Just yesterday, NaMo proposed a merger of the three banks namely – Vijaya Bank, Dena Bank and Bank of Baroda. This will be seen as a bad debts solver, something which the country is battling with. The plan of merger was seen as a negative move by the banking space as it will cause an erosion of capital and increased bad debt for buyers. Consequently, the bank stocks dipped and the banking domain lost about 203 billion rupees ($2.8 billion) of market value.
David Smith, chief investment officer at Smith Tan Asset Management Pte said, “The issue is: it will be a long, long time before anything happens, and a long path to work out the bad-loans issue.”
“The price response shows it’s a boon for the weak and a new headache for those getting better,” he added. Dena Bank which is the most inferior bank of all. On the newsbreak, it rose by more than 20% in the trade. Likewise, Bank Of Baroda dipped 16% and Vijaya Bank dipped close to 5.8%.
These mergers will put the Indian banking space back on track. The idea of merger strengthens the banks and makes them more compatible for handling the bad debt trails which have enveloped the country’s financial space.
The boards of all three banks will be meeting to curate a strategic plan and get approval for the government proposal, which is expected to be quite smooth as all the three banks are being controlled by the government. Another challenge is to appoint a new CEO for the new bank.
“Banks are already checking for fraud in all bad loans of over Rs 50 crore. Passport details (of borrowers) have been sought. The government has taken a series of steps towards clean banking and that the banks were in a fragile condition due to excessive lending and ballooning of bad loans,” FM Jaitley said.