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Project Report

On
An Analytical Study on
Consolidation of Banking
Sector in India

By

Institute of management Technology
Distance Learning Programme
Ghaziabad

Submitted By

Name : Himanshi Jain
Enrollment No. : 52102486
Address for : C-242/Yamuna
Correspondence Vihar, Delhi-
110053
Mobile No. : 9891772894
Resume of : Yes
Project Guide
Attached
Consent Letter : Yes
from Guide
Attached
Specialization : Finance
Ares
Date of : 30/03/2008
Submission

Guide’s Resume
G-599, Second-A, Nehru Nagar, Ghaziabad

E-mail:caamitbhargava@hotmail.com Amit Bhargava

Date of Birth : 18th Feb. 1981

Educational Qualification : B.Com from C.C.S. University
Qualified Chartered Accountant
from ICAI.

Professional Experience : Banking, Merchant Banking,
since April 2006 working with
SMC Group of Companies as
Manager Finance (Member of
*National Stock Exchange,
*Bombay Stock Exchange,
*National Commodity Exchange,
* Multi Commodity Exchange),
Registered Insurance Broker.
17, Netaji Subhash Marg,
Daryaganj, New Delhi-110002.

Responsibilties : * Funds Management
* Finalization of Account
* Commission Handling of
franchisee in the channel
* Internal Audit of Account
* MIS report for funds
planning for Directors &
companies.
* Currently undertaking

the responsibility of Merging of M/s SAM Global Securities Ltd. (Listed at Ludhiana Stock Exchange).(Listed at Guwahati Stock Exchange) with M/s SMC Global Securities Ltd. (Amit Bhargava) Contents Acknowledgements Preface Page .

This is to certify that the synopsis on the project entitled “An Analytical Study on Consolidation of Banking Sector in India” presented by Ms. student of MBA bearing enrolment . Institute of Management Technology.Chapter 1 Introduction Chapter 2 Profiles of Indian Banks Chapter 3 Main Mergers. Ghaziabad. Sub: Consent Letter Sir. Acquisitions & Consolidation Chapter 4 Main Driver For The Merger Acquisitions & Consideration Chapter 5 Relevance of Merger. Distance Learning Programme. Himanshi Jain. Acquisitions & Consolidation Chapter 6 Experience & Limitations of Merger & Consolidation Chapter 7 Findings & Suggestions Bibliography To.

(Amit Bhargava) . either in part or in full. to any other institute for the award of degree or diploma. this work has not been submitted.no. -52102486(session 2005). Thanking You. In my knowledge. in partial fulfillment of the requirement for the award of degree of MBA. is a bonafide work carried out by him under my supervision.

Mergers & Acquisitions-factors each aspect. Consolidation Mergers & Acquisitions in the financial sector is an open challenge across the global world. Foreign Sector & Regional Rural Banks as well. Acquisitions & Consolidation-Govt. . Chapter-II Describe the Profile of Indian Banks–Public Sector.I. This study is divided into seven chapters. Private Sector. But also from other segments of financial sector. Chapter-III Describe the Main Mergers & Acquisitions–Historical Perspective Phase Wise. Contents Consolidation Mergers & Administrations is gaining its strength from competition that emanates not only almost the banks. Chapter-VI Describe the Experience & Limitations of Mergers. Chapter-V Describe the Relevance of Consolidation. A spiriting wave of Consolidation Mergers & Acquisitions across the global has heralded a sea change in the nature of financial sector. role.B. Significance of Problem & Objective of study. Market led mergers may gain prominence in the coming years. Chapter-I Describe the Introduction. Chapter-IV Describe the Main Driver for the Consolidation. Mergers & Acquisitions Local as well International level. Since the financial sector is gearing to move towards Basel-II issues pertaining to consolidation gain momentum and this is visible in our country as well. role as well as R.

.Chapter-VII Describe the Whole hearted summary of the findings & Suggestions fully discussed.

poor customer service. For making the medium banks competitive profitable and vibrant in the long run. income recognition asset classification and provisioning etc. developer some weakness such as low profitability. Main banking is changing its shape and color. The expansion phase after Nationalization which was maker by geographical and numerical proliferation of bank branches. financial sector reforms which were introduced in the early Nineties of the last century based on the Narismham committee recommendations of 1991 & 1998. Finance plays an extremely crucial role in the continuity and growth of a business. mounting non-performing assets and over staffing etc. introduction of international norms of accounting in terms of capital adequacy. deregulation of the interest rates. The phase witnessed the liberal entry of private and foreign banks. Liberalization. Fit has to retain its human face such that the current offers bear fruit for a large number of people. Chapter – 1: Introduction Statement of the problem: Financial management is an integral part of overall corporate management. . deregulation and global integration of banking activities have increased the risks of the banking industry in depth and dimensions. operational freedom to the banks. reduction in the statutory reserve requirements of statutory liquidity ration and cash reserve ratio. These changes brought competitiveness in the Indian banking industry and profitability became the core business objective of the banking sector.

which was more of less a neglected area before the introduction of financial sector reforms. identification and management of these risks. . Banks being aware of the risk dimension of their business are proactively devising their internal mechanisms for anticipation.

which has a long way to go. such as merger of bank of Madura with ICICI Bank. Indian banks are passing through the phase of mass communication the twin objectives of handling which are the increasing volumes of business effectively on one hand and improving the housekeeping and customer service on the other. IFCI with IDBI and Global Trust Bank with Oriental Bank of Commerce. Times bank with HDFC bank and ICICI Ltd. merging and closing down the non-viable branches. We are still in the midst of the consolidation phase. The computerization will provide level paying filed for nationalized banks in relation of foreign and private sector banks. Legislative changes are taking place for making the . which led to introduction of voluntary retirement (VRS) in the nationalized banks with a view to rationalize the manpower. The opening of new branches is based purely on business consideration.This phase has been characterized by following features: The nationalized banks have started rationalizing their branch network by shifting. Computerization has rendered the manpower surplus in the banking industry. The increasing competition has made the banks more customers oriented. with ICICI Bank. The increasing competition among banks with the entry of foreign and private sector banks has increased the customers’ expectations on one hand and the rationalization of rate of interest and service charges has reduced the profit margins on the other because of the decreasing spreads. The increasing competition and shrinking profit margins led to the voluntary merger of the banks for going competitive edge.

“Survival of the fattest” has become a reality in most of the sectors including with entry of foreign players. on the other. This phase is likely to last by the end of present decade. The small and medium sized banks. In the era of globalization the organization will have to be competitive in order to face the challenges. For coping of with the problem of profitability. The banks are experiencing the pressure of competition in the form of changing customer requirements. Desire to become “Champion” is important to become strong through consolidation mergers and acquisitions. internationally competitive with sound capital base. Customers’ retention and thinking spreads. The emerging scenario after the consolidation phase will be dominated by existence of five to six nationalized banks having global presence and strong capital base with few private banks of all India character coupled with small regional banks suiting to local requirements. International accounting standards are being introduced in a phased manner with a view to make the Indian banks. To cope with these pressures the banks are becoming more and more customer friendly by introducing the tailor made products suiting to various segment of the population.banks more transparent and viable. With regard to India it is worth while to mention that merges between banks worded be of . including some of the nationalized banks are finding it difficult to survive in the long run because of the increasing competition and squeezing profit margins there by leading towards phase of merger and acquisitions in the final phase of the consolidation. banks are adopting tow pronged strategy by diversifying their activities to increase non-interest in-come on one hand controlling the operational expenses by rationalizing their network and workforce.

The basic idea is that the combined bank will create more value than the individual banks operating independently. Evolution of the Indian Banking Industry Table-1 Evolution of Indian Banking .Post-Independence 1947 to till date 3. Pre-Independence 1786 to 1947 2. Each and every aspect of life is touch by banking sector now a day.advantages only if it takes into account the synergies and complementarities of merging units.Post independence to till date can be classified in three sub categories. 196 regional rural banks. It is generally accepted that mergers promote synergies. It is clear that the banking sector has need and continues to need to execute almost magical transformation to be successful. The resulting combined entity gains from operating and financials synergies operational synergies generally refer to gains in economics of scale and economies of scope. 52 scheduled Urban cooperative banks and scheduled state cooperative banks. Basically a merger involves a merger of two or more banks. The Indian banking industry consisted of 97 commercial banks-28 public sector banks 20 private sector banks and 42 foreign banks. Economics refer to the phenomenon of the “2 + 2 =” effect brought about by synergy. The growth of the banking industry in India may be studied in terms of two broad phases:- 1.

Pre-Independence Post Independence (1786-1947) (1947 to till date) Pre-Nationalization Post Nationalization Post Liberalization (1947-1969) (1969-1991) (1991 onwards) Classification of Concepts:- Mergers: It is defined as combination of two or more companies into a single Company where one survives and the others loses its corporate existence. Acquisition: It is the purchased by one company of controlling interest in the share capital of another existing company. It can also be defined as the fusion of two or more existing companies all assets. The survivor acquires the assets as well as liabilities of the merged company or companies. the share holders of each blending company becoming substantially the share holders in the company which is to carry on the blended undertaking. liabilities and stock of one company stand transferred to transferred company in consideration of payment in the form of equity shares of Transfer Company or debentures or cash or a mix of these modes. Amalgamation: (Consolidation) Halsbury’s law of England describe amalgamations as a blending of two or more existing undertaking into one undertaking. Two or more banks combine to form a new entry in India the legal terms for merger is amalgamation: Take over: It is generally involves the acquisition of a certain block of equity capital of a company which enables the acquirer to exercise . These means that even after the takeover although there is change in the management both the firms obtain their separate legal identity.

These achievements deserve to be applauded. the mindsets that were cultivated after independence also changed.control over the affairs of the company. The new challenges are therefore. Shakespeare said. “Ignorance is the curse of God. In the banking sector. when the freedom for action is complete and when the price for in action may threaten their very survival. Our banks have done a great job in extending banking services. action is the wing wherewith we fly to heaven. After 14 years after reforms started with a bang. especially banking reforms took as deep root. some sectors have responded admirably.” . is that public sector banks or for what matter any bank cannot rest upon their or its laurels. They have developed a store house of expertise in lending to different sectors including agriculture and small and medium enterprises. knowledge is the wing where with we fly to heaven. “Inaction is the curse of God. especially at time. They have built a pan Indian branch network. Public sector banks have been the sharpest instrument in increasing the degree of financial inter-mediation in the economy. normally merger/amalgamation and acquisition/tank over are used interchangeably.” Paraphrasing Shakespeare it can be said. The point however. when unprecedented opportunities knock at their doorsteps. Among these the financial sector. not greater or more formidable than the challenges that we have overcome.

2005) Scheduled Banks in India Scheduled Commercial Banks Scheduled Co-operative Banks Public Private Foreign Regional Sector Sector Banks Rural Banks (27) Banks (29) Banks (33) Banks (196) Scheduled Scheduled Urban Co.Table-2 Scheduled Banking Structure in India # (As on March 31. Banks (57) Banks (16) Nationalized SBI & Its Old Private New Private Bank (19) Associate Sector Banks Sector Banks S (8) (21) (9) (8) Chapter – 2 Profile of Indian Banks . State Co.

Today in the world’s top 1000 banks. over 200 are located in USA. over 80 in Germany over 40 in Spain and around 40 in the UK. out of which as 14 are in the top 500. Consolidation of Banks: Statistical overview: Table-1 Data regarding all nationalized Banks Rs. just above 100 in Japan. which is the main frame work on which modern banking is based it is imperative that we restructure our financial and banking sector to make it more globally competitive with domestic as also global consolidation. there are many domestic banks from the developed countries than from the emerging economies. Crore 2002-04 2004-05 2005-06 Actual Actual Estimate . India on the other hand had 20 banks with in the top 1000 out of which only 6 within the top 500 banks with the great Talent available in India which sees Indians in many important positions in global banking as also the well established technology services sector of India. out of the top 1000 banks globally. Even China has as many as 16 banks within the top 1000.

Total deposit 6.787 95.00.000 Net Profit 7784 11.000 Total Income 79.88.224 5.93.00.60.000 .003 14.000 Total Advances 3.12.081 7.140 4.947 9.598 85.

The figure will be as shown under: . Crore Total deposit 47368 Total Advances 26315 Total Income 5000 Net profit 737 Now assume that the state bank subsidiaries are merged with state bank of India and other nationalized banks are merged with each other and the number is reduced from exiting 19 to 8.Table-2 Average Figure: per public sector bank & per nationalized bank: As per estimates of 2005-2006 Rs.

4 (ii) Next 10 2.Table-3 Consolidation will help drive down in intermediation costs Operating Cost/Average Cost (A) PSU.03 Avg 3. Banks (i) Top 5 2.45 (iii) Remaining 737 (B) Private Sector Banks: (i) Top 5 1.91 (iii) Remaining 3. of Banks Total Assets [Source: IBA Bulletin Special Issue] .01 [Source: RBI Mckinsey analysis] No.52 Avg 2.59 (iii) Remaining 1.79 (A) Foreign Banks: (i) Top 5 2.82 Avg 1.

So the scheduled bank.crores constitute only 4% form this it is apparent a few banks managing a larger proportion of total banking assets is evident. SBI 14465 National 36927 RBS 14773 Foreign Both 276 Other Schedule Bank 3363 Besides. India is a hugely over banked and under serviced country. the 19 nationalized banks have 36927 branches.crores and below Rs.crores constitute 14% and there are 12 banks whose assets size below Rs. The SBI and its seven associates have about 14465 branches. The 2nd Narasimham committee report was the first to make the proposal for the process of consolidation in the PSUS suggesting that they should be brought down to 3-4 global entities and 5-6 national entities. In India we have four category of banking players public Sector Banks (PSU) old private Sector banks. 15 banks whose assets size between Rs. There are close to 100 scheduled commercial banks 4 non schedule commercial banks and 196 regional rural banks.10000/.80000 crores such banks constitute 50% of the overall total assets of the industry.10000/.25000/. new private banks and foreign banks. However only one . There are 6 banks whose asset size is high than Rs. there are a few thousand cooperative bank branches on an average one bank branch caters to 15000 people. The RRBS have 14773 branches and foreign banks around 276 branches.

In other words the scale benefits are limited up to certain level of size.’ which allows the average cost to fall and average revenues to rise with increase in size. consolidation can also pose considerable challenges by way of integrating people. which is more important than scale and scope economies. Number of branches. culture. Despite gains in efficiency.bank – State Bank of India is among the top 100 banks in the world. including the managerial efficiency. are affected by the bank size. Fusing formal systems and processes is a Hercules task and it become more complicated due to disruption in existing system. However while considering the size of a bank it is necessary to link the size with bank’s profit and efficiency. capital and reserves etc are interchangeably considered as the size of a bank. Similarly the ‘scope economics’ allow a bank to divisibly its business and product mix to maximize its revenue. Consolidation is this imperative in the Indian banking industry. volume of business asset size. . However the scope economics also to a certain extent can have a favorable influence on the revenue. there is a limit to ‘scale economics. is also deemed as critical success factor that comes into play beyond size consideration for banks. rule base management system and universal set of guidelines and standards. On the other hand. Profit revenue and cost functions. Need for Consolidation of Banks:- In banking literature. Managerial ability to control costs. Consideration through merger can be easier if it is operational through rapid advancements in the communicate system. the concept of ‘Size’ is not uniformly defined. knowledge and common understanding to assimilate different style of operations prevailed before consolidation.

Where it gained importance in early 1980. Fund mobilization and deployment will be easy with large size leading to larger market share. Economics of scope can be achieved by enlarging the size and introducing product diversification. Large size allows wide penetration and hence boosts revenue of the bank. . Risk diversification is possible with large size and larger geographical reach. . The importance of size in the performance down-in of blanks can be outlined as follows: . The emerging view of the recent scale economies literature is that the average cost cure in banking has relatively ‘flat U Shape’ with medium–sized banks being more scale efficient than very large or small banks. . For cost reduction. In the US case most of the studies found evidence of scale economics for small banks. when large scale merger and consolidation took place. The word ‘MERGER’ may be taken as abbreviation which means– M – Mixing E – Entities . . Most recent studies on scale economy have used flexible functional forms like ‘translog’ to indicate the ‘U-Shape’ of average cost curve to include the possible potential cost variation. . The literature on scale economies in banking is mostly confined to the US economy. there is need to achieve economies of scale. Large banks can operate preferably with thinner margin compensated by sheer volumes.

R – Resource for G – Growth E – Environment R – Renovation .

Consolidation is inevitable and Need of the Hour:- In the Indian context one of the earliest studies was conclude by Keshari and Paul–1994 who took deposit as output. In India top banks by size are also top by size of profit though lagging behind in performance indicator. This is hardly surprising since the banking business has become global before globalization becomes a buzz word. All over the world. Added to this. Their estimates centered on PSBs and cost of capital was not considered by the author. Banking is one among the largest and most profitable industries in both domestic and global markets. In a quest to achieve there. the effect of size of the bank has been widely discussed and in fact India is relatively slow entrant into the subject. Refocusing the bank to grow the “good bank” and make enough profits is the new mantra of banking sector. particularly PSBs are operating at scale below the optimum size. the market power of the banking sector is increasing owing to globalization. which decrease with increasing size. Ray and Sanyal. banks are expanding their branch network. Srivastava concluded that large size provides gains to cost efficiency for in India. Now is has become imperative for banking industry to get consolidated to with-stand storms and shocks what-So- ever be so that they will not shiver and wither from being shaken by the global market forces. Chattergee-1997 using bank deposits as an output measured the scale economies of SCBs and found the same conclusion that small blanks do feature inherent economies of scale. increasing their technology investment and enlarging their business operations. 1995 found large economies of scale in cost structure of banks. Using Ray scale economies and expansion path scale economies. . Srivastava-1999 found that Indian banks. The topic attained heat in recent times with the failure of many banks due to low risk absorbing Capacity and lack of protecting the shareholders’ interest.

Cash Deposit 6.11 bills to Intermediation .15 87.51 134.85 8.71 Income to total Assets 7.13 104. Ratio of secured 94. Ratio 3.47 70. regulatory.32 86.13 87.16 59.69 4.56 67.10 31.02 8.07 99.14 105. Ratio of deposit 79.95 63. HR and technology related issues proactively.56 79.31 6. RRRS Nationali SBI and Foreign All zed Its Banks SCBS Banks associat es 1. 2003 clearly felt that consolidation in the Indian sector was imminent.86 8.22 65. Ratio of Term 53.66 Investment Dep.14 deposit to Total Deposit 5. Ratio of Intt. “Banking Industry: Vision 2010” document prepared by 1 BA in Nov.66 7. New Models for Restricting RRBs: The 196 RRBs to gather have 14433 branches in 516 districts spread over 22 states of the country.88 to total Liabilities 4. Ratio of wages 85. They have about 19% share in rural deposits and 21% shave in rural credit of all banks. Thus they control about 37% of rural branches of all banks.75 63.35 Ratio 2.58 6.99 79.03 66. Credit + 77. accounting. If the consolidation process has to take place smoothly it will be necessary to look at the legal.43 75.63 advances to total advances 6. 9.89 6.41 63.74 71.

43 6. The administrative model on the lines of SBI 9one control office with state level LHOs) can work best for such a single bank for rural Credit delivery.50 20.04 0.43 6. Need for a Merger Process Advocates of banking consolidation believe that M & As of banks will produce more efficient and healthier banking system less prone to .28 16.20 14.44 3. Cost 8.5 9.21 7.93 Advances 15.18 9. Return on 11. Return on 6.13 3. Cost of Funds 6.88 5.81 21.32 bills to Total costs Exp.40 19. Return on 12.26 6.02 3.74 8.31 6.07 bills to total Income 10. Return on 4. Ratio of wage 27. 9.28 9.7 12.18 8. Return on 1.89 15.70 9.62 2.20 6. Cost of 6.21 18.02 5.04 1.62 14.49 18.59 1.04 10.73 Advances adjusted to cost of funds 17. Return on 5.37 19.16 5.98 10.82 9.57 Equity 12.05 Assets 11.41 15. Ratio of wage 24.86 3.96 1.99 2.80 Investments 16.45 3.60 Investments adjusted to cost of funds So RRBs to be effective should be converted into one seamless organization of all India structure with a single owner to fully top upon the core competencies of the RRBs.46 Deposits 13.

things will change fast after the new issuance from China. The average market capitalization on the top there players in India is at $9 billion which is third from bottom. The industry structure is fragmented in India.failure. largely on a voluntary basis for strategic purposes. We have not come across any study to shoe that during the post-merger period transaction cost have fallen for customers or that the enlarged banks have provided better services at the same cost prevailing before merger. The enlargement of banks through mergers would increase the competitive strength and raise the efficiency of the system due to economies of scale. The general opinion is that only the corporate business class and upper-mid-class can enter multinational banks or banks like ICICI and HDFC. In India merger and amalgamation of banks are not new between 1969 and 2005 a total of 26 banks were merged. Again globalization of banking consolidation is that it might lead to reduction in bank lending to small business Excessive risk exists when merger/acquisition is very rapid without adequate managerial and financed capital to manage the expansion. The benefits and synergies from bank consolidation are obvious. Though China is the lowest now at $ 5 billion. There are a lot of small players in the Indian banking sector. No one has studied the real benefits of such mergers. Also even as India is among the top countries in the world in respect to GDP its strength is not reflect in the banking space. Now consolidation is the trend which will take place sooner or later in India as well. But in recent years particularly after 1991 even profit-making banks have been merged to achieve the number or position. Larger the Better Some indicators of performances of three Banks:- Operating Expenses .

N Bank 02-03 03-04 04-05 05-06 06-07 o 1 HDFC 5771 810 1055 1691 2421 2 ICICI 2012 2571 3299 5001 6691 3 PNB 2051 2371 3278 3023 3326 . (In crores) S.

41 It is clear from the data table–10. Profitability too has been on the decline for both ICICI bank and HDFC Bank. Thus merger policies of these banks have not resulted in mitigation of operational cost.93% in 1995-96 to 1.11.65 228.17 1.N Bank 02-03 03-04 04-05 05-06 06-07 o 1 HDFC 1.48 1.05% to 1.98 1.13 1.08 1. And it has not helped improve profits.52 1.47 1.87 330. in case of ICICI Bank the operating expenses increased from 1.09 3 PNB 0.92 407.31 1.45 1.88% during the same period. The PNB’s working hour maybe much less than those in ICICI and HDFC banks.95% in 2002-03.07 1.05% but in case of PNB.03 Business for Employee (In crores) S. . Though the business per employee had shown significant increase which could very well be on account of longer working hours.37 2 ICICI 1. This becomes obvious when they are compared to PNB with substantially lower level of business per employee.38 1. there has been a slight fall.N Bank 02-03 03-04 04-05 05-06 06-07 o 1 HDFC 865 866 806 758 607 2 ICICI 1120 1010 880 905 1027 3 PNB 195. In 2003-04 the ratio increased to 2.12 that operating expenses as 90% of total assets for HDFC Bank went up from .22 176.Return on Assets (In crores) S.30 1.

will have to treat at human resource equitably. . it should ensure that the merging banks go through identical corporate governance through various training programs at all levels to introduce comparable competence and culture of work. If a large bank fails. The presence of large banks in greater numbers in future would make the supervision of these institutions to ensure that they are healthy and are not taking excessive risk. though at an increasing operating cost. But market forces are the driving force behind bank consolidation. So if the finance ministry has decided to merge public sector banks. However the growing banking consolidation and the increasing competitive environment resulting from this process are going to face some challenge. An uphill task of course though banks supervision and increase in competition due to wide spread consolidation is certain to result in higher levels of development and economic growth. Further the increased diversification resulting from bank consolidation should make for a healthier banking system less prone to crisis. Depositors can’t spot whether or not banks are taking excessive risk in the course of consolidation and restricting. The RBI will have to be vigilant to make sure that banking consolidation does not lead to excess risk taking by banks seeking exponential growth through acquisition or unhealthy concentration in certain activities. Today we do not know the project-wise exposure of leading private banks. the entire sector will face enormous strain care must be taken to prevent such failures. The management. post merger. This has happened in 1980 in the west when depositor lost money due to banks risky exposure. There is an increase in competition and quality and quality in services. Banks some-time makes mistakes by having excess exposure in illiquid assets or by having adverse selection or investment in volatile assets.

“Chorus for banking reforms gets louder.” Morgan Stanley says India must join consolidation wave sweeping developing countries- Economic Times Oct. 08-2005. .

Table-18

Business for Employee

Population-Group 1995 1998 2001
Nationalized Banks -- -- --
Rural 14.48 13.02 13.39
Semi-urban 16.27 15.68 15.51
Rural+Semi urban 30.75 28.70 28.90
Urban 24.47 22.82 22.68
Metropolitan 44.76 47.92 48.90
Urban+Metropolitan 69.23 70.74 71.08
PSBs -- -- --
Rural 13.83 13.02 12.69
Semi-urban 18.50 18.40 17.99
Rural+semi-urban 23.33 31.42 30.68
Urban 24.56 22.92 22.74
Metropolitan 43.09 45.63 46.56
Urban+metropolitan 67.65 68.55 69.03

Chapter – 3

Business for Employee

Historical Perspective:
The banking system in India went through various stages before it
emerged into modern banking systems with increase in trading and
administration of East India Company. The early banking system of
banias, chetty, sahukaras, podars and shroffs was replaced by banks
established by English agency houses during the end of eighteenth
century. But almost of all them failed due to failure of parent agency
houses during the trading crisis of 1829-33 as they mixed bank with
trading.

The next set back by the banks was faced during 1862-65 during
American Civil War, which led to a speculating boom in the Indian
cotton trade, as a result of which many banks and Companies were
formed. Although almost all of them failed as soon as Civil war was
over and the boom collapsed. The three presidency banks set up by
respective Govt., also failed due to handicap of inexperience and their
inability to conduct foreign exchange business.

A list showing banks failed and mergers from 1720-1885 is
enclosed as Table-1.

Table-18

Business for Employee

Founded Failed year Name of Bank Where
year Merged F/M Founded
1720 1770 F Bank of Bombay Bombay
1770 1832 F Bank of Hindustan Calcutta
1773 1775 F Bank of Bengal & Bihar Calcutta
1784 1791 F Bengal Bank Calcutta
1786 1791 F General Bank of India Calcutta
1808 1920 M Bank of Calcutta/Bank of Calcutta
Bengal 1808
1819 1928 F The Commercial Bank Calcutta
1824 1829 F The Calcutta Bank Calcutta
1829 1848 F Union Bank Calcutta
1833 1866 F The Agra & United Agra
Service Bank Ltd.
1835 1837 F The Bank of Mirzapore Mirzapur
1840 1859 F North Western Bank of Mussoorie
India
1840 1920 M Bank of Bombay: Re- Bombay
formed in 1868
1841 1842 M Bank of Asia London
1841 1849 M The bank of Ceylon Colombo
1842 1884 F The oriental Bank Bombay
corporation
1842 1863 F The Agra saving fund Agra

1843 1920 M Bank of Madras Madras
1844 1850 F The Banaras Bank Banaras
1844 1893 F Shimla Bank Ltd. Shimla
1845 1866 F The commercial Bank of Bombay
India
1845 1851 F The conpore Bank Kanpur
1846 1862 M Dacca Bank Dacca
1852 1855 F Chartered Bank of Asia London
Chartered Mercantile
Bank of India London &
China
1854 1857 F The London and Eastern London
Banking Corp.
1854 -- The Comptoir D’ Paris
Escompte of Paris

1860 -- Central Bank of Western Bombay
India
1862 -- Bank of Rohilkhand Rampur
1863 -- Punjab Bank Ltd. Rawalpindi
1863 -- Sind Punjab & Delhi bank Calcutta
Corp. Ltd. Leading to
Grindlays Bank
1865 -- Allahabad Bank Allahabad
1881 1858 F The Oudh Commercial Faizabad
Bank

Source: IBA Bulletin

Under the impetus of the Swadeshi movement, the hither-to slow
growth of Indian banking picked up pace and between 1900-1914 a
large number of new banks camp up. Further the growth of Indian
banks suffered its first and major set bank in 1913, during the worst
ever banking crisis in India, starting before the war and accentuated by
it followed by post war depression (1922-23) wherein the rate of bank
failure was very high and thereafter followed by incident of partition
during 1947.

Probably till that time no proper attention was paid to rescue these
banks besides proper controlling and monitoring, to check the failures.

After 1951, with the emergence of RBI as a decisive factor armed
with new power it acquired in 1949 under banking companies Act to
intervene in the event of crisis in a bank, the picture totally changed.
The failure of Math bank created a panic among the depositors and had
it not been for the amalgamation of four banks in Bengal into United
Bank of India, there might well have been another major banking crisis
with the liquidation of two scheduled bank the Laxmi Bank and the
Palai Central Bank in 1960, several small and medium sized banks
experienced serious runs on them. It was the first and appropriate tool
to provide relief to ailing banks besides maintaining public and

depositors’ confidence in banking system in the country hence, a new
section 45 was inserted in banking companies Act in Sept. 1960.

According to section 45, the RBI can submit a scheme to the
central Government for amalgamation of a banking unit with a well
managed bank with in a period of hot more than six months
moratorium granted by the govt. on an application made earlier in that
behalf by the RBI. One advantage of compulsory amalgamation over
liquidation is that the depositors get immediate credit to the extent of
readily realizable assets at the common of the amalgamation additional
payments being make as and when the remaining assets are realized.

Thus in 1961 alone thirty banks were merged compulsorily with
other banks. As a consequence of improved atmosphere, banks failure
decreased, while the number of mergers amalgamation and transfers
in-creased from one in 1954 to twenty two in 1963 and seventy nine in
1964.

The idea behind this merger to strengthen the banking system,
small, weak and insufficient upon scheduled banks which could hardly,
if ever have become viable and eligible for a license, were being
merged with other scheduled bank. It is evident that the basic objective
of banks mergers of amalgamation in this period was to check the
frequent failure of banks and to save them from facing crisis and
maintaining public confidence.

A brief list of banks mergers, amalgamations transfers of assets
and liabilities are given in Table-2

Table-2

Year Voluntary Compulsory Other Transfer Total
Amalgamations merger mergers of Assets
under section under and
44-A section 45 Liabilities

credit management. staff productivity and profitability of banks. 3 3 1956 -. -. there was marked showdown in the branch expansion and attention was paid to improved housekeeping. The banks were faced with losses. -. -. Steps were also taken to reduce the structural constraints that obstructed the growth of banking industry. customer service. -. 4 8 1960 2 -. 1 1 1955 -. The rapid branch expansion resulted in stretching beyond the optimum level of supervision and control. 4 1953 -. 4 -. 4 1951 2 -. Banks merged since 1961: All the banks listed below (except new bank of India) were amalgamated under section 45 of the banking regulation Act 1949 while the new bank of India amalgamated under section-9 of the banking companies (Acquisition of undertaking) Act 1980.1950 4 -. As a result of these measures. 1 3 1952 -. -. -. -. -. -. 1 2 3 1954 -. -- 1957 2 -. -. 2 4 1958 4 -. -. -. Then there were a series of policy initiatives taken by the RBI. 5 7 1961 1 30 2 3 36 1962 3 1 2 5 11 1963 2 1 4 15 22 1964 7 9 1 62 79 Total 31 41 19 101 192 Source IBA Bulletion Consolidation process: The consolidation process of Indian banks has started in early 1960 itself. 2 1 1 1959 4 -. . -. -. -.

Maharashtra 16 Rayalaseema bank ltd. Bank of 27.09.61 Ltd.61 7 Bank of Poona Ltd.05.1961 Lahore Ltd. 10 Wankaner bank ltd. National Bank of 09. Travancore 6 Bank of Kerala Ltd. Name of Bank Merged With whom Date of merger No merged 1 Prabhat Bank Ltd.06.1961 Ltd. 18 merges with the SBI or its associates and 132 transfers of assets and liabilities. from 1960 to June 1993 there were 21 voluntary amalgamations. Indian Bank 01. Syndicate Bank 04.06.61 permanent bank ltd. 2005. Sangli bank Ltd. Bank of Baroda 29.61 17 Cuttack bank ltd.09.06.61 . State bank of 17.61 12 Kotlayam orient bank State Bank of 17.03.06. United Bank of 04.09.06. 03.61 Maharashtra 14 Poona investors bank Sangli bank 28. Dena bank 17.06.61 20 Merchants bank ltd.61 ltd.61 India 18 Pie Money Bank Pvt.61 5 Travancore forward bank State Bank of 15. Bank 3 Bank of Nagpur Ltd. Canara Bank 17.03.09.06.61 11 Seasia midland bank Ltd.05.61 bank Ltd.61 ltd. Besides these banks. 15 Bharat Industrial bank Bank of 01. Ltd. Syndicate Bank 04.09. Tagore 04.04.07.61 ltd.09. Travancore 13 Bank of Konkan Ltd. South Indian 17.61 Travancore 9 Venadu bank Ltd. Canara Bank 20.61 8 Bank of new India Ltd.61 19 Moolky bank ltd. Table-3 Sr.06.03. 2 Indo-Commercial Bank Punjab National 25.61 Maharashtra 4 New citizen bank Ltd. Bank of 19. 21 Tezpur industrial bank United bank of 04. The following list of Banks merged since 1961 to Oct.

23 Satara Swadeshi United western 06. 36 Unnao commercial bank Bareilly corp.61 corp.61 bank ltd. 37 Latin Christian bank ltd. India 43 Vettaikaran padur Bank of madura 01. 39 Shri Jadeya Shankarling Belgaum bank 26.09. 31 Unity bank ltd.65 mahajan bank ltd.64 corp. 44 Malnad bank ltd. commercial bank ltd 29 Peoples bank ltd.11. Lakshmi 11. State bank of 17. 40 Bareilly bank ltd. State bank of 20.02. 42 Allahabad trading & BKG State bank of 16.10.64 bank ltd.61 26 Jodhpur commercial Central bank of 16.11. India 27 Bank of citizen ltd.09. Syndicate Bank 11. State bank of 08.10. Indian Bank 14. ltd. bank ltd.64 ltd. United Industrial 06.10. ltd.61 25 Phaltan bank Sangli bank ltd.61 ltd. Canara banking 17.06. bank ltd. ltd.1. Syndicate bank 14.61 bank ltd.10.64 Knnukaparameshwari ltd.08.08.02.09. Lord Krishna 16.65 .61 commercial bank ltd.61 30 Pratap bank ltd.64 bank ltd.64 Travancore 35 Salem Shri Karur Vysya bank 01. 28 Karur mercantile bank Lakshmi 19. 07.64 bank ltd. bank ltd. Raghunathmull bank Canara Bank 04.64 bank ltd. India 22 G.08.10.09. ltd.08. State bank of 06. ltd.61 commercial bank ltd. 34 Chochin Nayar bank ltd. Banaras state 16. 12. 24 Catholic bank ltd. United industrial 24. 41 Thiya bank ltd.12.03 33 Metropolitan bank ltd.10.62 India 32 Bank of Algapuri Ltd.61 ltd.08.64 Travancore 38 Southern bank ltd.11.

08.09. State bank of 03.08. bank ltd.90 58 Parur central bank ltd. Central bank of 29.89 ltd 56 Bank of Tamilnadu ltd. 52 Bank of cochin ltd. Union bank of 08. State bank of 26.70 ltd. Do 1996-97 65 Bareilly corp.90 59 Purbanchl bank ltd.12. Bank of India 20.05. Bank of Baroda 03.85 India 53 Hindustan commercial Punjab National 19.02. Indian Bank 20.86 bank ltd.02.02. 26.90 India 60 New bank of India Punjab national 04.11.65 bank ltd. Union bank of 22. Lord Krishna 13. Bank 54 Traders bank ltd. mysore 45 Josna bank ltd.12.69 India 49 National bank of Lahore Do 20. Indian overseas 20.90 bank 57 Bank of Thanjavur ltd.99 66 Sikkim bank ltd.99 India 67 Times bank ltd.02.06.11. Punjab national 01.08. State bank of 08.03 bank . 50 Miraj state bank ltd.02.69 India 48 Bank of Behar ltd. bank ltd.68 Patiala 47 Chawla bank ltd. Oriental bank of 1996-97 commerce 64 Bari Doab bank ltd. New bank of 13.65 bank ltd.88 55 United industrial bank Allahabad bank 31.02.10.10.93 bank Some of banks merged after the reform process started are listed below:- 61 Bank of Karad ltd. Bank of India 1993-94 62 Kashinath Seth bank State bank of 1995-96 India 63 Punjab corp. Bank of Baroda 20.04. HDFC Bank ltd.07. 46 Amrit bank ltd.69 India 51 Lakshmi commercial Canara bank 24.00 68 Banaras state bank ltd. Bank of Baroda 13.02.02 69 Nedungadi bank ltd.

A merger movement may become pronounced feature of the banking industry. This may force banks to consolidate into a smaller number of larger banks. “ ……….05 ltd. which will enable them to respond to the stimulus to global opportunities. it. Size is a great competitive advantage for banks and this level of fragmentation needs to be corrected so as to create 4-5 ‘right size’ banks. The 21st century may see the dawn of “DARWINION BANKING” only the banks that could fulfill the demands of their market and changing times would survive the prosper. Size . the banking sector is already experiencing symptoms of excess capacity.70 Bank of Madura ICICI Bank 2001 71 Global trust bank ltd. bank of the size of SBI with world class standards.10.. a lack of capital and to poor profitability. forces are obliging may blanks to consolidate. [Trends and Progress in Banking] Source-RBI In the wake of globalization. Further. ………. Oriental bank of 24. the international experience has shown a steep surge in mergers and convergence in the banking industry and their efforts have shown remarkable result in their profit.”. which may be viewed as a solution to excess capacity. Whether the competition stems form within the industry or outside. This trend is likely to be accentuated as more and more national and international players are planning entry into and already overcrowded turf. lowering of entry barriers and inviting foreign investment in the industry. It is observed that return on assets of a large number of banks that under took mergers and acquisition increased immediately after the merger and continued to remain higher in successive years. The bank for international settlements Reprt-1992 note.04 commerce 72 Centurion bank Bank of Punjab 01.07.

completion and risk management are no doubt critical to the future of banking but it is our belief that governance and financial inclusion would also emerge as the key issues for a country like India at this stage of socio-economic development. the banking sector has become even more fragmented in the reform year since 1992. the paced with which banks accept the new paradigms of globalization would determine winners and losers. The Indian banking system would therefore see consolidation through mergers and Acquisitions and a coexistence of both national and international players. Consolidation. 3 to 4 large globally competitive banks . 8 to 10 national banks with a network of branches throughout the country engaged in ‘Universal’ banking. As traditional competitive advantages vanish. It is widely believed-based on empirical evidence sector.5%. The market share of the top 10 banks is 57%. After all state bank of India is after the many M & A the only bank in India ranked among the top 100 best banks in the worlds.enables banks to lend large sums to select corporate. The market share of the top 5 banks in India is 41. thereby ensuring a better quality asset book. . The remaining local banks and regional rural banks being the niche players. As against this china the market share of the top 5 banks is 75% and that of the top 10 banks is 85% with the entry of new private sector banks. As we envisaged by the Narasimham committee report (1991) the broad pattern of the structure of the banking system in India as I foresee will be:- . Structurally the banking sector displays a high degree of fragmentation. .

such as Government share holdings of public sector banks. towards friendly relations with a view to get best possible results out of available resources. geographical presence etc. performance. Govt. Bank suiting to each other requirements on the basis of strengths on the basis of capital. egoism etc. Mindset should be changed from superiority/inferiority. should come up voluntary for mergers and amalgamations. system and procedures. following points should be taken case of: 1. Union and staff etc. business. An atmosphere conductive for M & A can be created from all sides viz. Few most important impediments for paving the way towards merger and amalgamation on commercial consideration and mutual arrangements. legal provisions relating to banking and industrial matters must immediately be resolved if at all the pace of M & A (Merger & Acquisition) has to be accelerated in Indian banking Industry. consolidation on commercial considerations. 2. . technological advancement. Banks. Cultural and human resource integration can be given top priority. automated and technology oriented so as to provide environment more competitive and customer friendly. it is need of the hour to restructure the banking sector is India through mergers and amalgamations in order to make them more capitalized. Chapter – 4 Main Driver for the consolidations Mergers & Acquisition Looking the global trend of consolidation and convergence. 3. 4. In order to boost the mergers and acquisition.

The overcome the problem of slow pace of growth and profitability due to widening of banking industry.‘Cooperation and not competition’ need of the hour: With the opening up of financial services under W. . Overcrowding and mushrooming up of many banks. regime. To utilize the underutilized market power in terms of regional or geographical coverage in best possible manner. This happens when the merger is vertical or conglomerate. Objective behind mergers and acquisitions in banking Industry: The people objectives behind mergers and acquisition may be highlighted as given below: . .T.O. Globalization of operations iii. . To achieve some sort of diversification. The public sector banks have to compete both with the private banks and the foreign banks both in terms of products and service parameters. Consolidation of players through mergers and acquisitions. the process of globalization would gain momentum. ii. To limit competition and prevent. Universalization of banking With technology acting as a catalyst. To revive a loss making bank as it may not able to restore the non- performing assets (NPA) on its own. Development of new technology iv. . In the banking system all over the world the following changes are visualized: i. banking segment except to see great changes in the coming years. .

. In their 1996 article. compiled a list of factors motivating bank merger and acquisition activity:- a. many indicated that revenue enhancement due to increased size was a moderately important factor motivating consolidation. . To utilize under utilize resources. To crave a nice for one self as a strategic empire builder and amass vast economic power. Revenue growth from a larger customer base b. (A) Revenue Enhancement: Consolidation can lead to increased revenues through its effects on firm size.e. Diversification of income from both products and geographic area f. . Ability to spread fixed costs over a larger customer base d. firm scope i. The resources include human. physical and managerial skills. Dominant Factors: A number of issues emerge in the consideration of expected continuation of bank M & A activity high on the list is what factories are likely to dominate in future bank merger and acquisitions. Optimal deployment of excess capital g. Research suggests that mergers may provide some opportunities for revenue enhancement either from efficiency gains or form increased marked power however. To gain economies of scale and increase income in proportion to less amount of investment. Efficiencies in operations c. . through either product or geographic diversification as market power. Spiegel and Govt. The search for higher value of common shares.

(D) Diversification of income from both products and geographic area: The one area where consolidation seems most likely to reduce firm risk is the potential for diversification gains. and ICICI Bank clearly demonstrate in the Indian context that consolidation can lead to increased revenue. although even here the possibilities are complex. On the other hand after consolidation some firm’s shift towards riskier asset for folios and . (B) Efficiencies in operations: Mergers and acquisitions can lead to reductions in costs for a variety of reasons. (C) Ability to spread fixed Cost over a larger customer: Base: New technological developments have encouraged consolidation because of their high fixed costs and the need to spread these costs across a large customer base. many pointed to economics if scale as a very important motivating factor for consolidations. economies of scope or more efficient allocation of resources. such gains are most likely to arise due to assets. some gains may also derive from geographic diversification on the liabilities side of the balance sheet. fail to find much evidence suggesting that cost saving constitute an important out-come of M As. In addition. At the same time. The existing research literate. However. Diversification across geographies. diversification gains may result from consolidation cross financial products and services. The merger of ICICI Ltd. which focuses on cost saving attributable to economies of scale. dramatic improvements in the speed and quality of communications and information processing have made it possible for financial service provider to offer a broader array of products and services to larger numbers of clients over wider geographic areas then had been feasible in the past.

crores] Asset size <1000 -. 2. (E) Stabilization of asset quality: Small sized banks with weaker assets would find it difficult to survive in the long run as they need to meet the additional capital requirements.consolidation may increase operating risks and managerial complexities.5 percent is width in the acceptable range.33% [Source IBA Bulletin] In the developed economies.68% >8000 -. More broadly.P. the average NPA levels are at a level of 1-2 percent and average for the Indian context around 2. Average net N. -.1000 crores is around 4. 3. The exit route for such banks will be to get absorbed by banks with strong asset quality. requires a huge cost outlay: .98% 25000-8000 -. there is no guarantee that cost saving or efficiency gain will be realized. % Table-1 [Rs. NPA Level 4.A. For example. organizational diseconomies institution become larger and move may occur as financial complex if senior management teams stray for their area of core competency. (F) Changing environment – Capital allocation using Basle-II frame work.98% which substantially high weaker asset quality necessitates infusion of additional capital and hence Stabilization of asset quality is important. The average NPA level for the banks whose size lesser that Rs.

Effective credit risk assessment is fundamental in banking and it is an especially important skill in India where credit satins and traded security prices are less available as additional information for credit risk managers. . Even if there is data. In such circumstance. loss given default and so on would not provide a good guide to the current situation. calculating the key variables of Basle-II default probabilities. the skills of credit risk manager are very important. because the economic environment in which banks operate has changed so much since the mid–1990. preferably through a full economic cycle. There are very limited data default histories. RBI has indicated the desire that banks must more towards adopting standardized approach for credit risk management and basic indicator approach for operational risk management as per Basle-II frame work. The New Basle-II Capital Accord Minimum Supervisory Market Capital Review Discipline Requirement Process Pillar-I Pillar-II Pillar-III In fact. Basle-II expects banks to access those parameters on the basis of a long period of time.

share holders have gained power relative to other stakeholders in recent years. An important innovation of Basle-II is the incorporation of supervisory review into the international framework. Hence under the changing environment of implementing Basel-II framework. as it is the result of a structural move towards the institutionalization of savings. This is expected to result in bankers and regulators engaging more focused discussions of risk management pillar 2 recognizes that national supervises may have different ways of entering. While budgeting huge cash outlay is inevitable. the size of total assets of the bank plays a critical for spreading the fixed cost over a larger size of assets. This development is expected to continue. Table – 2 . including efforts by banks to assess their capital adequacy. (G) Search for high value of shares Increased competition has helped to squeeze profit Margins. Default probabilities and loss given default are terms used in the context of Base-II‘s pillar one. Basle-II however is more than just its pillar-I it is based on three pillars. Importantly. This second pillar it is critical that the minimum capital requirements set out in the first pillar be accomplished by a robust implementation of a supervisory review process. the small banks tend to lose out their competitiveness. resulting in shareholders pressure to improve performance. the minimum capital requirements. The way out of this situation is to go for consolidation and this would ensure creating shareholder value as against destroying shareholder value if no action if taken.

1000 – 25000 crs. lower NPA etc. 2500-80000 crs. There are several parameters under which one could measure whether the business is really creating shareholders value. 25. 18. One such important parameter is the profitability of the overall business.04% IBA Bulletin Special The bank has to remain rich in order to enhance its credibility among the various stake-holders. Suggestions:- The banks having similar technology can be merged: Table –3 Bank Core Banking Solution Vendor Bank of India Finacle Infosys PNB No Finacle Infosys ICICI Bank No Finacle Infosys IDBI Bank No Finacle Infosys Axis Bank No Finacle Infosys . Average PAT (%) Across Asset Size <Rs. but in addition the share-holders look at learning per share accusation year on year.35% >Rs. 10000 crs.70 % Rs. -. It is not enough that net interest margin is high. It is interesting to note that almost all size of banks are generating profit and hence the share holders interest is currently taken care of completely. -. however the equity market has reacted differently for different type of banking categories. 22. 23. -. -.66% Rs.80000 crs.

and the banking regulation Act. ⇒ The large number of branches and the manpower can be controlled through the upgraded technology. They will accept the change for their betterment. well furnished and decorated branches and better working conditions. With the core banking solution the more number of units will not matter. ⇒ The productivity of the merged entity will improve and most of the other problem will be solved automatically. Further the manpower can be managed by using technology. which is popularly known as the bank nationalist ion Act. ⇒ Imparting training to the employees. There will not be much problem on this account. Their attitude can be changed through training. Chapter – 5 Relevance of Consolidation. better facilities. better remuneration. Mergers and acquisitions Consolidation in Banks: Legal Problems and Solutions Currently. the banking companies (Acquisitions) Act 1970. ⇒ The consolidation will take care of region-wise presence of banks. The training will help improving knowledge and developing skills amongst the employees.Bank of Rajasthan No Finacle Infosys Bank of Punjab No Finacle Infosys Alternatively the technology can be developed to convert the data of the bank having different technology. While SBI is governed . They can be prepared for change and work in a new environment. there by addressing the problem of maintaining balance throughout the country. 1949 govern nationalized banks.

It involves a big bank taking a smaller bank or a group of smaller banks . private banks are covered under the Banking regulations Act 1949.by the State Bank of India Act. A committee was formed (by Indian banks association) IBA for drafting a legal framework for consolidation in the domestic banking sector. Section 44-A of the Banking Banking Regulation (BR) Act allows a private Banks to acquire another private Bank. 1959. Emergence of two Scenarios There could be two basic banking structures that could emerge. to place banks under a moratorium and prepare a scheme for amalgamation. 1955 and the seven associate banks of SBI are governed by the SBI (subsidiary banks) Act. the state bank of India and its seven associate banks. 1. Section of the BR Act gives RBI powers to apply to the Govt. The new umbrella legislation could suggest a single composite banking law that could govern all state owned banks. A legal framework for consolidation in the banking sector is how being put in place to consolidated legislation governing both public and private banks instead of separate status existing now. However the provision of the BR Act does not clearly spell out mergers and acquisitions among the public Banks (PSUs) without the intervention of the RBI. The committee has already finalized the report and sent to the Govt. of India for further action. and all the private banks.

and hence it could be reckoned as another large player.com HDFC Bank. When we took at the table No.cr) ICICI 1. Private Sector ROA % NIM Total Assets Bank 31.32 360548 Source: ICICI Bank. It involves a merger of group of mid-sized banks to form a larger institution.1 it is an apparent that ICICI Bank emerges at the largest player in the private sector bank.3. There is always a possibility for HDFC Bank to merge with HDFC Ltd.33 4. First Structure: It is perfect fit for the new private sector bank taking over an old smaller banks or a group of smaller banks.07 (Rs.com .09 2.6 344658 HDFC 1. 1.2. We are summing here an existing new private sector bank taking over a smaller bank or a group of smaller banks.

The asset size is critical for the profitability of the business and hence the asset size is below a threshold limit.09 2. the NIM is much higher in the case of HDFC Bank and this could be due to how cost of resources. this will not be economical. HDFC Bank 2.81 1. 1. UTI Bank 1.6 344658 2.Table–1 Private Sector Market ROA % NIM % Total Assets Bank 31. For e. profit margins and market share and growth.15 1.g.33 3. Technology advancement for providing service meeting Basel-II requirements for risk management would require additional infusion of funds. Federal .68 360548 3. ICICI Bank 6. .03. It could be seen that though the ROA is almost same for ICICI Bank and HDFC Bank.com HDFC Bank.Cr. It is also interesting to note that the PAT (Profit after Tax) for ICICI Bank is 33% against HDFC Bank at 28%.04 Share % Rs.00 1.com Let us look at some of the key performance indicators: . when NIM is lower and where as the PAT is higher for ICICI Bank? This could be due to larger proportion of other income or due to large asset size.32 21882 4. The fixed could be spread over when the asset size is large and otherwise.00 13658 Bank Source: ICICI Bank.87 1. There are 18 banks whose market share is less than 1% and for these banks to sustain the pressure in the medium to long term in the changing scenario is going to be difficult.27 4. How could be a scenario.30 1. it could destroy share holders value.namely- return on Assets.

Source: RBI.org. The process of M & A is comparatively for the nationalized banks as the controlling interest is with the Govt. The group is will be integrating risk management practices SBI group as one entity in the future will become a largest bank in the country. HDFC Bank merged entity of IDBI Bank absorbing 4 or 5 old private sector Banks. (B) Consolidation within the nationalized Bank: A cluster approach could emerge in the Case of nationalized banks. SBI is already a player who is well positioned to be on the global map. The combined entity of the SBI group is currently holding close to one third of the market share. II Second Structure: Consolidation within the nationalized banks/PSU Banks: A) Consolidation with the SBI group: The consolidation within the SBI group is always on the cards.in Special-Jan-05 Charting the End objective: . There are 5 banks with size of over Rs 80000/. The scenario that could emerge will be that each of new private sector bank such as ICICI Bank. of India. In additional they could absorb one bank with size less than Rs 25000 Crores. The ideal scenario will be that not more than five banks among the nationalized banks to remain in the long run.Crores each of the banks could look at absorbing one bank in the size category of Rs 25000-80000 crores. It is important for the group not to lose the market share.

Apply international accounting norms for computing capital adequacy. To have an aggressive acquisition strategy. however face and equal challenges how to benefit from competitive pricing without jeopardizing the benefits of relationship. 4). 2). Create an operational efficiency frame work in order to achieve cost efficiency in line with international benchmarks. 5). 3). Borrowers. The desired business lines and product offers. Whether the vision is to become a global player or a regional player or a niche player. Is Relationship Banking at Risk? Many believe that a consolidated environment may threaten relationship. 7). Borrowers might be tempted to switch to other banks. 6). This is the relationship puzzle. or to the financial market. but at the same careful consideration for selecting the right candidate. Whether plans for foreign banks as joint venture partners or what is the desired pattern of share holding. . The weak banks have an exit strategy.While charting the end objective the consolidation strategies must include:- 1). The relationship puzzle has no obvious solution.

. What might be true is that a bank-dominated system invites oligopolistic behavior such that completion is contained while a market- dominated system suppresses competition less.

The past experience being as such now Indian banking industry is moving towards it true sense of consolidation for creation of globally competitive strong big banks. Bank of Punjab with centurion Bank and IDBI Bank are not intended to create a big bank. Chapter-6 Experience & Limitations of Mergers and Acquisition The current Scenario: It appears to be an open season for the M & A in the stogy world of public sector banks.” M & A –Indian Experience: Merger of Laxmi Commercial bank with Canara Bank of Karad Ltd. . With OBC. With the merger of crisis ridden Global Trust Bank (GTB) with Delhi based oriental Bank of Commerce. Bank of India. Global Trust Bank Ltd. Hindustan Commercial Bank. New bank of India. Bank of Punjab Ltd. but the weak banks are merged with strong banks by considering it as the better solution at that particular point of time. With centurion Bank a new chapter has begun in the history of banking sector. Nedugandi bank with PNB. about half a dozen public sector banks are fishing for acquisition tar-gets in the region where they are recessive sector as well and then the Indian banks will have to prove their “Global Competence” and only then Indian banking industry will be able to stand right forth the global banking “Competition hurricane. According to the reports published in the Economics Times.

Further recent mergers and amalgamations of Banaras state Bank with Bank of Baroda and Global Trust bank with the oriental Bank of Commerce were also mooted with similar objectives. political uncertainty. NPA’s were becoming high. redeployment of manpower. quality of assets were deteriorating and financial position was so unsatisfactory that its capital and to some extent the deposits were eroded under the circumstances in order to safeguard the depositors interest and image of banking. that it could serve public interest if the said New Bank of India is merged with another stronger nationalized bank. affect on seniority/promotion to staff. After the report of Marasimham committee. governed by banking (Regulation) Act 1949. was advised to maintain through RBI directives. RBI under its supervisory and controlling role observed that New Bank of India was incurring heavy losses. the new bank of India-a nationalized bank. both having its has office at New Delhi. Banking (Acquisition and transfer of under takings) Act 1980 banking nationalized Act 1970/80 was merged with PNB nationalized bank. But due to various constraints viz. governed by the same acts. Hence we can say that merger and amalgamation in India banking so far has been to provide the safeguard and hedging to weak bank against their failure and that too at the initiative of RBI. cultural and systemic integration etc. With Bank of Baroda was mainly guided by need of requirement of capital and net worth. which BCD Ltd. which took about 5/6 years to get finally resolved by supreme court of India. In spite of all these things the amalgamation of Bareilly Corporation bank Ltd. number of cases were filed in various courts. rather . relocation of branches. non-clarity of legal provisions regarding adjustment and written off or loss against capital/reserve. RBI suggested to central govt.

.than to pave the way to initiate the banks to come forward on their own record for merger and amalgamation purely with a commercial view and economic consideration.

5 1.6 2. United 1354 1477 1083 628 56. Itlay 122 105 94 24 5. Austria 35 19 21 7 1. 95.4 3.8 55.4 1.5 6.3 Kingdom 9. United 71 40 22 11 7. Germany 71 83 36 25 3.1 0.3 114.3 4.3 4. 20 13 8 8 0. France 133 71 49 24 2.5 3.5 2 0. M & A at international level International experience:- An important force of change taking place in the world wide banking industry is consolidation. 93.9 0. 91.9 1. A major outcome of the financial sector reforms in a large part of the developed world has been consolidation of banking industries.4 . 97.6 States 10.5 23 Switzerland Source BIS working paper No-54 Table-2 .2 8. 47 59 27 7 0.1 6.01 3. Table-1 Mergers & Acquisitions activity in banking industry in selected country of the world 1991-1998 Numbers Value ($ billions) Countries 91.07 0.3 5.3 22.1 1.04 2. Belgium 22 18 12 7 1 0.1 2.4 Netherlands 7.2 0.7 6.1 19.9 107. 95-96 97- 92 94 96 98 92 94 98 1.6 04 5. 93.7 8.3 6.08 2. Spain 76 44 26 13 4.

France Starting consolidation. Austria Completing bank consolidation 7. Saudi Arabia and soon it will pick up the pace like other countries of the world. Singapore. No Country Stage 1. Spain/Portugal Another round required to complete bank consolidation 5. Japan. Korea. Mergers and acquisitions has already been started in countries like Philippines. UK Still expect serval defining transactions to complete bank consolidation 6. political constrained 3. Benelux Netherlands-substantially complete now cross border in Belgium 9. . Switzerland Substantially completed Source-The Banker London. An overview of the financial services industries in the world indicate that steeps surge in the trends of consolidation is talking place. The data in the table-1 shows that while in most of the countries no. Stage of Bank consolidation in different European countries S. Germany Starting 2. Merger in Asia:- Merger and acquisitions activities in Asian countries are not as frequent as witnessed in America and Europe. Nordic Region High degree of domestic retail bank consolidation-now cross border and Bancassurance 8. of mergers have reduced the value involved in them has increased many folds. Italy Consolidation rapidly getting underway 4.

25% of acquiring bank. − 48% of the target banks were having ranging from 5 to 50% of capital of the acquiring bank 52% of target banks were having capital ranging from 51 to 98% of the capital of the acquiring bank. While 36% of the range of 75-120% of acquiring bank.Merger:-An overview of performance would include an analysis of important aspects of mergers among top 200 banks. 46% cases of the target banks was of the range up to 50% of acquiring banks. Limitations of M & As: The probable limitations that every merger might have to face are:- i) Dysynergy Effects:- It is very important that before merging the two banks should take into consideration the . A review of post- merger performance and significance of size of banks that merger and their performance discussed below. while approx. − 30% of total cases the target banks were having as low as up to 25% capital of the acquiring bank. − Assets of approx. − In 35% cases the target banks were having assets as low as 5. while in case of 20% difference between the capital of acquired and largest bank was only 15%. 54% cases of the target banks were having assets more than 50% of assets of acquiring bank.

Generally it is sees that if the two combining entities differ in their work culture then the synergy might go negative and this brings about dysynergy. But beyond the particular size. Sectoral consolidation and reduction in competition suggestion no immediate benefits for customers or staff who find them-selves in the front line of rationalization and having . the economies of scale turn into diseconomies of scale. ii) Striving for bigness:- It is matter of fact that size is taken to be the most important yardstick for the measurement of success. the focus should be on to create or maximize the share-holders wealth rather than increasing the size. nature and extent of synergy which they have. iii) Failure or integrate well:- It is said that “sometimes even a best strategy can be ruined by poor implementation. Although this is an extremely complex task-just like grinding east and west together.” A post merger or post acquisition integration of the two banks is must. Thus while evaluating a merger or acquisition proposal. iv) Threats and effects of mergers:- v) Whatever the motives driving M & As. many fear that the quest for size is leading to the unhealthy creation of super banks.

indeed the announcement of a merger is usually accompanied by an announcement of cost-cutting redundancies context their consumer gains and maintain that they only result in employment losses and diminishing access to services. consequently. Mergers can also result in poor credit flow to small business segments and a lion share may go to corporate sector thus effecting the economic cycle. Consistent with the findings of many others a study by the bank of international settlements (BIS) reports the experience of the majority of mergers as “disappointing” with organizational problems almost inevitably under estimated and most acquisitions overpriced. However the failure of such huge banks would be of such consequence that host govt. notably with respects to employment. this merger driven consolidation is raising important public policy concerns. may be forced to use taxpayers money to bail out any which encountered difficulties because of the serious implications for the financial system. this “virtual insurance policy” allows large financial institution to pursue imprudent credit and investment policies. nothing the creation of banks “Too Big to Fail” The super banks short size and unwieldiness can encourage complacency and offer no more protection against failure. mainly due to problems with credit quality and below average generation. . It is the having ‘wounded giants’ which carries systemic risk along with them. Merging units tend to under-perform the industry in the first merger years.to bear the burn of its casts.

between employers and employees. here the community did not oppose the dial since the then chairman KM Thyagarajan also chattier convinced the community members to agree. Integration of links requires harmonization of various aspects of terms and conditions of employment to ensure common practice in the combined organization that may change existing human resource management practices of either or both organizations. If the bank was merged with a nationalized bank hundred would have been transferred outside Kerala. A few years ago Bank of Madura where the chattier community held a lot of shares. But in the absence of someone to play a decisive role. A merger or acquisition or takeover upsets the links between implicit and explicit in a company based on trust between managers and workers. was merged with ICICI bank. while a . rather than merge itself with another bank. many banks would be unwilling partners. According to a banker associated with the Lord Krishna- Federal Bank merger deal there could be different considerations at play. The Lord Krishna employees are not unhappy since the deal will not unsettle their lives and careers. In some banks resistance from the community to the entry of an investor bringing in fresh capital could well be less. But bank like city union bank or Rajasthan could be more open to a merger with another bank. For instance united western bank will look at options like rights and may be preferential allotment to pure financial investors. perhaps the same holds true for the Kerala based catholic Syrian bank.

and private banks through the accepted share-swap route. However. the regulator. The increased potential of systemic risk created by large size banks also intensify concurs about there . A community which associates itself with a bank. Such mergers are messy. But in such cases the present law does not allow a normal merger through exchanges of shares. the regulator has to wait till the bank slips to a point of no return. It was an old private bank acquiring another with a similar culture. because for many old.severance scheme would have followed if LKB was acquired by a new generation private bank. The precondition is that the private banks capital has been wiped out. push through a change in law to a allow mergers of govt. second these banks would have more options and certainly fetch a better price as the merger would happen before the capitals eroded. More so. there is no thumb rule. and third this would not be opposed even by the most hardboiled trade unionist. private. public sector banks could be the only takes: first it would quicken consolidation in the banking sector. draw bad press and could be politically embarrassing since these are preceded by a moratorium on depositors withdrawing funds. A PSU bank can acquire a private bank only if the later is a basket case. Such a bank would perhaps approve of a merger with a public sector banks. It is possibly time that the central bank and the govt. The creation of very large banks also heightened concern about systemic risk. Under the circumstances. will not agree to merger with another bank controlled any another community which share similar feelings.

Norms as under: − The regulator cannot be side stepped to push through a merger between a non-banking finance company and bank by moving the court of law. − The banks boards must disclose valuation details. being considered “To big to fail” (TBFT) strict prudential norms and supervisory guidance assumes all the more significance in such a converged and consolidated environment. RBI Lays down M & A Norms:- Reserve banks lay down mergers and acquisitions norms for the first time. However. − The directors who participate in such meeting must be signatories to existing corporate governance covenants. financials share price movements among other things to RBI. It can be said that bank merger must now pass through Mint-Street. this the first indication of the central bank’s support to PSU Bank mergers. there is no . − Before merger proposal is put to vote by share holders. − A ‘Voluntary’ merger between two private banks must be approved by two third of the total board members and not those present alone. RBI has said the guidance would also be applicable to mergers between public sector banks which have been opposed by the left parties significantly.

.legal provision for paying off a dissenting share holder of a PSU Bank.

− Basel-II due to be implemented by 2007 will require in increased capital commitments from all banks as well as increased transparency and accountability to both regulators and the market. Port folio risk on the asset side and funding risk on the liability side would be reduced. − Indian banks would also have a presence at both ends of the transition of the Indian business expanding overseas. Geographic expansion allows banks to diversify risks by exploring more avenues for profitable business in the global market. . − Stake holders would benefits due to reduced inter- mediation cost and consolidation would also benefits employees in the banking system since it would lead to retraining and re-skill of the work force enabling personal growth. it will also facilitate financial strength. Consolidation will ensure fair valuation. − Weak banks that are threat to the system will be weeded out. Chapter-7 Findings & Suggestion While consolidation is in many ways a natural response to our rapidly changing banking environment. − Public sector banks have been relatively poorly valued as against the private sector.

Technology is the fundamental force driving the merger wave but the benefits of the technology revolution accrue optimally only to large scale banks. However there are risks involved in realizing this synergy value primarily related to technology. work culture and human resources. lowering the cost of servicing a customer and increased profitability of even smaller branches. Thus Indian banking industry expects consolidation to set in motion several future benefits arising out of synergies between business. Technology enables the banks to share customer wallet. The process of mergers and acquisitions required the assimilation of two different cultures and managing the integration process of such diverse cultures is the greatest problem that the banks are facing today in the post merger of New Bank of India with PNB highlights the complexities involved in such integration process. Consolidation-Critical size to succeed in business: The issue of consolidation merger and acquisitions in the Indian banking sector has been debated for many years and intensified recently given the large number of political and regulatory . These issues head to be sorted out very early for the same success of any M&A. However. integration. critical areas that need careful consideration for integration of different technology platforms and software which not only have process and control implications but may involve substantial costs in terms of money and time and retraining of personnel.

Myth-3: Consolidation will “hurt” consumers on price and service parameters . Redundancies in traditional roles (teller operations etc) are being more than offset by the rapid growth in new roles (sales. Myth-2: Consolidation will create people redundancies. marketing product. development. Some myths associated with consolidation and private/foreign ownership pertinent to the Indian banking industries are as under: Myth-I: Consolidation will “reduce” competitive and competitive forces:- − Competitive forces are influenced less by existing competition and more by new entrants taking away market share through product development and innovation. governance and merger acquisition activity among banks. − A great example is the rapid development of the cellular phone industry and its impact on the fixed line service providers in terms of both cost and services. − Reality is that banks like most other industries are rapidly evolving in terms of their technology. product and organization structure. − This is true but only partially. announcements related to ownership. customer services) and in new industries including the out sourcing industry.

− To be able to complete globally public sector bank need to urgently adopt the private enterprise model and this can only be possible through private owner ship and management. − The key is market potential profitability. − Flow of credit to specific sectors is and will continue to be driven by competition and risk-reward trade off’s especially with the adoption of Basel-II norms on risk capital. Hence consolidation should be more gradual. well-capitalized banks with strong risk management controls will be better equipped to channel credit to all sectors including priority sectors. benefits of which can be passed on to consumers. risk-reward environment and not a large number of players in fragmented industry. − Take the example of the pioneering work being done by Yes Bank a new generation private sector bank in the area of agriculture and rural banking. − Larger organizations by virtue of scale have a lower cost. − Large. Myth-5: Indian Banks need a few more years before they ready to face global competitive. Myth-4: Consolidation will reduce flow of credit top priority sectors. . thereby improving efficiency and quality of service to consumers. − Larger organizations have greater ability to invest in technology.

1) Need to invest in and continuously upgrade technology:- − Technology is expensive to procure and implement. − The best example of this is the success of new generation private sector banks like HDFC bank and ICICI Bank who have effectively competed against both nationalized and foreign banks. − Size and scale helps justify investments in up to date technology through larger productivity gains. Larger and better capitalized entities will also reduce systematic risks. − A good although extreme example would be the dramatic decline of the cooperative banking in last few years. − Consolidation will considerably reduce the span of supervision for regulators. effectively policy making and closer supervision will be more easily possible with fewer players rather than in a fragmented market. The need for size and hence consolidation is being driven by 4 global trends in the industry. 2) Rapid communization of products resulting in shrinking margins: . Myth-6: Consolidation will result in the creation of “Large Financial conglomerates” which will be difficult to supervise. Having attempted to address some of the myths associated with consolidation let me turn to the issue of size and its critically to succeed in business. − Whilst complexity associated with the diverse lines of business and scale of inter-linked exposures will increase.

− Rapid replication by many competitors has resulted in shrinking margins and commoditization. − Risk of merge-in-a-lization and disinter mediation is also high with a single or limited product set. − Consolidation of weaker banks with stronger banks is the only real alternative. − This implies considerable investment in product development- people. − It is difficult to ‘build’ product if you are a late entrant-particularly in light of commoditization and shrinking margins. The question is whether these should be market determined or driven by the govt. infrastructure and investments.− Banking products are normally not amenable to ‘patenting and hence a very limited window of exclusively exits. − The “buy” option to full product gaps has a shorter time to market. − To survive in such a market size and scale becomes imperative.? . 4) Recapitalization of banks in the light of Basel-II norms:- − Weaker bank will find it difficult to raise sufficient capital to meet Basel-II norms. 3) Need to offer a comprehensive suite of products to both corporate and retail customers: − X-selling a number of products to customers is critical for profit ability and return on equity.

• Align voting rights in private banks (Currently capped at 10%) with economic interests.− Even the stronger local banks will need to access international market to augment capital resources and this would be difficult in the absence of size. • Ensure RBI and govt. Given the existing structure of market participants this can be achieved only through a consolidation of the existing players. − Ensure clarity on ownership and governance policy vis a vis private sector banks. − Setup a wholly owned subsidiary − Operate as a branch of the foreign parent. Size and scale are also important for growth since longer links with larger balance sheets and larger customer base are better place to top new opportunities through appropriate investment appetite. Consolidation has to be a market determined process and the key steps required to enable consolidation are: • Implement and operationalise the press note issued in march 2004 where by foreign bank could have a presence in India through: − 74% ownership in private sector bank. speaks in the same voice on FDI policy in banks. . Here size is critical for both survival and growth size and scale are critical in this capital intensive industry for survival since without size it is difficult to be competitive.

in particular govt. which a singular particular bank could have taken. The popular view that large banking firms are more efficient and less risky than smaller firms or the notion that the global banking industry is consolidating in order to eliminate excess capacity may be some of the forces bat one cannot deny the fact that today public policies are encouraging bank to merge. India on the other hand. . over 80 in Germany over 40 in Spain and around 40 in the UK. holding 1% voting right and 20% FII limit) leveling the playing field between domestic and foreign banks is particularly important for a competitive setting. The question is not consolidation to cover weaknesses. According to the banker 2004 out of the top 1000 banks globally. there are many domestic banks from the developed countries than from the emerging economies. Even China has as many as 16 banks with in the top 1000. Though each bank and brand can be effective and progress too. Banks where there are major deterrents over a specific time frame (Minimum 51% govt. out of which as many as 14 are in the top 500. Today in the world’s top 1000 banks. over 200 are located in USA.− Allowing fulfledged M & A in banking sector. The landscape for both regional and national banking mergers would evolve since the same corporate owner will be able to segment and cross promote the products of both banks without customers. just above 100 in Japan. but to build stronger financial sector. had 20 banks with in the top 1000 out of which only 6 within the top 500 banks. but the combined assets systems technology platforms of the corporate parent will mitigate the risks and extend the credit.

” . With the great talent available in India which sees Indians in many important positions in global banking as also the well established technology services sector of India. banks have to consolidate. which is the main framework on which modern banking is based it is imperative that we restructure our financial and banking sector to make it more globally competitive with domestic as also global consolidation. The finance minister’s recent quote seems appropriate for ensuring that more than 6 Indian Banks are represented amongst the top 500 banks of the world “to attain global aspirations and greater banking synergy.

has been planning for the consolidation of public sector banks. The decision of merger has been left to the Board of the banks and the govt. Supportive Role by the Government: The Govt. networking and the state . Benefits of core banking solution. After the merger and amalgamation of all the banks it will be possible to have 2-3 banks of international standards and 6-8 banks of National standards and 10-12 banks of regional levels It is the present context that the world bank funding arm. wants merger and acquisitions of the PSBs. The consolidation of banks will be a win-win situation for all the parties as under:- i) Banks:- Sound financial position large Business. would play a supportive role. Now idea has been picking up very fast and the govt. regional rural banks and private sector banks. this is also a step towards improving the capital adequacy of the banks. has started working on catalyzing the first merger between two or three strong PSBs which may come very soon and then the process will continue. This could involve financing the tier (ii) capital of banks by providing long term dept. Large assets. RRBs and private sector banks but it does not want to impose the same and enforce it as imperative but wants it to happen willingly. The present govt. IFC has planned to fund the upcoming consolidation in the Indian banking Industry in case of need.

easy implementation of policies and convenience in surveillance due to better and undated technology higher dividends. of the art technology. The . improved investor confidence. safer investments and higher dividends better deal. v) Foreign institutions/investors/depositors/NRIs:- Ultimate safety of funds better investment opportunities negotiable environment. ii) Customers:- Better and competitive pricing of all products including services and better improved and upgraded technology. no risk in performance of the contracts and obligations. vi) All other entities dealing with the Indian banks:- Sound and large Indian banks. iii) The Govt. The regulatory authority the CEOs of most of the banks and other authorities have been pointing out that in the text couple of years the banking industry will see a number of banks planning merger and acquisition. interaction with less number of CEO’s. Indian banks of international standards. iv) Rating Agencies:- Better or improved rating of Indian Banks. Thus the process of consolidation on Indian banking is a must. large profit. of India and RBI:- It helps in Better monitoring.

banks should be of an ideal size and strength to offer competitive pricing of the products and to sustain in a competitive banking atmosphere. Not only this they can also afford the huge expenditure to be uncured for transformation and ongoing technology up gradation. We are examining these issue but they have to examine in the context of the implications for the public sector as a whole. The area where it is possible to make further improvement have been identified by IBA (Indian bank association) as remuneration package for retaining the top management delegation of powers to the respective boards for appointing statutory central auditors and doing away with the jurisdictions of CBI/CVC over the offers of PSBs. Measures have already been announced to grant complete managerial autonomy at the public sector banks in keeping with the clearly delineated ownership role. We should be in favor of a separate dispensation for PSBs because world over banking is regards as one of the lifelines of the economy and cannot be equated with manufacturing or any other services. market risk and operational risk will also be addressed as the consolidated entity will be able to meet all the parameters of international standards. The issue of credit risk. . It is oblivious that only large bans can offer the lowest cost for the lending of funds and also providing diversified services. They will be ready to face any future unforeseen challenges which may arise and appear in future.

The mergers cult in India has yet to each fire with merchant bankers and financial consultants acquiring skills in grinding the banks to absorb weak /unviable banks and but then again on successful operations. As the entire banking industry is witnessing a paradigm shift in system process. amalgamation and damagers are bound to change drastically and rapidly the economy in size and quality performance through recognized corporate undertakings. Merger in India between weak/unviable banks should growth faster so that the weak / unviable banks could be rehabilitated providing continuity of employment to the working force. “ United we stand-divided we fall” in a way corporate mergers takeovers. consolidation/merger/acquisition is one of the best available alternatives which require attentions from all concerns. combined resources and united efforts of experience executives and skilled work force. To remove sickness from the banking industry. faltering marketing efforts and weak financial structure. strategies it would warrant creation of new . utilization of assets blocked up in the weak/unviable banks and adding constructively to the prosperity of the nation through increased below of funds. VIZ. Inadequacies of resources. It is rightly said. The small and medium sized banks are working under threats from economic environment which is full of problem for them. out dated technology/non systematized management pattern. Important suggestions towards consolidation To sum up mergers and acquisitions will encourage banks to gain global reach and better synergy and allow large banks to acquire the stressed assets of weaker banks.

There is every reason to welcome the process of creating globally strong and competitive banks and let the big Indian banks create big thunders internationally in the days out come. Mainly the reasons for mergers and acquisitions can include motives for value maximization as well as non-value maximization.competencies and capabilities on an on-going basis for which an environment of continuous learning would have to be created so as to enhance knowledge and skills. Indian has only one where as China has five and Brazil has six banks among the top twenty banks in emerging economies.P. In order to achieve the Indian Vision-2020 as envisaged by hon’ble president of Indian Sh. functional and Product restriction. ⇒ With the international banking scenario being dominated by larger banks. consolidation of international banking market and deregulation of geographic. The factor including mergers and acquisitions usually include technological progress. ⇒ The performance of banks in India indicates that certain performances catachrestic are not restricted to a particular bank. emerging opportunities. Therefore consolidation of banking industry is critical from several aspects. A. Policy inducements such as the govts’ incentives that could accrue to the top managers are also other important factors which may determine the pace of consolidation. . it is important that Indian too should have a fair number of larger banks which could play a meaningful role in the emerging economies.J Abdul Kalam much require to be done by the banking industry in this regard. excess capacity.

⇒ Evaluation of banks carried out by individual banks reveal that higher capital adequacy and lower non-performing assets explain to a greater extent the growth.⇒ It is found that in all major economies banking industry undergoes some sort of restructuring process. That is why it is important from the point of view of long term prospects of the economy the consolidation process should be given prime attention. The economy which delays this process leads to stagnation. ⇒ An important observation which may be induced from various past mergers that the merger between big and small banks led to greater gains as compared to merger between equals. consolidation increase the market power and does not cause any damage to the availability of services to small customers. ⇒ The major gains perceived from bank consolidation are the ability to withstand the pressures of emerging global competition to strengthen the performance of the banks. It is also observed from past experimental if the merger follows business expansion aided by appropriated technology and diversified product range it could lead to greater gains for the banking industry as a whole similarly. ⇒ The international experiences reveal a wide range of processes and practices involving consolidation. These experiences could provide useful inputs to the banking policy in India. their impact on the banking market and the trend in post merger performance of banking institutions. profitability and productivity of banks . to effectively absorb the new technologies and demand for sophisticated products and services to arrange funding for major development products in the realm of infrastructure. outlays and to streamline human resources and skills in tune with the emerging competitive environment. telecommunication.

⇒ A diagnostic performance evaluation study would reveal out important aspects of divergence in the performance of the domestic banking institutions. It indicates that restructuring in Indian banking may not be evolved across the bank groups. ⇒ Consolidation can also be considered critical from the point of view of quantum of resources required for strengthening the ability of banks in asset creation. so that. Consolidation in the banking industry is of great relevance to the economy. A high degree of variation is found in the performance of various groups of banks. Since PSU account for a large share of banking assets and their lower performance ratio reflect the entire banking industry it is considered important that suitable consolidation process may be initiated at the earliest. since increase in capital and steep reduction in non-performing assets cannot be entirely left to the individual banks in the present scenario. The issue of bank consolidation assumes significance from the point of view of making Indian banking strong and sound. This trend further substantiates the scope for consolidation across the bank groups. It is strongly felt in the Indian banking circles that a suitable consolidation process through merger and acquisitions is long due to . the efficiency gain made by a large number of banks of other groups will be properly reflected which could lead to a positive impact on the image of banking. apart from it growth and development to become sustainable international evidences strongly indicate greater gains to the banking industry after the consolidation process. ⇒ Indian banks have the unique character in displaying similar characteristics of performance despite consisting of different size and ownership.

the message a clear-consolidation and merger of India public sector banks is around the corner and such a situation. Sooner the process takes off.address some of the structural problems that are being faced by the banking industry in India. . when it becomes a reality will augur well especially for rural financing and the benefits of consolidation and emergence of financially strong and globally competitive new entities in Indian Banking will retain the local feel and render much more effective rural lending ensuring that the banking benefit reach out to the rural masses as well in our Indian subcontinent. Thus. greater the benefits to the economy as a whole. Indian banking is changing its shape its shape and color. It has to retain its human face such that the current effort gear fruit for a large number of people.

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