Bank of Baroda's merger with Vijaya Bank, Dena Bank: Four key challenges

Three years ago, the government picked Bank of Baroda, country's fifth largest bank, for a turnaround experiment. It appointed high-profile outside professionals to overhaul the scheme of things at BoB. Ravi Venkatesan, former chairman of Microsoft India and ex- independent director of Infosys, joined the bank as its chairman. P S Jayakumar, an ex-citibanker, took over as MD& CEO. In fact, a lot of professionals joined laterally to work with them to transform the bank. The idea behind inducting professionals was to create a fresh template for public sector banks (PSBs) for them to stay competitive in the market.

In the last three years, the duo managed to create some building blocks for a complete transformation of business. In fact, a lot of work was left to be done. Strangely, Venkatesan declined the offer for a second term. Jayakumar's tenure is also coming to an end next month. There is no news of his extension. But the merger announcement with Vijaya Bank and Dena Bank hit headlines just before his extension. The merger of Dena Bank and Vijaya Bank with Bank of Baroda will create following new challenges for BoB:

1) Does size matter?

The merged entity will emerge as the second largest bank after State Bank of India with balance sheet size of close to Rs 10 lakh crore. The SBI's balance sheet stood at over Rs 27 lakh crore as of March 2017. The next two after BoB will be HDFC Bank and ICICI Bank. But the question is; size for what? Amid fast-changing digital banking world, the banks should focus on faster processing of loans, risk management and cost and also on lucrative return for the shareholders.

2) New geographies

With Vijaya Bank, there will be new geographies in the South, but Bank of Baroda also has a national presence. There is likely to be some duplication of branches. The three banks actually mirror each other in terms of portfolio of assets and also the quality of portfolio. Dena Bank is in a bad shape with higher NPAs, higher cost to income and falling profitability. Dena Bank's numbers will pull down some of the profitability numbers of the merged entity.

3) Technology integration

The technology integration will be a big issue. The bank of Baroda recently upgraded its core banking technology from Finacle 7 to Finacle 10. It was a huge exercise lasting for months. In fact, the BoB was targeting on the up-gradation of its core banking of foreign offices from the older version. They will now have a huge task at hand to put all the three banks in the same platform.

4) Workforce troubles

The BoB had hired a lot of outside professionals at the level three after executive directors and MD&CEO. The merged entity will have lot of senior people coming from Vijaya and Dena Bank. The new capabilities that the BoB was building in loan processing at Gift City and two new IT subsidiaries require completely different set of people with new skills. These people from new banks have to be trained to put them in new areas like relationship managers, marketing and sales work etc.

The BoB insiders say the building blocks created by the new management, especially share services -- an independent processing subsidiary based in Gujarat's Gift city for retail loans -- is a good template for the new merged entity. They just have to shift the branch processing work of Dena and Vijaya to this newly created subsidiary. Similarly, the focus on relationship manager in the corporate banking will be expanded in the new entities merging with it.