Merger of three banks may see spurt in bad assets, warns report

Mumbai, September 20

The merger of Bank of Baroda, Vijaya Bank and Dena Bank by the government poses short-term challenges like spurt in bad assets, but will be beneficial over a longer term, a report said on Thursday.

Slippages may increase in the short-term as recognition of non-performing assets is harmonised and accelerated, India Ratings said in a note.

Stating that it may take appropriate rating actions after the merger proposed earlier this week gets a formal approval, it said the combined entity will require “significant bandwidth” in the management for business growth and NPA resolutions.

Dena Bank’s lower capital buffers are offset by Vijaya Bank’s higher capital buffers, it said, adding that the merged bank may need additional tier 1 capital depending on internal accruals for FY19.

However, from a longer term perspective, the merger will be positive with benefits like reducing combined operating costs, lower funding cost and strengthened risk management practices, it said. The asset-liability mismatch issues at smaller banks (Vijaya &  Dena) can be better addressed at the consolidated level, it said. — PTI