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India mulling merger of three state-run lenders

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 will become the third-largest bank by loans and the government would ensure that there are no job losses, he said.

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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 US$210 billion 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 Ltd. "While the asset quality of the merged entity may be weak, the government seems committed to give it adequate capital support."

The combined entity will have outstanding loans of 6.4 trillion rupees (S$120.6 billion) 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 US$5 billion to lenders after Tata Steel Ltd bought insolvent Bhushan Steel Ltd.

India doesn't want a merger of weak banks, Mr Jaitley said at the press conference, adding that 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 added.

Earlier in the year, he had said that bank consolidation would happen after strengthening lenders.

Government-controlled lenders are estimated to hold 90 per cent of non-performing loans, and 11 of the 21 are in an emergency programme, supervised by the RBI, which restricts new lending. Dena Bank is one of the lenders in that programme.

India merged five associates of State Bank of India (SBI) - the country's biggest lender - into the parent last year. Bharatiya Mahila Bank was also merged into SBI. The government had formed a panel on "alternative mechanism" for the consolidation of state-owned banks last November. The panel headed by Mr Jaitley included Railways Minister Piyush Goyal and Defence Minister Nirmala Sitharaman. BLOOMBERG