United Bank of India, stuck with bad debts of Rs 8,546 crore, is likely to be bailed out through a merger with Union Bank of India than through a government infusion of capital.

According to sources, the government will not want to re-capitalise United Bank, whose non-performing assets (NPAs) grew almost overnight during the tenure of chairman and managing director Archana Bhargava.

Arun Tiwari, CMD of Union Bank, denied the merger. "Government banks continue to stay and I absolutely deny this (merger with United Bank of India)," he told dna.

Union Bank has a pan-India presence and United is confined to east India. Union Bank has a 59% government holding versus United's 88%. Union Bank share currently trades at Rs 103 and United Bank of India's at Rs 24.

United incurred losses in the past two quarters after a profit of Rs 45 crore in the first quarter (April-June 2013).

The losses in the second and third quarter were Rs 489 crore and Rs 1,238 crore, respectively, forcing the Reserve Bank of India to issue a cap of Rs 10 crore on loans to a borrower account.

Bankers say political interference played a major role in the bank incurring such large NPAs, when there are built-in mechanisms to flag-off a potential NPA from the 91st day of non-payment of dues.

The government can divest its holding to the public, but with a dismal market cap of Rs 912 crore, such a move will not work out.

That leaves merger with a stronger bank the only option. Bankers say it is too early to comment and one would have to wait for at least two quarters to see the recovery measures initiated by the bank. Most bankers were surprised at the hasty exit of Bhargava.

"If the bank can improve profits, it will get back on track," said a chairman of a public sector undertaking (PSU) bank.

One strong reason for the merger talk is the sub-division of 26 PSU banks into seven groups, with smaller banks being the subset of larger ones, by the finance ministry last year.

"The move to form groups was nothing but a sinister move by government towards mergers. What is the point of forming a group to exchange vital information even on recovery?" said a senior member of the All India Bank Employees' Association.

Bank unions say the group was formed to prevent regional concentration. Union Bank has a pan-India presence, unlike United Bank of India that is mainly confined to eastern India.

The seven heads of the group and cluster of banks under each are: Union Bank of India with United Bank of India and Punjab & Sind; State Bank of India and its six associate banks; Punjab National Bank with Dena Bank and Vijaya Bank; Bank of Baroda with IDBI and Uco; Bank of India with Oriental Bank of Commerce and Andhra Bank; Canara Bank with Indian Overseas and Syndicate banks; Central Bank of India with Allahabad Bank and Bank of Maharashtra. (DNA)