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, Delhi110053 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
: 18th Feb. 1981 : B.Com from C.C.S. University Qualified Chartered Accountant from ICAI.

Date of Birth Educational Qualification

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

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

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

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

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

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

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

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

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. IFCI with IDBI and Global Trust Bank with Oriental Bank of Commerce. merging and closing down the non-viable branches. which led to introduction of voluntary retirement (VRS) in the nationalized banks with a view to rationalize the manpower. The increasing competition and shrinking profit margins led to the voluntary merger of the banks for going competitive edge. Times bank with HDFC bank and ICICI Ltd. which has a long way to go. The increasing competition has made the banks more customers oriented. We are still in the midst of the consolidation phase. 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. 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. such as merger of bank of Madura with ICICI Bank. 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 . The opening of new branches is based purely on business consideration.

internationally competitive with sound capital base. With regard to India it is worth while to mention that merges between banks worded be of . The small and medium sized banks. For coping of with the problem of profitability.banks more transparent and viable. Desire to become “Champion” is important to become strong through consolidation mergers and acquisitions. 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 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. on the other. “Survival of the fattest” has become a reality in most of the sectors including with entry of foreign players. The banks are experiencing the pressure of competition in the form of changing customer requirements. 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. 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. This phase is likely to last by the end of present decade. International accounting standards are being introduced in a phased manner with a view to make the Indian banks. Customers’ retention and thinking spreads. In the era of globalization the organization will have to be competitive in order to face the challenges.

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

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. Amalgamation: (Consolidation) Halsbury’s law of England describe amalgamations as a blending of two or more existing undertaking into one undertaking. The survivor acquires the assets as well as liabilities of the merged company or companies.Pre-Independence (1786-1947) Post Independence (1947 to till date) Pre-Nationalization (1947-1969) onwards) Post Nationalization Post Liberalization (1969-1991) (1991 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. 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 . 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. These means that even after the takeover although there is change in the management both the firms obtain their separate legal identity.

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

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

Crore 2002-04 Actual 2004-05 Actual 2005-06 Estimate . out of which as 14 are in the top 500. 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. there are many domestic banks from the developed countries than from the emerging economies. over 200 are located in USA. just above 100 in Japan. Even China has as many as 16 banks within the top 1000. over 80 in Germany over 40 in Spain and around 40 in the UK.Today in the world’s top 1000 banks. 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. Consolidation of Banks: Statistical overview: Table-1 Data regarding all nationalized Banks Rs.

000 14.598 7784 7.081 3.000 .88.140 79.947 4.003 9.Total deposit Total Advances Total Income Net Profit 6.93.00.000 5.224 85.12.00.787 11.60.000 95.

Table-2 Average Figure: per public sector bank & per nationalized bank: As per estimates of 2005-2006 Rs. The figure will be as shown under: . Crore Total deposit Total Advances Total Income Net profit 47368 26315 5000 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-3 Consolidation will help drive down in intermediation costs Operating Cost/Average Cost (A) PSU.52 737 Avg 2.01 (iii) Remaining [Source: RBI Mckinsey analysis] No.4 2. of Banks Total Assets [Source: IBA Bulletin Special Issue] .91 3.59 1.45 (ii) Next 10 (iii) Remaining (B) Private Sector Banks: (i) Top 5 1.79 (iii) Remaining (A) Foreign Banks: (i) Top 5 2.82 Avg 1. Banks (i) Top 5 2.03 Avg 3.

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

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

Large banks can operate preferably with thinner margin compensated by sheer volumes. Risk diversification is possible with large size and larger geographical reach. Fund mobilization and deployment will be easy with large size leading to larger market share. The word ‘MERGER’ may be taken as abbreviation which means– M – Mixing E – Entities . Economics of scope can be achieved by enlarging the size and introducing product diversification.The importance of size in the performance down-in of blanks can be outlined as follows: For cost reduction. when large scale merger and consolidation took place. 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. Where it gained importance in early 1980. Large size allows wide penetration and hence boosts revenue of the bank. there is need to achieve economies of scale. The literature on scale economies in banking is mostly confined to the US economy. In the US case most of the studies found evidence of scale economics for small banks. 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.

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

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. Their estimates centered on PSBs and cost of capital was not considered by the author. 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. . increasing their technology investment and enlarging their business operations. In a quest to achieve there. Refocusing the bank to grow the “good bank” and make enough profits is the new mantra of banking sector. All over the world. particularly PSBs are operating at scale below the optimum size. the market power of the banking sector is increasing owing to globalization. banks are expanding their branch network. Now is has become imperative for banking industry to get consolidated to with-stand storms and shocks what-Soever be so that they will not shiver and wither from being shaken by the global market forces. Srivastava concluded that large size provides gains to cost efficiency for in India. Ray and Sanyal. which decrease with increasing size. Using Ray scale economies and expansion path scale economies. 1995 found large economies of scale in cost structure of banks.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. Added to this. the effect of size of the bank has been widely discussed and in fact India is relatively slow entrant into the subject. In India top banks by size are also top by size of profit though lagging behind in performance indicator. Banking is one among the largest and most profitable industries in both domestic and global markets. This is hardly surprising since the banking business has become global before globalization becomes a buzz word. Srivastava-1999 found that Indian banks.

2003 clearly felt that consolidation in the Indian sector was imminent.95 63.47 bills to Intermediation 70. If the consolidation process has to take place smoothly it will be necessary to look at the legal. Ratio of secured 94. Ratio of wages 85.74 71.16 59.75 63.51 6.35 104.88 63.11 . RRRS Nationali SBI and Foreign zed Its Banks Banks associat es 6. accounting.15 87.66 3. Cash Deposit 6. Ratio of Intt.07 6.41 deposit to Total Deposit 86. Ratio of Term 53.56 79.69 99.71 7.“Banking Industry: Vision 2010” document prepared by 1 BA in Nov. Thus they control about 37% of rural branches of all banks.66 7. Ratio + 77.10 31.14 5.31 Ratio Credit Investment Dep.85 8.43 75.63 8.99 79. 2.58 134. New Models for Restricting RRBs: The 196 RRBs to gather have 14433 branches in 516 districts spread over 22 states of the country.03 66.22 65.14 4.13 advances to total advances 6.13 All SCBS 1. Ratio of deposit 79. They have about 19% share in rural deposits and 21% shave in rural credit of all banks.02 Income to total Assets 87.89 105. 9. regulatory.56 67.32 to total Liabilities 4. HR and technology related issues proactively.86 8.

Cost Deposits 13.73 16. Return on 5.60 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. Return on 6.05 18. 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 .32 16.59 15. Ratio of wage 24. 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.41 15.74 2.20 9. Return Investments on 1.86 3.49 18.Cost 8.16 1.28 bills to total Income 10.18 8.50 6.88 9. Return Equity 12.99 2.98 21. Return Advances 15.81 bills to Total costs Exp.18 3.13 Advances adjusted to cost of funds 17.31 5.04 9.21 5.04 19. Ratio of wage 27.46 6.44 1.93 9. Cost of Funds 14.07 1.28 5.02 6.21 6.96 20.89 7.80 3.57 6.02 3.43 on 11.43 6.40 of 6. Return Assets 11.37 19.26 10.45 Investments adjusted to cost of funds 3.04 on 4.70 8.5 on 12.20 9.7 12.82 10.62 0. 9.62 14.

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 industry structure is fragmented in India. No one has studied the real benefits of such mergers. things will change fast after the new issuance from China. In India merger and amalgamation of banks are not new between 1969 and 2005 a total of 26 banks were merged. The general opinion is that only the corporate business class and upper-mid-class can enter multinational banks or banks like ICICI and HDFC. The average market capitalization on the top there players in India is at $9 billion which is third from bottom. The benefits and synergies from bank consolidation are obvious. Larger the Better Some indicators of performances of three Banks:Operating Expenses . 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. 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.failure. There are a lot of small players in the Indian banking sector. Now consolidation is the trend which will take place sooner or later in India as well. largely on a voluntary basis for strategic purposes. The enlargement of banks through mergers would increase the competitive strength and raise the efficiency of the system due to economies of scale. Though China is the lowest now at $ 5 billion. But in recent years particularly after 1991 even profit-making banks have been merged to achieve the number or position.

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

98 03-04 1.11.52 1.65 03-04 866 1010 228. And it has not helped improve profits. This becomes obvious when they are compared to PNB with substantially lower level of business per employee.13 0.92 06-07 607 1027 407.41 It is clear from the data table–10.N o 1 2 3 Bank HDFC ICICI PNB 02-03 1.45 1. in case of ICICI Bank the operating expenses increased from 1.31 1.22 04-05 806 880 176.07 06-07 1.12 that operating expenses as 90% of total assets for HDFC Bank went up from .93% in 1995-96 to 1.37 1.Return on Assets (In crores) S.30 1.87 05-06 758 905 330.03 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.05% to 1.48 1.88% during the same period.08 04-05 1.09 1.38 1.47 1. In 2003-04 the ratio increased to 2.05% but in case of PNB.17 05-06 1. .95% in 2002-03.N o 1 2 3 Bank HDFC ICICI PNB 02-03 865 1120 195. Profitability too has been on the decline for both ICICI bank and HDFC Bank. The PNB’s working hour maybe much less than those in ICICI and HDFC banks. there has been a slight fall. Thus merger policies of these banks have not resulted in mitigation of operational cost.

the entire sector will face enormous strain care must be taken to prevent such failures. Today we do not know the project-wise exposure of leading private banks. However the growing banking consolidation and the increasing competitive environment resulting from this process are going to face some challenge. . though at an increasing operating cost. 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. Further the increased diversification resulting from bank consolidation should make for a healthier banking system less prone to crisis. There is an increase in competition and quality and quality in services. will have to treat at human resource equitably. Depositors can’t spot whether or not banks are taking excessive risk in the course of consolidation and restricting. post merger.But market forces are the driving force behind bank consolidation. So if the finance ministry has decided to merge public sector banks. 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. 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. This has happened in 1980 in the west when depositor lost money due to banks risky exposure. Banks some-time makes mistakes by having excess exposure in illiquid assets or by having adverse selection or investment in volatile assets. The management. 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.

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

Table-18 Business for Employee Population-Group Nationalized Banks Rural Semi-urban Rural+Semi urban Urban Metropolitan Urban+Metropolitan PSBs Rural Semi-urban Rural+semi-urban Urban Metropolitan Urban+metropolitan 1995 -14.48 16.27 30.75 24.47 44.76 69.23 -13.83 18.50 23.33 24.56 43.09 67.65 1998 -13.02 15.68 28.70 22.82 47.92 70.74 -13.02 18.40 31.42 22.92 45.63 68.55 2001 -13.39 15.51 28.90 22.68 48.90 71.08 -12.69 17.99 30.68 22.74 46.56 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 year 1720 1770 1773 1784 1786 1808 1819 1824 1829 1833 1835 1840 1840 1841 1841 1842 1842 1843 1844 1844 1845 1845 1846 1852 Failed year Merged F/M 1770 F 1832 F 1775 F 1791 F 1791 F 1920 M 1928 1829 1848 1866 F F F F Name of Bank Where Founded Bank of Bombay Bombay Bank of Hindustan Calcutta Bank of Bengal & Bihar Calcutta Bengal Bank Calcutta General Bank of India Calcutta Bank of Calcutta/Bank of Calcutta Bengal 1808 The Commercial Bank Calcutta The Calcutta Bank Calcutta Union Bank Calcutta The Agra & United Agra Service Bank Ltd. The Bank of Mirzapore Mirzapur North Western Bank of Mussoorie India Bank of Bombay: Re- Bombay formed in 1868 Bank of Asia London The bank of Ceylon Colombo The oriental Bank Bombay corporation The Agra saving fund Agra Bank of Madras The Banaras Bank Shimla Bank Ltd. The commercial Bank of India The conpore Bank Dacca Bank Chartered Bank of Asia Chartered Mercantile Bank of India London & China The London and Eastern Banking Corp. The Comptoir D’ Escompte of Paris Madras Banaras Shimla Bombay Kanpur Dacca London

1837 F 1859 F 1920 M 1842 M 1849 M 1884 F 1863 F 1920 1850 1893 1866 M F F F

1851 F 1862 M 1855 F

1854 1854

1857 F --

London Paris

1860 1862 1863 1863 1865 1881

-----1858 F

Central Bank of Western India Bank of Rohilkhand Punjab Bank Ltd. Sind Punjab & Delhi bank Corp. Ltd. Leading to Grindlays Bank Allahabad Bank The Oudh Commercial Bank

Bombay Rampur Rawalpindi Calcutta Allahabad Faizabad

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

The rapid branch expansion resulted in stretching beyond the optimum level of supervision and control. The banks were faced with losses. there was marked showdown in the branch expansion and attention was paid to improved housekeeping. Steps were also taken to reduce the structural constraints that obstructed the growth of banking industry. . credit management. Then there were a series of policy initiatives taken by the RBI. customer service.1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 Total 4 2 -----2 4 4 2 1 3 2 7 31 -----------30 1 1 9 41 --4 1 ----2 --2 2 4 1 19 -1 -2 1 3 -2 1 4 5 3 5 15 62 101 4 3 4 3 1 3 -4 1 8 7 36 11 22 79 192 Source IBA Bulletion Consolidation process: The consolidation process of Indian banks has started in early 1960 itself. 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. As a result of these measures. staff productivity and profitability of banks.

61 04. Travancore forward bank Ltd. Punjab National Bank Bank of Maharashtra Bank of Baroda State Bank of Travancore Canara Bank Sangli bank Ltd.09. Tagore permanent bank ltd. Indo-Commercial Bank Ltd. Bank of Konkan Ltd.09.61 20. Bank of Kerala Ltd. Bharat Industrial bank Bank of ltd.09.06. from 1960 to June 1993 there were 21 voluntary amalgamations.06.61 04. Dena bank Canara Bank State Bank of Travancore Bank of Maharashtra Sangli bank Date of merger 09. Bank of Poona Ltd.61 17.61 15.1961 27. Ltd.04.06.06.09.06. Maharashtra Rayalaseema bank ltd.06.61 29.61 28.61 04. With whom merged National Bank of Lahore Ltd. Table-3 Sr. 2005.03. Bank of Nagpur Ltd. Seasia midland bank Ltd.Besides these banks.1961 25. State bank of Travancore South Indian bank Ltd. Tezpur industrial bank United bank of .61 17. Bank of new India Ltd. Indian Bank Cuttack bank ltd.61 19. Syndicate Bank Merchants bank ltd.06.61 17. New citizen bank Ltd.03. The following list of Banks merged since 1961 to Oct.06.05. Venadu bank Ltd.05.03. 18 merges with the SBI or its associates and 132 transfers of assets and liabilities. No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Name of Bank Merged Prabhat Bank Ltd. Wankaner bank ltd.09.61 Poona investors bank ltd. Syndicate Bank Moolky bank ltd.61 01.61 03.61 04.61 17.07.61 01.61 04.09. Kotlayam orient bank ltd. United Bank of India Pie Money Bank Pvt.61 17.

Shri Jadeya Shankarling Belgaum bank bank ltd.61 19. Thiya bank ltd.61 06. Unity bank ltd.03 06.10.10. Latin Christian bank ltd.12. Syndicate bank Pratap bank ltd. Chochin Nayar bank ltd.11.08. United industrial bank ltd. India Vettaikaran padur Bank of madura mahajan bank ltd.08. Lakshmi commercial bank ltd. Lord Krishna bank ltd.11. Karur mercantile bank Lakshmi ltd. Central bank of India Canara banking corp.08.64 16.61 17.08.10.08.64 08. ltd. Allahabad trading & BKG State bank of corp. ltd.61 11.09.64 12.61 14. Banaras state bank ltd.10.64 16. United Industrial bank ltd.02. Syndicate Bank Sangli bank ltd.64 01. Raghunathmull bank ltd. bank ltd. India Canara Bank 04. bank ltd. Phaltan bank Jodhpur commercial bank ltd. Bank of citizen ltd. Bareilly bank ltd. State bank of Travancore Salem Shri Karur Vysya bank Knnukaparameshwari ltd.10.02.09.65 United western bank ltd.64 17. commercial bank ltd Peoples bank ltd.1.61 11.09.22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 ltd.64 24.06. ltd.61 07. State bank of India Bank of Algapuri Ltd.62 14.09.10. State bank of Travancore Southern bank ltd.11.65 06. Indian Bank Metropolitan bank ltd. State bank of .61 16. Malnad bank ltd.61 20. ltd. Satara Swadeshi commercial bank ltd. Catholic bank ltd.61 16. Unnao commercial bank Bareilly corp.64 26. ltd.64 01. G.

69 India 49 National bank of Lahore Do 20.02. Union bank of 08.mysore 45 Josna bank ltd. Central bank of 29.08.70 ltd.10. 26. bank ltd. Oriental bank of 1996-97 commerce 64 Bari Doab bank ltd.00 68 Banaras state bank ltd. bank ltd.02.89 ltd 56 Bank of Tamilnadu ltd. Union bank of 22.11. HDFC Bank ltd. Bank of Baroda 13.02 69 Nedungadi bank ltd.02.08.08.65 bank ltd.04. Bank of Baroda 20. State bank of 26.68 Patiala 47 Chawla bank ltd.90 58 Parur central bank ltd. State bank of 08. Indian overseas 20.69 India 51 Lakshmi commercial Canara bank 24. Bank of India 20.02. New bank of 13. Indian Bank 20. 46 Amrit bank ltd. Bank of India 1993-94 62 Kashinath Seth bank State bank of 1995-96 India 63 Punjab corp.12.02.99 India 67 Times bank ltd.05.93 bank Some of banks merged after the reform process started are listed below:61 Bank of Karad ltd.90 bank 57 Bank of Thanjavur ltd. 50 Miraj state bank ltd. Punjab national 01.90 India 60 New bank of India Punjab national 04.90 59 Purbanchl bank ltd.03 bank . State bank of 03.69 India 48 Bank of Behar ltd. Lord Krishna 13.88 55 United industrial bank Allahabad bank 31.02.10.09.65 bank ltd.99 66 Sikkim bank ltd.07.12. Do 1996-97 65 Bareilly corp. 52 Bank of cochin ltd.02.11.86 bank ltd. Bank 54 Traders bank ltd.06. Bank of Baroda 03.85 India 53 Hindustan commercial Punjab National 19.

Centurion bank ICICI Bank 2001 Oriental bank of 24. which may be viewed as a solution to excess capacity. Source-RBI [Trends and Progress in Banking] In the wake of globalization. A merger movement may become pronounced feature of the banking industry. The bank for international settlements Reprt-1992 note. a lack of capital and to poor profitability. This trend is likely to be accentuated as more and more national and international players are planning entry into and already overcrowded turf.. Size . forces are obliging may blanks to consolidate. bank of the size of SBI with world class standards. Further. This may force banks to consolidate into a smaller number of larger banks.05 ltd. 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. 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. lowering of entry barriers and inviting foreign investment in the industry.07.”.70 71 72 Bank of Madura Global trust bank ltd. it. the banking sector is already experiencing symptoms of excess capacity. ……….10.04 commerce Bank of Punjab 01. “ ………. Whether the competition stems form within the industry or outside. 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. which will enable them to respond to the stimulus to global opportunities.

The remaining local banks and regional rural banks being the niche players. Structurally the banking sector displays a high degree of fragmentation. 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:3 to 4 large globally competitive banks 8 to 10 national banks with a network of branches throughout the country engaged in ‘Universal’ banking. The Indian banking system would therefore see consolidation through mergers and Acquisitions and a coexistence of both national and international players. 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. The market share of the top 10 banks is 57%. the paced with which banks accept the new paradigms of globalization would determine winners and losers. thereby ensuring a better quality asset book. the banking sector has become even more fragmented in the reform year since 1992.enables banks to lend large sums to select corporate. Consolidation.5%. It is widely believed-based on empirical evidence sector. 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. The market share of the top 5 banks in India is 41. . 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. As traditional competitive advantages vanish.

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

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

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

However. (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. such gains are most likely to arise due to assets.The merger of ICICI Ltd. In addition. Diversification across geographies. many pointed to economics if scale as a very important motivating factor for consolidations. 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. some gains may also derive from geographic diversification on the liabilities side of the balance sheet. At the same time. (B) Efficiencies in operations: Mergers and acquisitions can lead to reductions in costs for a variety of reasons. which focuses on cost saving attributable to economies of scale. (D) Diversification geographic area: The one area where consolidation seems most likely to reduce firm risk is the potential for diversification gains. The existing research literate. although even here the possibilities are complex. On the other hand after consolidation some firm’s shift towards riskier asset for folios and of income from both products and . and ICICI Bank clearly demonstrate in the Indian context that consolidation can lead to increased revenue. fail to find much evidence suggesting that cost saving constitute an important out-come of M As. economies of scope or more efficient allocation of resources. diversification gains may result from consolidation cross financial products and services.

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

preferably through a full economic cycle. the skills of credit risk manager are very important.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. calculating the key variables of Basle-II default probabilities. loss given default and so on would not provide a good guide to the current situation. In such circumstance. 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. . There are very limited data default histories. because the economic environment in which banks operate has changed so much since the mid–1990. The New Basle-II Capital Accord Minimum Capital Requirement Supervisory Review Process Market Discipline 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. Even if there is data.

Basle-II however is more than just its pillar-I it is based on three pillars. 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. 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.Default probabilities and loss given default are terms used in the context of Base-II‘s pillar one. as it is the result of a structural move towards the institutionalization of savings. the size of total assets of the bank plays a critical for spreading the fixed cost over a larger size of assets. resulting in shareholders pressure to improve performance. share holders have gained power relative to other stakeholders in recent years. Hence under the changing environment of implementing Basel-II framework. While budgeting huge cash outlay is inevitable. An important innovation of Basle-II is the incorporation of supervisory review into the international framework. the minimum capital requirements. the small banks tend to lose out their competitiveness. (G) Search for high value of shares Increased competition has helped to squeeze profit Margins. 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. Importantly. Table – 2 . This development is expected to continue. including efforts by banks to assess their capital adequacy.

10000 crs. Rs. IBA Bulletin Special -- 23.70 % 25. >Rs.80000 crs. -18. 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. 2500-80000 crs.04% The bank has to remain rich in order to enhance its credibility among the various stake-holders. One such important parameter is the profitability of the overall business. lower NPA etc. however the equity market has reacted differently for different type of banking categories. but in addition the share-holders look at learning per share accusation year on year.66% --22. Suggestions:The banks having similar technology can be merged: Table –3 Bank Bank of India PNB ICICI Bank IDBI Bank Axis Bank Core Banking Solution Finacle No Finacle No Finacle No Finacle No Finacle Vendor Infosys Infosys Infosys Infosys Infosys .1000 – 25000 crs.35% Rs.Average PAT (%) Across Asset Size <Rs. There are several parameters under which one could measure whether the business is really creating shareholders value.

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

It involves a big bank taking a smaller bank or a group of smaller banks . 1. A committee was formed (by Indian banks association) IBA for drafting a legal framework for consolidation in the domestic banking sector. to place banks under a moratorium and prepare a scheme for amalgamation. 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. of India for further action. private banks are covered under the Banking regulations Act 1949. 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.by the State Bank of India Act. The committee has already finalized the report and sent to the Govt. 1955 and the seven associate banks of SBI are governed by the SBI (subsidiary banks) Act. and all the private banks. 1959. Section 44-A of the Banking Banking Regulation (BR) Act allows a private Banks to acquire another private Bank. the state bank of India and its seven associate 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. Emergence of two Scenarios There could be two basic banking structures that could emerge.

We are summing here an existing new private sector bank taking over a smaller bank or a group of smaller banks. When we took at the table No.33 NIM 2.com HDFC Bank.1 it is an apparent that ICICI Bank emerges at the largest player in the private sector bank.com .09 1.2. and hence it could be reckoned as another large player.07 ICICI HDFC 1.32 Total (Rs.3. Private Sector ROA % Bank 31. 1.cr) 344658 360548 Assets Source: ICICI Bank. There is always a possibility for HDFC Bank to merge with HDFC Ltd.6 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. It involves a merger of group of mid-sized banks to form a larger institution.

the NIM is much higher in the case of HDFC Bank and this could be due to how cost of resources. The fixed could be spread over when the asset size is large and otherwise.04 Share % 1.Table–1 Private Sector Market Bank 31. it could destroy share holders value. Technology advancement for providing service meeting Basel-II requirements for risk management would require additional infusion of funds.00 Total Assets Rs. The asset size is critical for the profitability of the business and hence the asset size is below a threshold limit. It could be seen that though the ROA is almost same for ICICI Bank and HDFC Bank.com Let us look at some of the key performance indicators: .g.81 Source: ICICI Bank. this will not be economical.32 1.Cr. UTI Bank 4. It is also interesting to note that the PAT (Profit after Tax) for ICICI Bank is 33% against HDFC Bank at 28%.15 1.27 1.00 NIM % 2. For e. 344658 360548 21882 13658 Federal . .30 ROA % 1.87 2. 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. HDFC Bank 3.09 1.6 3. Bank 6.33 1. profit margins and market share and growth.com HDFC Bank. How could be a scenario. ICICI Bank 2. 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.03.namelyreturn on Assets.68 4.

The ideal scenario will be that not more than five banks among the nationalized banks to remain in the long run. of India. SBI is already a player who is well positioned to be on the global map. 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.in Special-Jan-05 Charting the End objective: . The process of M & A is comparatively for the nationalized banks as the controlling interest is with the Govt. 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. There are 5 banks with size of over Rs 80000/. In additional they could absorb one bank with size less than Rs 25000 Crores.The scenario that could emerge will be that each of new private sector bank such as ICICI Bank. 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. The combined entity of the SBI group is currently holding close to one third of the market share. It is important for the group not to lose the market share. Source: RBI.org.Crores each of the banks could look at absorbing one bank in the size category of Rs 25000-80000 crores.

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

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

. According to the reports published in the Economics Times. Global Trust Bank Ltd. 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. but the weak banks are merged with strong banks by considering it as the better solution at that particular point of time. Nedugandi bank with PNB. With the merger of crisis ridden Global Trust Bank (GTB) with Delhi based oriental Bank of Commerce. Bank of Punjab Ltd. Bank of India. With centurion Bank a new chapter has begun in the history of banking sector.” & Limitations of Mergers and M & A –Indian Experience: Merger of Laxmi Commercial bank with Canara Bank of Karad Ltd. 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. Hindustan Commercial Bank. Bank of Punjab with centurion Bank and IDBI Bank are not intended to create a big bank. With OBC. New bank of India.Chapter-6 Experience Acquisition The current Scenario: It appears to be an open season for the M & A in the stogy world of public sector banks.

which BCD Ltd. relocation of branches. RBI suggested to central govt. RBI under its supervisory and controlling role observed that New Bank of India was incurring heavy losses. rather . 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. 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.After the report of Marasimham committee. 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. With Bank of Baroda was mainly guided by need of requirement of capital and net worth. cultural and systemic integration etc. non-clarity of legal provisions regarding adjustment and written off or loss against capital/reserve. But due to various constraints viz. both having its has office at New Delhi. governed by the same acts. political uncertainty. governed by banking (Regulation) Act 1949. which took about 5/6 years to get finally resolved by supreme court of India. redeployment of manpower. the new bank of India-a nationalized bank. was advised to maintain through RBI directives. Banking (Acquisition and transfer of under takings) Act 1980 banking nationalized Act 1970/80 was merged with PNB nationalized bank. affect on seniority/promotion to staff. In spite of all these things the amalgamation of Bareilly Corporation bank Ltd. NPA’s were becoming high. that it could serve public interest if the said New Bank of India is merged with another stronger nationalized bank. number of cases were filed in various courts.

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. .

01 1.08 5.6 114. 3.4 0. 6. United 1354 States 10.07 1 2. United 71 Kingdom 9. 4.6 .3 107.1 4. 5.1 1.5 1.1 6.3 55.3 3.5 3.3 7.9 0.5 9798 2.2 2.04 04 6. Spain 76 8.4 0.3 0.9 95-96 1.4 9394 0.2 2 22.3 8.1 4.9 6.5 5. A major outcome of the financial sector reforms in a large part of the developed world has been consolidation of banking industries.8 0.7 2. Table-1 Mergers & Acquisitions activity in banking industry in selected country of the world 1991-1998 Numbers billions) Countries 1. 2.3 19.1 0. Austria Belgium France Germany Itlay 9192 35 22 133 71 122 20 9394 19 18 71 83 105 13 44 40 1477 59 9596 21 12 49 36 94 8 26 22 1083 27 9798 7 7 24 25 24 8 13 11 628 7 9192 1.M & A at international level International experience:An important force of change taking place in the world wide banking industry is consolidation. Switzerland 47 Source BIS working paper Table-2 No-54 .5 56.6 23 Value ($ Netherlands 7.7 0.4 3.

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

− 30% of total cases the target banks were having as low as up to 25% capital of the 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. 46% cases of the target banks was of the range up to 50% of acquiring banks. − Assets of approx. A review of postmerger performance and significance of size of banks that merger and their performance discussed below. 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 . 54% cases of the target banks were having assets more than 50% of assets of acquiring bank. − In 35% cases the target banks were having assets as low as 5. while approx.25% of acquiring bank.Merger:-An overview of performance would include an analysis of important aspects of mergers among top 200 banks. while in case of 20% difference between the capital of acquired and largest bank was only 15%.

the focus should be on to create or maximize the share-holders wealth rather than increasing the size.” A post merger or post acquisition integration of the two banks is must. Thus while evaluating a merger or acquisition proposal. iii) Failure or integrate well:It is said that “sometimes even a best strategy can be ruined by poor implementation. But beyond the particular size. 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. many fear that the quest for size is leading to the unhealthy creation of super banks.nature and extent of synergy which they have. iv) v) Threats and effects of mergers:Whatever the motives driving M & As. 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 . 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. Although this is an extremely complex task-just like grinding east and west together.

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. 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. mainly due to problems with credit quality and below with average respects generation. consequently. It is the having ‘wounded giants’ which carries systemic risk along with them.to bear the burn of its casts. indeed 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. to this merger driven the consolidation is raising important public policy concerns. However the failure of such huge banks would be of such consequence that host govt. 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. notably employment. 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. Merging units tend to under-perform the industry in the first merger years.

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

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

− A ‘Voluntary’ merger between two private banks must be approved by two third of the total board members and not those present alone. there is no .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. 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. this the first indication of the central bank’s support to PSU Bank mergers. However. − Before merger proposal is put to vote by share holders. RBI has said the guidance would also be applicable to mergers between public sector banks which have been opposed by the left parties significantly. − The directors who participate in such meeting must be signatories to existing corporate governance covenants. RBI Lays down M & A Norms:Reserve banks lay down mergers and acquisitions norms for the first time. financials share price movements among other things to RBI. − The banks boards must disclose valuation details. It can be said that bank merger must now pass through Mint-Street.

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

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. − Indian banks would also have a presence at both ends of the transition of the Indian business expanding overseas. Consolidation will ensure fair valuation. − 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. Port folio risk on the asset side and funding risk on the liability side would be reduced. Geographic expansion allows banks to diversify risks by exploring more avenues for profitable business in the global market. . − 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. − Weak banks that are threat to the system will be weeded out. it will also facilitate financial strength.

Technology is the fundamental force driving the merger wave but the benefits of the technology revolution accrue optimally only to large scale banks. However. work culture and human resources. These issues head to be sorted out very early for the same success of any M&A. lowering the cost of servicing a customer and increased profitability of even smaller branches. consideration for critical areas of that need careful integration 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. 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. Technology enables the banks to share customer wallet. integration. However there are risks involved in realizing this synergy value primarily related to technology.Thus Indian banking industry expects consolidation to set in motion several future benefits arising out of synergies between business. 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 .

− 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.announcements related to ownership. marketing product. Redundancies in traditional roles (teller operations etc) are being more than offset by the rapid growth in new roles (sales. − Reality is that banks like most other industries are rapidly evolving in terms of their technology. governance and merger acquisition activity among banks. Some as under: myths associated with consolidation and private/foreign ownership pertinent to the Indian banking industries are 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. − This is true but only partially. customer services) and in new industries including the out sourcing industry. Myth-2: Consolidation will create people redundancies. product and organization structure. Myth-3: Consolidation will “hurt” consumers on price and service parameters . development.

thereby improving efficiency and quality of service to consumers. − Larger organizations by virtue of scale have a lower cost. − Large. Myth-4: Consolidation will reduce flow of credit top priority sectors. well-capitalized banks with strong risk management controls will be better equipped to channel credit to all sectors including priority sectors. Myth-5: Indian Banks need a few more years before they ready to face global competitive.− Larger organizations have greater ability to invest in technology. Hence consolidation should be more gradual. − 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. . − 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. − 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. risk-reward environment and not a large number of players in fragmented industry. benefits of which can be passed on to consumers.

Larger and better capitalized entities will also reduce systematic risks. − Size and scale helps justify investments in up to date technology through larger productivity gains. The need for size and hence consolidation is being driven by 4 global trends in the industry. Myth-6: Consolidation will result in the creation of “Large Financial conglomerates” which will be difficult to supervise.− 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. effectively policy making and closer supervision will be more easily possible with fewer players rather than in a fragmented market. 2) Rapid communization of products resulting in shrinking margins: . − Whilst complexity associated with the diverse lines of business and scale of inter-linked exposures will increase. 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. 1) Need to invest in and continuously upgrade technology:− Technology is expensive to procure and implement. − 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.

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. − Rapid replication by many competitors has resulted in shrinking margins and commoditization. − To survive in such a market size and scale becomes imperative. − It is difficult to ‘build’ product if you are a late entrant-particularly in light of commoditization and shrinking margins. − This implies considerable investment in product developmentpeople. − 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.? . 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.− Banking products are normally not amenable to ‘patenting and hence a very limited window of exclusively exits. infrastructure and investments. The question is whether these should be market determined or driven by the govt. − The “buy” option to full product gaps has a shorter time to market.

• Align voting rights in private banks (Currently capped at 10%) with economic interests. 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. speaks in the same voice on FDI policy in banks. − Ensure clarity on ownership and governance policy vis a vis private sector banks. 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. Given the existing structure of market participants this can be achieved only through a consolidation of the existing players.− 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. − Setup a wholly owned subsidiary − Operate as a branch of the foreign parent. 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.

The question is not consolidation to cover weaknesses. in particular govt. Though each bank and brand can be effective and progress too. Today in the world’s top 1000 banks. but the combined assets systems technology platforms of the corporate parent will mitigate the risks and extend the credit. India on the other hand. over 200 are located in USA. Banks where there are major deterrents over a specific time frame (Minimum 51% govt. . holding 1% voting right and 20% FII limit) leveling the playing field between domestic and foreign banks is particularly important for a competitive setting. which a singular particular bank could have taken.− Allowing fulfledged M & A in banking sector. over 80 in Germany over 40 in Spain and around 40 in the UK. 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. Even China has as many as 16 banks with in the top 1000. just above 100 in Japan. had 20 banks with in the top 1000 out of which only 6 within the top 500 banks. out of which as many as 14 are in the top 500. but to build stronger financial sector. there are many domestic banks from the developed countries than from the emerging economies. According to the banker 2004 out of the top 1000 banks globally. 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.

” . 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. banks have to consolidate.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.

has been planning for the consolidation of public sector banks. would play a supportive role. networking and the state . 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.Supportive Role by the Government: The Govt. The consolidation of banks will be a win-win situation for all the parties as under:i) Banks:Sound financial position large Business. Benefits of core banking solution. The decision of merger has been left to the Board of the banks and the govt. wants merger and acquisitions of the PSBs. This could involve financing the tier (ii) capital of banks by providing long term dept. regional rural banks and private sector banks. Large assets. Now idea has been picking up very fast and the govt. 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. 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. IFC has planned to fund the upcoming consolidation in the Indian banking Industry in case of need. this is also a step towards improving the capital adequacy of the banks. The present govt.

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

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

utilization of assets of funds. “ United we stand-divided we fall” in a way corporate mergers takeovers. faltering marketing efforts and weak financial structure. available blocked up in the weak/unviable banks and adding constructively to the prosperity of the nation through increased below consolidation/merger/acquisition alternatives which require attentions from all concerns. To remove sickness from is one the of banking the best industry. VIZ. Inadequacies of resources. combined resources and united efforts of experience executives and skilled work force. out dated technology/non systematized management pattern. 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. strategies it would warrant creation of new . 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. As the entire banking industry is witnessing a paradigm shift in system process. It is rightly said. amalgamation and damagers are bound to change drastically and rapidly the economy in size and quality performance through recognized corporate undertakings. The small and medium sized banks are working under threats from economic environment which is full of problem for them.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.

⇒ With the international banking scenario being dominated by larger banks. it is important that Indian too should have a fair number of larger banks which could play a meaningful role in the emerging economies. ⇒ The performance of banks in India indicates that certain performances catachrestic are not restricted to a particular bank. Mainly the reasons for mergers and acquisitions can include motives for value maximization as well as non-value maximization.J Abdul Kalam much require to be done by the banking industry in this regard. Therefore consolidation of banking industry is critical from several aspects. emerging opportunities. In order to achieve the Indian Vision-2020 as envisaged by hon’ble president of Indian Sh. 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.P. excess capacity. Indian has only one where as China has five and Brazil has six banks among the top twenty banks in emerging economies. The factor including mergers and acquisitions usually include technological progress.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. 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. . functional and Product restriction. A. consolidation of international banking market and deregulation of geographic.

outlays and to streamline human resources and skills in tune with the emerging competitive environment. consolidation increase the market power and does not cause any damage to the availability of services to small customers. ⇒ The international experiences reveal a wide range of processes and practices involving consolidation. 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. ⇒ 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 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. their impact on the banking market and the trend in post merger performance of banking institutions. telecommunication.⇒ It is found that in all major economies banking industry undergoes some sort of restructuring process. profitability and productivity of banks . 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. These experiences could provide useful inputs to the banking policy in India. ⇒ 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.

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. ⇒ Indian banks have the unique character in displaying similar characteristics of performance despite consisting of different size and ownership. This trend further substantiates the scope for consolidation across the bank groups. A high degree of variation is found in the performance of various groups of banks.since increase in capital and steep reduction in non-performing assets cannot be entirely left to the individual banks in the present scenario. 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. ⇒ A diagnostic performance evaluation study would reveal out important aspects of divergence in the performance of the domestic banking institutions. Consolidation in the banking industry is of great relevance to the economy. so that. The issue of bank consolidation assumes significance from the point of view of making Indian banking strong and sound. apart from it growth and development to become sustainable international evidences strongly indicate greater gains to the banking industry after the consolidation process. ⇒ 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. It indicates that restructuring in Indian banking may not be evolved 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 .

Indian banking is changing its shape its shape and color. .address some of the structural problems that are being faced by the banking industry in India. greater the benefits to the economy as a whole. the message a clear-consolidation and merger of India public sector banks is around the corner and such a situation. Thus. 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. Sooner the process takes off. It has to retain its human face such that the current effort gear fruit for a large number of people.

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