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Project Report On

An Analytical Study on Consolidation of Banking Sector in India
By

Institute of management Technology Distance Learning Programme

Ghaziabad

Submitted By

Name : Himanshi Jain Enrollment No. : 52102486 Address for : C-242/Yamuna Correspondence Vihar, 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.

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

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

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

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

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

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

which has a long way to go. IFCI with IDBI and Global Trust Bank with Oriental Bank of Commerce. with ICICI Bank. merging and closing down the non-viable branches. Times bank with HDFC bank and ICICI Ltd. 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.This phase has been characterized by following features: The nationalized banks have started rationalizing their branch network by shifting. The increasing competition has made the banks more customers oriented. The increasing competition and shrinking profit margins led to the voluntary merger of the banks for going competitive edge. such as merger of bank of Madura with ICICI Bank. which led to introduction of voluntary retirement (VRS) in the nationalized banks with a view to rationalize the manpower. The opening of new branches is based purely on business consideration. 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. Computerization has rendered the manpower surplus in the banking industry. Legislative changes are taking place for making the . The computerization will provide level paying filed for nationalized banks in relation of foreign and private sector banks.

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

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

Acquisition: It is the purchased by one company of controlling interest in the share capital of another existing company. 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.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. Amalgamation: (Consolidation) Halsbury’s law of England describe amalgamations as a blending of two or more existing undertaking into one undertaking. Two or more banks combine to form a new entry in India the legal terms for merger is amalgamation: Take over: It is generally involves the acquisition of a certain block of equity capital of a company which enables the acquirer to exercise . It can also be defined as the fusion of two or more existing companies all assets. The survivor acquires the assets as well as liabilities of the merged company or companies. the share holders of each blending company becoming substantially the share holders in the company which is to carry on the blended undertaking. These means that even after the takeover although there is change in the management both the firms obtain their separate legal identity.

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

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.Table-2 Scheduled Banking Structure in India # (As on March 31. 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 .

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

Total deposit Total Advances Total Income Net Profit 6.140 79.598 7784 7.947 4.000 14.00.00.000 .88.12.224 85.081 3.787 11.000 5.93.000 95.003 9.60.

The figure will be as shown under: .Table-2 Average Figure: per public sector bank & per nationalized bank: As per estimates of 2005-2006 Rs. 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.

03 Avg 3.01 (iii) Remaining [Source: RBI Mckinsey analysis] No.4 2.52 737 Avg 2.79 (iii) Remaining (A) Foreign Banks: (i) Top 5 2.45 (ii) Next 10 (iii) Remaining (B) Private Sector Banks: (i) Top 5 1. Banks (i) Top 5 2. of Banks Total Assets [Source: IBA Bulletin Special Issue] .Table-3 Consolidation will help drive down in intermediation costs Operating Cost/Average Cost (A) PSU.91 3.82 Avg 1.59 1.

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

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

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

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

1995 found large economies of scale in cost structure of banks. Refocusing the bank to grow the “good bank” and make enough profits is the new mantra of banking sector. . Srivastava-1999 found that Indian banks. the effect of size of the bank has been widely discussed and in fact India is relatively slow entrant into the subject. increasing their technology investment and enlarging their business operations. This is hardly surprising since the banking business has become global before globalization becomes a buzz word. 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.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. Their estimates centered on PSBs and cost of capital was not considered by the author. Banking is one among the largest and most profitable industries in both domestic and global markets. Srivastava concluded that large size provides gains to cost efficiency for in India. which decrease with increasing size. banks are expanding their branch network. Added to this. In a quest to achieve there. Using Ray scale economies and expansion path scale economies. In India top banks by size are also top by size of profit though lagging behind in performance indicator. Ray and Sanyal. 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. 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. 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.

New Models for Restricting RRBs: The 196 RRBs to gather have 14433 branches in 516 districts spread over 22 states of the country.31 Ratio Credit Investment Dep. Ratio of Term 53.66 3. Ratio of secured 94.51 6. Ratio of Intt. 2. Ratio of wages 85.07 6. 9.02 Income to total Assets 87.85 8.13 advances to total advances 6. accounting.88 63. regulatory.74 71.35 104.14 4.22 65. Ratio of deposit 79.63 8.41 deposit to Total Deposit 86. RRRS Nationali SBI and Foreign zed Its Banks Banks associat es 6.14 5.11 .58 134.75 63.56 67.99 79.95 63. HR and technology related issues proactively.89 105.“Banking Industry: Vision 2010” document prepared by 1 BA in Nov.47 bills to Intermediation 70.32 to total Liabilities 4. 2003 clearly felt that consolidation in the Indian sector was imminent.69 99. If the consolidation process has to take place smoothly it will be necessary to look at the legal. Ratio + 77.03 66.56 79. Cash Deposit 6.86 8. They have about 19% share in rural deposits and 21% shave in rural credit of all banks.16 59.71 7.15 87.10 31.43 75.66 7.13 All SCBS 1. Thus they control about 37% of rural branches of all banks.

20 9.21 5.21 6. Ratio of wage 27.62 0.18 3. Return on 6.73 16.59 15.70 8. 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.46 6. Return Advances 15.89 7.88 9. Return Assets 11.99 2.44 1.49 18.45 Investments adjusted to cost of funds 3.02 3.28 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. 9.28 bills to total Income 10.05 18.37 19. Cost of Funds 14.20 9. Return Investments on 1.13 Advances adjusted to cost of funds 17.32 16.31 5.04 9.98 21.43 on 11.26 10.02 6.Cost 8. Cost Deposits 13.80 3.04 19.74 2.93 9.50 6.04 on 4.86 3.40 of 6.62 14. Return on 5.81 bills to Total costs Exp.43 6. Ratio of wage 24.18 8.57 6. Need for a Merger Process Advocates of banking consolidation believe that M & As of banks will produce more efficient and healthier banking system less prone to .5 on 12.96 20. Return Equity 12.7 12.41 15.82 10.07 1.16 1.

The general opinion is that only the corporate business class and upper-mid-class can enter multinational banks or banks like ICICI and HDFC. things will change fast after the new issuance from China. The benefits and synergies from bank consolidation are obvious. The industry structure is fragmented in India. 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. 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. In India merger and amalgamation of banks are not new between 1969 and 2005 a total of 26 banks were merged. The average market capitalization on the top there players in India is at $9 billion which is third from bottom. But in recent years particularly after 1991 even profit-making banks have been merged to achieve the number or position. Larger the Better Some indicators of performances of three Banks:Operating Expenses . Though China is the lowest now at $ 5 billion.failure. No one has studied the real benefits of such mergers. 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. 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. 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.

(In crores) S.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 .

This becomes obvious when they are compared to PNB with substantially lower level of business per employee.98 03-04 1.05% but in case of PNB.07 06-07 1.93% in 1995-96 to 1.37 1.31 1.11. . The PNB’s working hour maybe much less than those in ICICI and HDFC banks.12 that operating expenses as 90% of total assets for HDFC Bank went up from .92 06-07 607 1027 407.38 1.65 03-04 866 1010 228.30 1.N o 1 2 3 Bank HDFC ICICI PNB 02-03 1.22 04-05 806 880 176.17 05-06 1.09 1.87 05-06 758 905 330.03 Business for Employee (In crores) S.52 1. And it has not helped improve profits.N o 1 2 3 Bank HDFC ICICI PNB 02-03 865 1120 195.95% in 2002-03.88% during the same period. Thus merger policies of these banks have not resulted in mitigation of operational cost.47 1.48 1.Return on Assets (In crores) S. in case of ICICI Bank the operating expenses increased from 1.08 04-05 1. there has been a slight fall.45 1.41 It is clear from the data table–10. Though the business per employee had shown significant increase which could very well be on account of longer working hours.13 0. Profitability too has been on the decline for both ICICI bank and HDFC Bank.05% to 1. In 2003-04 the ratio increased to 2.

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

“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

Then there were a series of policy initiatives taken by the RBI. The rapid branch expansion resulted in stretching beyond the optimum level of supervision and control. As a result of these measures. there was marked showdown in the branch expansion and attention was paid to improved housekeeping. The banks were faced with losses. credit management. staff productivity and profitability of banks. 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. Steps were also taken to reduce the structural constraints that obstructed the growth of banking industry. .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. customer service.

61 17. 18 merges with the SBI or its associates and 132 transfers of assets and liabilities.03. Bank of Konkan Ltd.61 17.09.61 20.61 29. Bank of new India Ltd.61 04.09.09.06. Seasia midland bank Ltd.61 17. The following list of Banks merged since 1961 to Oct.61 04.06. Bank of Kerala Ltd. Bharat Industrial bank Bank of ltd. New citizen bank Ltd.03.06.1961 27. Syndicate Bank Merchants bank ltd. Travancore forward bank Ltd.06.07. State bank of Travancore South Indian bank Ltd. 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.61 19. Ltd.61 15. Dena bank Canara Bank State Bank of Travancore Bank of Maharashtra Sangli bank Date of merger 09. Venadu bank Ltd.04.09.61 04.61 28. Bank of Poona Ltd.61 17. Kotlayam orient bank ltd.61 04.03.09. Tagore permanent bank ltd.1961 25.61 04. Indian Bank Cuttack bank ltd.61 17.05.05.61 Poona investors bank ltd.06. Wankaner bank ltd.61 01.Besides these banks. Indo-Commercial Bank Ltd. from 1960 to June 1993 there were 21 voluntary amalgamations. Table-3 Sr. With whom merged National Bank of Lahore Ltd. Punjab National Bank Bank of Maharashtra Bank of Baroda State Bank of Travancore Canara Bank Sangli bank Ltd. Syndicate Bank Moolky bank ltd. Maharashtra Rayalaseema bank ltd.61 03. 2005.06.06.06. Bank of Nagpur Ltd.61 01. United Bank of India Pie Money Bank Pvt. Tezpur industrial bank United bank of .09.

ltd.09. United Industrial bank ltd. ltd.08.61 19. Bareilly bank ltd. ltd. Central bank of India Canara banking corp.22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 ltd. Phaltan bank Jodhpur commercial bank ltd.64 01. Syndicate Bank Sangli bank ltd. Satara Swadeshi commercial bank ltd. State bank of Travancore Southern bank ltd.61 16.62 14.64 26.10. United industrial bank ltd. Indian Bank Metropolitan bank ltd. Raghunathmull bank ltd.11.03 06.64 01.61 07.64 08.02.65 United western bank ltd.61 11.64 17.08. State bank of India Bank of Algapuri Ltd.61 06.10. Thiya bank ltd. Banaras state bank ltd. Catholic bank ltd.10.09.09. Bank of citizen ltd.61 14. State bank of Travancore Salem Shri Karur Vysya bank Knnukaparameshwari ltd.61 16.08. Allahabad trading & BKG State bank of corp. G. Unity bank ltd.10.10. State bank of . Lakshmi commercial bank ltd.61 11.12.61 20.06.61 17.08. commercial bank ltd Peoples bank ltd. Karur mercantile bank Lakshmi ltd.64 16. Latin Christian bank ltd.10. bank ltd. bank ltd.08.65 06. Chochin Nayar bank ltd.09.1. India Vettaikaran padur Bank of madura mahajan bank ltd. Syndicate bank Pratap bank ltd. ltd. Unnao commercial bank Bareilly corp. Malnad bank ltd.02.11.64 24. Lord Krishna bank ltd. India Canara Bank 04.64 16. ltd.11. Shri Jadeya Shankarling Belgaum bank bank ltd.64 12.

Bank of Baroda 03. bank ltd.68 Patiala 47 Chawla bank ltd. HDFC Bank ltd.12.69 India 51 Lakshmi commercial Canara bank 24. 50 Miraj state bank ltd. Central bank of 29.03 bank .02. Bank of Baroda 13.08. State bank of 26.mysore 45 Josna bank ltd.04.85 India 53 Hindustan commercial Punjab National 19.70 ltd.02 69 Nedungadi bank ltd.06. Indian overseas 20.10.09.90 India 60 New bank of India Punjab national 04. Bank 54 Traders bank ltd.08.11.99 India 67 Times bank ltd. 46 Amrit bank ltd.05.90 58 Parur central bank ltd.11.93 bank Some of banks merged after the reform process started are listed below:61 Bank of Karad ltd. State bank of 03. Do 1996-97 65 Bareilly corp.02.65 bank ltd.88 55 United industrial bank Allahabad bank 31. Lord Krishna 13.07. State bank of 08.86 bank ltd. Union bank of 08.02.90 59 Purbanchl bank ltd.02.90 bank 57 Bank of Thanjavur ltd.12. New bank of 13.99 66 Sikkim bank ltd. Union bank of 22. 52 Bank of cochin ltd.69 India 49 National bank of Lahore Do 20. bank ltd. Bank of India 1993-94 62 Kashinath Seth bank State bank of 1995-96 India 63 Punjab corp.89 ltd 56 Bank of Tamilnadu ltd. Oriental bank of 1996-97 commerce 64 Bari Doab bank ltd. Bank of India 20. Punjab national 01.02.10.02.65 bank ltd.69 India 48 Bank of Behar ltd.00 68 Banaras state bank ltd. Bank of Baroda 20.02.08. 26. Indian Bank 20.

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.”.04 commerce Bank of Punjab 01. it.05 ltd. 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. which will enable them to respond to the stimulus to global opportunities. forces are obliging may blanks to consolidate. The bank for international settlements Reprt-1992 note.. A merger movement may become pronounced feature of the banking industry. the banking sector is already experiencing symptoms of excess capacity. 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.10. This may force banks to consolidate into a smaller number of larger banks.70 71 72 Bank of Madura Global trust bank ltd. 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. Size . Source-RBI [Trends and Progress in Banking] In the wake of globalization. lowering of entry barriers and inviting foreign investment in the industry. bank of the size of SBI with world class standards. “ ………. Further. Whether the competition stems form within the industry or outside.07. which may be viewed as a solution to excess capacity. Centurion bank ICICI Bank 2001 Oriental bank of 24.

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

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

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

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

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

requires a huge cost outlay: . The exit route for such banks will be to get absorbed by banks with strong asset quality. the average NPA levels are at a level of 1-2 percent and average for the Indian context around 2.68% 3.consolidation complexities. Average net N. there is no guarantee that cost saving or efficiency gain will be realized.P. (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.1000 crores is around 4.5 percent is width in the acceptable range.33% [Rs. (F) Changing environment – Capital allocation using Basle-II frame work. crores] 25000-8000 ->8000 -- [Source IBA Bulletin] In the developed economies. 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. % Table-1 Asset size <1000 -NPA Level -4. may increase operating risks and managerial For example. The average NPA level for the banks whose size lesser that Rs.98% 2.98% which substantially high weaker asset quality necessitates infusion of additional capital and hence Stabilization of asset quality is important.A.

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. because the economic environment in which banks operate has changed so much since the mid–1990.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. Even if there is data. 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. . Basle-II expects banks to access those parameters on the basis of a long period of time. The New Basle-II Capital Accord Minimum Capital Requirement Supervisory Review Process Market Discipline Pillar-I Pillar-II Pillar-III In fact. There are very limited data default histories. the skills of credit risk manager are very important. In such circumstance. preferably through a full economic cycle.

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

however the equity market has reacted differently for different type of banking categories. 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. Rs. -18.Average PAT (%) Across Asset Size <Rs. 2500-80000 crs. but in addition the share-holders look at learning per share accusation year on year. lower NPA etc.1000 – 25000 crs. 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 . There are several parameters under which one could measure whether the business is really creating shareholders value.80000 crs. It is not enough that net interest margin is high.66% --22. 10000 crs. >Rs.04% The bank has to remain rich in order to enhance its credibility among the various stake-holders. IBA Bulletin Special -- 23.35% Rs. One such important parameter is the profitability of the overall business.70 % 25.

Further the manpower can be managed by using technology. Their attitude can be changed through training. There will not be much problem on this account. well furnished and decorated branches and better working conditions. ⇒ The large number of branches and the manpower can be controlled through the upgraded technology. ⇒ Imparting training to the employees. better remuneration. better facilities. Mergers and acquisitions Consolidation in Banks: Legal Problems and Solutions Currently. With the core banking solution the more number of units will not matter. While SBI is governed . They will accept the change for their betterment. The training will help improving knowledge and developing skills amongst the employees. They can be prepared for change and work in a new environment. there by addressing the problem of maintaining balance throughout the country. the banking companies (Acquisitions) Act 1970. and the banking regulation Act. ⇒ The productivity of the merged entity will improve and most of the other problem will be solved automatically. 1949 govern nationalized banks.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. which is popularly known as the bank nationalist ion Act. ⇒ The consolidation will take care of region-wise presence of banks. Chapter – 5 Relevance of Consolidation.

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

2. Private Sector ROA % Bank 31. It involves a merger of group of mid-sized banks to form a larger institution.com . We are summing here an existing new private sector bank taking over a smaller bank or a group of smaller banks.6 4.com HDFC Bank.32 Total (Rs. and hence it could be reckoned as another large player. 1. First Structure: It is perfect fit for the new private sector bank taking over an old smaller banks or a group of smaller banks. When we took at the table No.1 it is an apparent that ICICI Bank emerges at the largest player in the private sector bank.3.09 1.07 ICICI HDFC 1. There is always a possibility for HDFC Bank to merge with HDFC Ltd.33 NIM 2.cr) 344658 360548 Assets Source: ICICI Bank.

33 1. Bank 6. Technology advancement for providing service meeting Basel-II requirements for risk management would require additional infusion of funds. How could be a scenario.6 3.00 Total Assets Rs.09 1. For e.com Let us look at some of the key performance indicators: .Table–1 Private Sector Market Bank 31. 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.81 Source: ICICI Bank. . this will not be economical. It could be seen that though the ROA is almost same for ICICI Bank and HDFC Bank.15 1. ICICI Bank 2.87 2.com HDFC Bank. it could destroy share holders value. The fixed could be spread over when the asset size is large and otherwise. the NIM is much higher in the case of HDFC Bank and this could be due to how cost of resources.00 NIM % 2.32 1. There are 18 banks whose market share is less than 1% and for these banks to sustain the pressure in the medium to long term in the changing scenario is going to be difficult.namelyreturn on Assets. 344658 360548 21882 13658 Federal .04 Share % 1. UTI Bank 4. The asset size is critical for the profitability of the business and hence the asset size is below a threshold limit.g. profit margins and market share and growth.27 1.03.Cr.68 4. It is also interesting to note that the PAT (Profit after Tax) for ICICI Bank is 33% against HDFC Bank at 28%. HDFC Bank 3.30 ROA % 1.

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

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

.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.

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

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

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

5 1.3 7.M & A at international level International experience:An important force of change taking place in the world wide banking industry is consolidation. 3. Spain 76 8.7 2.3 0.9 0.7 0.1 1.2 2 22. 4.9 6.3 55.04 04 6. A major outcome of the financial sector reforms in a large part of the developed world has been consolidation of banking industries.5 3.1 4.4 9394 0.5 9798 2. 5.3 19.6 114.08 5.4 3. 6. United 71 Kingdom 9.6 23 Value ($ Netherlands 7.2 2. United 1354 States 10.9 95-96 1. Table-1 Mergers & Acquisitions activity in banking industry in selected country of the world 1991-1998 Numbers billions) Countries 1.4 0.6 .1 4.8 0.4 0.01 1.07 1 2.1 0.3 3.1 6.5 56.3 107. 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. Switzerland 47 Source BIS working paper Table-2 No-54 .3 8.5 5. 2.

Saudi Arabia and soon it will pick up the pace like other countries of the world.Stage countries S. 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. 9. 6. of Bank consolidation in different European Country Germany France Italy Spain/Portugal UK Austria Nordic Region Stage Starting Starting consolidation. 7. An overview of the financial services industries in the world indicate that steeps surge in the trends of consolidation is talking place. 5. No 1. Mergers and acquisitions has already been started in countries like Philippines. . 3. Merger in Asia:Merger and acquisitions activities in Asian countries are not as frequent as witnessed in America and Europe. Japan. 4. Korea. Benelux Switzerland complete Source-The Banker London. The data in the table-1 shows that while in most of the countries no. of mergers have reduced the value involved in them has increased many folds. Singapore. 2.

− Assets of approx.Merger:-An overview of performance would include an analysis of important aspects of mergers among top 200 banks. While 36% of the range of 75-120% of acquiring bank. − 30% of total cases the target banks were having as low as up to 25% capital of the acquiring bank. 54% cases of the target banks were having assets more than 50% of assets of acquiring bank. − 48% of the target banks were having ranging from 5 to 50% of capital of the acquiring bank 52% of target banks were having capital ranging from 51 to 98% of the capital of the acquiring bank. while approx.25% of acquiring bank. A review of postmerger performance and significance of size of banks that merger and their performance discussed below. while in case of 20% difference between the capital of acquired and largest bank was only 15%. 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 . 46% cases of the target banks was of the range up to 50% of acquiring banks. − In 35% cases the target banks were having assets as low as 5.

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

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

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

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

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

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

it will also facilitate financial strength. . − 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.Chapter-7 Findings & Suggestion While consolidation is in many ways a natural response to our rapidly changing banking environment. Geographic expansion allows banks to diversify risks by exploring more avenues for profitable business in the global market. − Indian banks would also have a presence at both ends of the transition of the Indian business expanding overseas. Port folio risk on the asset side and funding risk on the liability side would be reduced. − Weak banks that are threat to the system will be weeded out. − 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. Consolidation will ensure fair valuation. − Public sector banks have been relatively poorly valued as against the private sector.

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.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 . lowering the cost of servicing a customer and increased profitability of even smaller branches. However. However there are risks involved in realizing this synergy value primarily related to technology. Technology is the fundamental force driving the merger wave but the benefits of the technology revolution accrue optimally only to large scale banks. integration. work culture and human resources. These issues head to be sorted out very early for the same success of any M&A. Technology enables the banks to share customer wallet. 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.

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

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

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

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

• Ensure RBI and govt. • Align voting rights in private banks (Currently capped at 10%) with economic interests. speaks in the same voice on FDI policy in banks. . − Ensure clarity on ownership and governance policy vis a vis private sector banks. Here size is critical for both survival and growth size and scale are critical in this capital intensive industry for survival since without size it is difficult to be competitive. 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.− 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. − Setup a wholly owned subsidiary − Operate as a branch of the foreign parent. Given the existing structure of market participants this can be achieved only through a consolidation of the existing players. 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.

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

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

has started working on catalyzing the first merger between two or three strong PSBs which may come very soon and then the process will continue. 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. This could involve financing the tier (ii) capital of banks by providing long term dept. 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. this is also a step towards improving the capital adequacy of the banks.Supportive Role by the Government: The Govt. The present govt. 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. Now idea has been picking up very fast and the govt. IFC has planned to fund the upcoming consolidation in the Indian banking Industry in case of need. has been planning for the consolidation of public sector banks. wants merger and acquisitions of the PSBs. regional rural banks and private sector banks. networking and the state . would play a supportive role. Large assets. The decision of merger has been left to the Board of the banks and the govt.

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

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. market risk and operational risk will also be addressed as the consolidated entity will be able to meet all the parameters of international standards. . The 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. Not only this they can also afford the huge expenditure to be uncured for transformation and ongoing technology up gradation. 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. The issue of credit risk.banks should be of an ideal size and strength to offer competitive pricing of the products and to sustain in a competitive banking atmosphere. They will be ready to face any future unforeseen challenges which may arise and appear in future. We are examining these issue but they have to examine in the context of the implications for the public sector as a whole.

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

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

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. profitability and productivity of banks . ⇒ 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. outlays and to streamline human resources and skills in tune with the emerging competitive environment. ⇒ An important observation which may be induced from various past mergers that the merger between big and small banks led to greater gains as compared to merger between equals. consolidation increase the market power and does not cause any damage to the availability of services to small customers. 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. ⇒ 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. 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. ⇒ The international experiences reveal a wide range of processes and practices involving consolidation. telecommunication. These experiences could provide useful inputs to the banking policy in India. their impact on the banking market and the trend in post merger performance of banking institutions.⇒ It is found that in all major economies banking industry undergoes some sort of restructuring process.

It is strongly felt in the Indian banking circles that a suitable consolidation process through merger and acquisitions is long due to . 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. ⇒ Indian banks have the unique character in displaying similar characteristics of performance despite consisting of different size and ownership. A high degree of variation is found in the performance of various groups of banks. Since PSU account for a large share of banking assets and their lower performance ratio reflect the entire banking industry it is considered important that suitable consolidation process may be initiated at the earliest. It indicates that restructuring in Indian banking may not be evolved across the bank groups. ⇒ Consolidation can also be considered critical from the point of view of quantum of resources required for strengthening the ability of banks in asset creation.since increase in capital and steep reduction in non-performing assets cannot be entirely left to the individual banks in the present scenario. ⇒ A diagnostic performance evaluation study would reveal out important aspects of divergence in the performance of the domestic banking institutions. so that. Consolidation in the banking industry is of great relevance to the economy. This trend further substantiates the scope for consolidation across the bank groups. 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.

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

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