The government on Monday announced that public sector banks-Dena Bank, Vijaya Bank and Bank of Baroda will be merged into a single entity, making it India's third largest bank.

The merged entity will have total assets of more than Rs 14 lakh crore.

The net non-performing asset (NNPA) ratio of the combined entity will be at 5.71 percent, significantly lower than the public-sector bank average of 12.13 percent.

Consolidation is always anticipated to be disadvantageous for the stronger banks. However, the proposed merger comes across as a credible move.

According to Edelweiss report, the proposed merger has many synergies which may prove helpful for the stronger banks –Vijaya Bank and Bank of Baroda going forward. The report highlights that the size of the weaker bank – Dena Bank is small, thus making it easy to absorb.

Moreover, all the three banks work on the same technological platform, which eases integration and the banks will also enjoy complementary geographies as Bank of Baroda has a stronghold in the western part of India while Vijaya Bank is strong in the south. This will help the merged bank to scale up across the country.

Here is what the merged entity will look like:

Bank of Baroda is the biggest of the three in terms of market capitalisation, followed by Vijaya Bank.

The merger will also help the banks in managing the balance between their corporate loan book and retail loan book. Corporate loan book constitutes 60 percent of the total loan book for Bank of Baroda and only 17 percent is constituted by the retail loan book. While, for Vijaya Bank and Dena Bank, the retail loan book is more than 25 percent, around 21 percent and the corporate loan book is 55 percent.

The net NPA ratio for the merged bank would be around 5.6 percent as compared to 5.4 percent for Bank of Baroda and a little higher than 4.1 percent of net NPA ratio for Vijaya Bank. The net NPA ratio is highest for Dena Bank at 11 percent.

First Published:Sept 18, 2018 2:16 PM IST