Indian Bank shares slumped over 7% in early trade on Tuesday, i.e. September 3, after Finance Minister Nirmala Sitharaman announced the lender’s consolidation with Allahabad Bank under the government’s mega merger plan for public sector banks (PSU banks).
At 9:22 am, shares of Indian Bank were trading down 5% at Rs 189.80, after hitting an intra-day low of Rs 185.25. Meanwhile, shares of Allahabad Bank were trading down 1.7%. The merger of Chennai-based Indian Bank with Allahabad Bank will create India’s seventh-largest public sector bank with Rs 8.08 lakh crore business and strong branch networks in the south, north and east of the country. Moreover, since both banks reportedly share a common core banking software (CBS), BaNCS, integration and realisation of gains would be quicker.
Indian Bank will also get Rs 2,500 crore of capital infusion from the government as part of the upfront release of Rs 70,000 crore capital for PSU banks. Padmaja Chunduru, managing director and chief executive at Indian Bank, said in a statement on Sunday that the merger of Indian Bank and Allahabad Bank will create a robust amalgamated entity with a pan-India presence. “Indian Bank currently has a strong presence in South India, whereas Allahabad Bank is present in northern and eastern India. This will also enable major scaling up of both the banks’ business due to complementary networks since currently both use the same CBS platform (BaNCS), thereby enabling the quick realisation of gains,” Chundru said.
In a separate development, the bank announced in a regulatory filing a reduction in its marginal cost of funds-based lending rate (MCLR) by 15 basis points across all tenors. The revised rates will be effective from 3 September 2019. The one-year MCLR will now stand at 8.45% per annum from 8.6% earlier.
Sitharaman on 30 August unveiled a merger plan of 10 PSU banks into four to create fewer and stronger global-sized lenders amid a slowdown in economic activity. The four new set of banks would be created after merging the following banks -- 1) Punjab National Bank, Oriental Bank of Commerce and United Bank of India; 2) Canara Bank and Syndicate Bank 3) Union Bank of India, Andhra Bank and Corporation Bank; and 4) Indian Bank and Allahabad Bank.
Indian Overseas Bank, UCO Bank, Bank of Maharashtra and Punjab and Sind Bank will continue as separate entities due to their strong regional focus, while Bank of India and Central Bank of India will also operate separately.
While the move is aimed at making Indian banks globally competitive, analysts raised questions over merging the weak banks with strong ones at a time when asset quality concerns linger.