Kerala's private sector Federal Bank (FB), which survived a takeover by ICICI Bank last year, is in the news again as its proposed merger with Lord Krishna Bank (LKB) has run into controversy.

The employees of FB, a leading bank in the state, have threatened to go on strike if the management goes ahead with the merger saying their bank had nothing to gain from the move.

Talks on the proposed merger took place between the two bank managements almost three weeks ago.

"A lot of fears and apprehensions are there from the employees and stakeholders of our bank because the promoter of LKB, the Puri Group, is demanding a huge amount and also a place in the director's board of our bank," said P.V. Mathew, general secretary of the FB Association.

"Even the Reserve Bank of India had imposed restrictions on LKB because of the intervention of the Puri group in the day to day affairs of LKB."

LKB was formed in 1940 in Trissur district and currently has 111 branches spread across 11 states in the country. It had a net worth of Rs.1.6 billion at the end of the last fiscal.

The LKB Officers Association has welcomed news of the proposed merger and said it would strengthen the banking sector in Kerala.

"Our bank has shown qualitative improvements in key parameters during the last fiscal and the merger would help increase the total number of branches of the banks," said S.K. Sanil, general secretary of the association.

FB, situated in Alwaye in Ernakulam district, was incorporated in 1931 and is now the largest scheduled commercial bank in Kerala. It has 456 branches in the country and has a net worth of Rs.7.15 billion.

FB employees say a merger would only help LKB and their bank would have to pay out close to Rs.3 billion.

"A merger means it would be on their terms, but if it is a takeover of LKB by our bank it would be on our terms," said a senior FB employee.

"Moreover, why should we merge with a bank that is in dire straits. Also several employees of LKB were previous employees of our bank and when a merger takes place, most of them would sit above us. That is not at all fair."

Things took an unexpected turn when opposition leader V.S. Achuthanandan wrote to Prime Minister Manmohan Singh asking him to stop the proposed merger but take steps for the takeover of LKB by a public sector bank.

"The proposed merger would not in any way benefit the public, shareholders or the employees of LKB. Instead it would only help cover the heavy bleeding of funds by the Puri Group," said Achuthanandan.