Bank Merger is O.K, But not like this way...

Bank of Baroda, Dena Bank and Vijaya Bank the 3 public sector banks amalgamated to create third-largest lender as per the merger plan proposed by the Union government.

Makes sense, now this bank will be more powerful and better lending backbone. This entity now becomes the third largest lending entity with a massive outreach. The actual intention of government is also clear; it’s to check the overwhelming bad loan crisis the banking sector is suffering.

But wait…. Did all these banks gained equally? And if not what about shareholders’ interests?

After the so-called financial marriage, the shares of comparatively well to do entities i.e Bank of Baroda and Vijaya Bank have plunged like anything. Dena Bank the worst-performing entity among these three on the other side, is having a sip of wine after hitting the bullseye. Unlike the other 2 entities, its shareholders will gain considerably being part of a new entity with greater prowess. This merger came after the govt. let SBI’s associate banks amalgamate with their parent entity and the LIC of India taking over the struggling IDBI Bank.

Forced mergers like this one make no business sense for the stronger entities as the weaker entities tend to bring them down with their liabilities. It is unlikely to find a solution for the bad loan crisis that is killing the banking system. It is crucial to ensure that this kind of mergers do create an entity that is weaker than the pre-merger strong entity. Ideally said merger only solves on side of problem but it's not a wholesome solution. However, there is no denying that there are bucket full of public sector banks in India. With this fact, consolidation is the best idea in principle. But, mergers should be among the stronger banks. Meanwhile from a corporate standpoint, the merger can be detrimental to the weaker entities’ interest as well. The dominant shareholder will dictate critical moves that ought to impact the interest of minority shareholders, who won't have a say.

The stronger shareholder loses w.r.t value, and weaker shareholder would lose w.r.t decision making strength. So this deal is not at all a win-win one, rather more of a loss-loss.