house loans were disbursed by financial institutions to people without proper assessment of their repayment capability. Therefore it is of prime importance to assess properly the repayment capability of loan takers.
The valuation of the collateral is a very important task of the banks. The market valuation of the collateral may change from time to time. That should also come under banks’ consideration. This can help banks to recollect money by selling collateral if the loan takers default on loans. There may have been legal problems in selling the collaterals. The banks should investigate the valuation before accepting something as collateral. At times, ratio of loan versus value of collateral is fixed at 80%. But it is not enough in many cases. This should be higher if needed.
In India, market for bond is not free. There are many obstacles in its sale and purchase. Mainly the financial companies are in an advantageous position to issue bonds in the market as their ratings are higher. Even other big corporate are not always able to raise money by issuing bonds. Therefore the RBI is suggesting that banks should raise money from foreign markets by issuing masala bonds, that is, repayment to bond holders in rupees. So long as corporate sector has been able to raise money by issuing bonds in the market their dependence on banks will continue.
The banks in India always offer homogeneous products. For example, SBI and UBI offer similar products. The main difference between them is the rate of interest. In this situation competition will lead to lower profit for the banks. This may not be healthy for the banking industry. This should be changed. That is why the RBI gave licence to open different types of banks, like payments banks, Bandhan bank, small bank, etc. But this is yet to be successful.
It is said that big banks have a social advantage in running a business. It is true that the BoB is now the second largest PSB in the country. But this not sufficient for being a successful bank. There are a lot of big banks that have either liquidated or face great trouble. But only time will tell how far the BoB will be successful in its business.