The Bank of Baroda headquarters in Mumbai, India. Picture: REUTERS/DANISH SIDDIQUI
The Bank of Baroda headquarters in Mumbai, India. Picture: REUTERS/DANISH SIDDIQUI

New Delhi — India is considering merging three state-run lenders as it seeks to strengthen the debt-laden banking system in Asia’s third-largest economy.

A panel headed by finance minister Arun Jaitley recommended combining Vijaya Bank and Dena Bank with Bank of Baroda, banking secretary Rajiv Kumar said at a briefing in New Delhi on Monday. The merged entity would become the third-largest bank by loans and the government would ensure there are no job losses, he said.

A larger, better-capitalised bank will be in a stronger position to negotiate with delinquent borrowers and will have the capacity to absorb losses as India accelerates its attempts to clean up the world’s worst bad-loan ratio after Italy. Indian banks are struggling with more than $210bn of stressed debt on their balance sheets.

"This merger would be looked on favourably by investors," said Siddharth Purohit, a Mumbai-based analyst at SMC Global Securities. "While the asset quality of the merged entity may be weak, the government seems committed to give it adequate capital support."

Shares in Bank of Baroda, the largest of the three, rose 0.6% in Mumbai before the announcement. Vijaya Bank added 0.9%, while Dena Bank dropped 0.3%. The combined entity would have outstanding loans of 6.4-trillion rupees ($88bn) and 9,489 branches, the second-highest among Indian banks.

Indian lenders have already taken dozens of top delinquent debtors to the bankruptcy court as overdue borrowings hamper fresh investment.

In May, the nation’s first big success under the new insolvency law handed about $5bn to lenders after Tata Steel bought insolvent Bhushan Steel.

India does not want a merger of weak banks, Jaitley said, adding the ability of the merged entity to increase and expand would be "inevitable". The boards of the three banks will meet to decide on the recommendation, he said.

Government-controlled lenders are estimated to hold 90% of nonperforming loans, and 11 of the 21 are in an emergency programme, supervised by the central bank, which restricts new lending. Dena Bank is one of the lenders in that programme.

India merged five associates of State Bank of India, the country’s biggest lender, into the parent in 2017.