Dena Bank Current Affairs
Union Finance Ministry announced proposal for amalgamation of three public sector banks- Bank of Baroda, Dena Bank and Vijaya Bank. The combined entity after consolidation will create India’s third largest bank. Post this merger, number of PSU banks will come down to 19 from 21, accounting for more than two-thirds of banking assets in the country.
This was second major banking sector consolidation in recent year after merger of five associate banks of State Bank of India with itself. The amalgamation will be through share swap which will be part of scheme of merger. The proposal will now need approval of boards of these individual banks. This amalgamation will particularly help Dena Bank, the weakest of the three which is currently under Reserve Bank of India’s Prompt Corrective Action (PCA) framework and has been barred from extending fresh loans.
The merger of three PSBs will help create strong globally competitive bank with economies of scale. It will enable realisation of synergies for networks, low-cost deposits and subsidiaries of these three PSBs. The merger will result in substantial rise in customer base, operational efficiency, market reach and wider bouquet of products and services. The merged entity will have better financial strength and will place all three banks on Finacle Core Banking Solution (CBS), a platform that helps banks enhance agility and efficiency of operations, while significantly improving customer experience across channels. The merger of these three banks will have no adverse impact on employees and customers of individual banks.
Key Features of merged entity
- Net non-performing assets (NPA) ratio: The amalgamated entity will have net NPA ratio of 5.71% as against 11.04% of Dena Bank, 5.40% for Bank of Baroda and 4.10% for Vijaya Bank.
- Provision coverage of amalgamated entity will have 67.5%, higher than PSB average of 63.7% and it will have a total of 9,489 branches across the country.
- Cost to income ratio of amalgamated entity is estimated at 48.94%, better than PSB average of 53.92%.
- Capital Adequacy Ratio of amalgamated entity is estimated at 12.25%, higher than regulatory requirement.
The merger of these three state-owned banks was part of government’s agenda of consolidation of PSBs. It was proposed by Alternative Mechanism comprising Chairperson Arun Jaitley. Under it, government did not want merger of weak banks and has therefore suggested idea of amalgamating one weak bank and two strong banks, in order to create entity which is able to increase banking operations. This also indicates approach that government may deploy in future consolidation.
Reserve Bank of India (RBI) has put state-run lender Dena Bank under prompt corrective action (PCA) framework. It has barred Dena Bank from extending fresh credit in view of deteriorating financial health due to mounting non-performing assets (NPAs) and mounting losses. It makes Dena Bank first lender to face curbs on lending under PCA framework.
This means Dena bank can disburse loans for credit facilities already sanctioned, but cannot sanction fresh loans. In addition, RBI also has barred from recruiting more staff. RBI may lift these restrictions in case the bank improves profitability and reduces the ratio of bad loans.
In May 2017, RBI had placed Dena Bank under PCA framework, which had imposed restrictions including ban on dividend payments. Despite earlier restrictions, the financial health of Dena bank had not shown any signs of improvement, prompting the banking regulator to freeze fresh lending.
Dena bank’s loss had widened to Rs. 1,225.42 crore compared with previous year, when the loss was Rs. 575.26 crore. For financial year 2017-18, it had posted a net loss of ₹1,923.15 crore. This was third consecutive year bank has posted a net loss. Moreover, its gross NPAs as percentage of gross advances, was 22.4% as on end March 2018 as compared with 16.17% year earlier. In absolute terms, bad loans rose to Rs. 16,361.44 crore from Rs. 12,618.73 crore. The bank’s net NPAs were up to 11.95% or Rs. 7,838.78 crore from 10.66% or Rs. 7,735.12 crore.
Prompt Corrective Action (PCA) framework
PCA is process or mechanism to ensure that banks don’t go bust. Under it, RBI has put in place some trigger points to assess, monitor, control and take corrective actions on banks which are weak and troubled. It was first introduced after global economy incurred huge losses due to failure of financial institutions during 1980s-90s.
Parameters for placing under PCA framework are Capital ratios, Asset Quality and Profitability. Indicators to be tracked for these three parameters are CRAR (Capital to Risk weighted Assets Ratio)/Common Equity Tier I ratio, Net NPA (non-performing assets) ratio and Return on Assets (RoA) respectively. If banks breach of any risk threshold mentioned above, it results in invocation of PCA against them.
RBI enforces these guidelines to ensure banks do not go bust and follow prompt measures to put their house in order. It has tightened its PCA framework in April 2017 to turn around lenders with weak operational and financial metrics, Depending on the risk thresholds set in PCA rules, banks placed under it are restricted from expanding number of branches, staff recruitment and increasing size of their loan book. Other restrictions include higher provisions for bad loans and disbursal only to those companies whose borrowing is above investment grades.