Project Report

On

An Analytical Study on Consolidation of Banking

Sector in India

By

Institute of management TechnologyDistance Learning Programme

Ghaziabad

Submitted By

Name :Himanshi JainEnrollment No. :52102486Address for Correspondence

:C-242/Yamuna Vihar, Delhi-110053

Mobile No. :9891772894Resume of Project Guide Attached

:Yes

Consent Letter from Guide Attached

:Yes

Specialization Ares

:Finance

Date of Submission

:30/03/2008

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

E-mail:caamitbhargava@hotmail.com Amit Bhargava

Date of Birth : 18th Feb. 1981

Educational Qualification : B.Com from C.C.S. University

Qualified Chartered Accountant

from ICAI.

Professional Experience : Banking, Merchant Banking,

since April 2006 working with

SMC Group of Companies as

Manager Finance (Member of

*National Stock Exchange,

*Bombay Stock Exchange,

*National Commodity Exchange,

* Multi Commodity Exchange),

Registered Insurance Broker.

17, Netaji Subhash Marg,

Daryaganj, New Delhi-110002.

Responsibilties : * Funds Management

* Finalization of Account

* Commission Handling of

franchisee in the channel

* Internal Audit of Account

* MIS report for funds

planning for Directors &

companies.

* Currently undertaking

the responsibility of

Merging of M/s SAM

Global Securities Ltd.(Listed

at Guwahati Stock

Exchange) with M/s SMC

Global Securities Ltd.

(Listed at Ludhiana Stock

Exchange).

(Amit Bhargava)

Contents

Acknowledgements

Preface

Page

Chapter 1 Introduction

Chapter 2 Profiles of Indian Banks

Chapter 3 Main Mergers, Acquisitions & Consolidation

Chapter 4 Main Driver For The Merger Acquisitions & Consideration

Chapter 5 Relevance of Merger, Acquisitions & Consolidation

Chapter 6 Experience & Limitations of Merger & Consolidation

Chapter 7 Findings & Suggestions

Bibliography

To,

Institute of Management Technology,

Distance Learning Programme,

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. Himanshi Jain, student of MBA bearing enrolment no. -52102486(session 2005), in partial fulfillment of the requirement for the award of degree of MBA, is a bonafide work carried out by him under my supervision.

In my knowledge, this work has not been submitted, either in part or in full, to any other institute for the award of degree or diploma.

Thanking You,

(Amit Bhargava)

Contents

Consolidation Mergers & Administrations is gaining its strength

from competition that emanates not only almost the banks. But also

from other segments of financial sector. Consolidation Mergers &

Acquisitions in the financial sector is an open challenge across the

global world.

A spiriting wave of Consolidation Mergers & Acquisitions across

the global has heralded a sea change in the nature of financial sector.

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.

Market led mergers may gain prominence in the coming years.

This study is divided into seven chapters.

Chapter-I Describe the Introduction, Significance of Problem &

Objective of study.

Chapter-II Describe the Profile of Indian Banks–Public Sector, Private

Sector, Foreign Sector & Regional Rural Banks as well.

Chapter-III Describe the Main Mergers & Acquisitions–Historical

Perspective Phase Wise.

Chapter-IV Describe the Main Driver for the Consolidation, Mergers &

Acquisitions-factors each aspect.

Chapter-V Describe the Relevance of Consolidation, Mergers &

Acquisitions Local as well International level.

Chapter-VI Describe the Experience & Limitations of Mergers,

Acquisitions & Consolidation-Govt. role as well as R.B.I. role.

Chapter-VII Describe the Whole hearted summary of the findings &

Suggestions fully discussed.

Chapter – 1: Introduction

Statement of the problem:

Financial management is an integral part of overall corporate

management; Finance plays an extremely crucial role in the continuity

and growth of a business.

Main banking is changing its shape and color. Fit has to retain its

human face such that the current offers bear fruit for a large number

of people.

The expansion phase after Nationalization which was maker by

geographical and numerical proliferation of bank branches, developer

some weakness such as low profitability, poor customer service,

mounting non-performing assets and over staffing etc. For making the

medium banks competitive profitable and vibrant in the long run,

financial sector reforms which were introduced in the early Nineties of

the last century based on the Narismham committee recommendations

of 1991 & 1998.

The phase witnessed the liberal entry of private and foreign banks,

operational freedom to the banks, deregulation of the interest rates,

reduction in the statutory reserve requirements of statutory liquidity

ration and cash reserve ratio, introduction of international norms of

accounting in terms of capital adequacy, income recognition asset

classification and provisioning etc. These changes brought

competitiveness in the Indian banking industry and profitability

became the core business objective of the banking sector.

Liberalization, deregulation and global integration of banking

activities have increased the risks of the banking industry in depth and

dimensions.

Banks being aware of the risk dimension of their business are

proactively devising their internal mechanisms for anticipation,

identification and management of these risks, which was more of less a

neglected area before the introduction of financial sector reforms.

This phase has been characterized by following features:

The nationalized banks have started rationalizing their branch

network by shifting, merging and closing down the non-viable

branches. The opening of new branches is based purely on business

consideration.

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. The

computerization will provide level paying filed for nationalized banks in

relation of foreign and private sector banks.

Computerization has rendered the manpower surplus in the

banking industry, which led to introduction of voluntary retirement

(VRS) in the nationalized banks with a view to rationalize the

manpower.

The increasing competition among banks with the entry of foreign

and private sector banks has increased the customers’ expectations on

one hand and the rationalization of rate of interest and service charges

has reduced the profit margins on the other because of the decreasing

spreads.

The increasing competition 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, Times bank with HDFC bank

and ICICI Ltd. with ICICI Bank, IFCI with IDBI and Global Trust Bank with

Oriental Bank of Commerce.

We are still in the midst of the consolidation phase, which has a

long way to go. Legislative changes are taking place for making the

banks more transparent and viable. International accounting standards

are being introduced in a phased manner with a view to make the

Indian banks, internationally competitive with sound capital base. The

banks are experiencing the pressure of competition in the form of

changing customer requirements. Customers’ retention and thinking

spreads. 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. For coping of with the

problem of profitability, 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, on the other.

The small and medium sized banks, 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.

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. This phase is likely to last by the end of present decade.

In the era of globalization the organization will have to be

competitive in order to face the challenges. “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. With regard to India it

is worth while to mention that merges between banks worded be of

advantages only if it takes into account the synergies and

complementarities of merging units.

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.

Basically a merger involves a merger of two or more banks. 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. 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.

The Indian banking industry consisted of 97 commercial banks-28

public sector banks 20 private sector banks and 42 foreign banks, 196

regional rural banks, 52 scheduled Urban cooperative banks and

scheduled state cooperative banks. The growth of the banking industry

in India may be studied in terms of two broad phases:-

1. Pre-Independence 1786 to 1947

2.Post-Independence 1947 to till date

3.Post independence to till date can be classified in three sub

categories.

Evolution of the Indian Banking Industry

Table-1

Evolution of Indian Banking

Pre-Independence Post Independence(1786-1947) (1947 to till date)

Pre-Nationalization Post Nationalization Post Liberalization(1947-1969) (1969-1991) (1991 onwards)

Classification of Concepts:-

Mergers: It is defined as combination of two or more companies into a

single Company where one survives and the others loses its corporate

existence. The survivor acquires the assets as well as liabilities of the

merged company or companies.

It can also be defined as the fusion of two or more existing

companies all assets, 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.

Acquisition: It is the purchased by one company of controlling

interest in the share capital of another existing company. These means

that even after the takeover although there is change in the

management both the firms obtain their separate legal identity.

Amalgamation: (Consolidation) Halsbury’s law of England describe

amalgamations as a blending of two or more existing undertaking into

one undertaking, the share holders of each blending company

becoming substantially the share holders in the company which is to

carry on the blended 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

control over the affairs of the company, normally

merger/amalgamation and acquisition/tank over are used

interchangeably.

Our banks have done a great job in extending banking services.

They have built a pan Indian branch network. They have developed a

store house of expertise in lending to different sectors including

agriculture and small and medium enterprises. Public sector banks

have been the sharpest instrument in increasing the degree of

financial inter-mediation in the economy. These achievements deserve

to be applauded. The point however, is that public sector banks or for

what matter any bank cannot rest upon their or its laurels, especially

at time, when unprecedented opportunities knock at their doorsteps,

when the freedom for action is complete and when the price for in

action may threaten their very survival.

After 14 years after reforms started with a bang, some sectors

have responded admirably. Among these the financial sector,

especially banking reforms took as deep root. In the banking sector,

the mindsets that were cultivated after independence also changed.

The new challenges are therefore, not greater or more formidable than

the challenges that we have overcome.

Shakespeare said, “Ignorance is the curse of God; knowledge is

the wing where with we fly to heaven.”

Paraphrasing Shakespeare it can be said, “Inaction is the curse of

God; action is the wing wherewith we fly to heaven.”

Table-2

Scheduled Banking Structure in India #

(As on March 31, 2005)

Scheduled Banks in India

Scheduled Commercial Banks Scheduled Co-operative Banks

Public Private Foreign RegionalSector Sector Banks RuralBanks (27) Banks (29) Banks (33) Banks (196)

Scheduled ScheduledUrban Co. State Co.Banks (57) Banks (16)

Nationalized SBI & Its Old Private New PrivateBank (19) Associate Sector Banks Sector Banks

S (8) (21) (9) (8)

Chapter – 2

Profile of Indian Banks

Today in the world’s top 1000 banks, there are many domestic

banks from the developed countries than from the emerging

economies, out of the top 1000 banks globally; over 200 are located in

USA, just above 100 in Japan, over 80 in Germany over 40 in Spain and

around 40 in the UK. 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, which is the main frame work on which modern banking is based

it is imperative that we restructure our financial and banking sector to

make it more globally competitive with domestic as also global

consolidation.

Consolidation of Banks: Statistical overview:

Table-1

Data regarding all nationalized Banks

Rs. Crore

2002-04 2004-05 2005-06

Actual Actual Estimate

Total deposit 6,88,081 7,93,947 9,00,000

Total Advances 3,60,140 4,12,224 5,00,000

Total Income 79,598 85,787 95,000

Net Profit 7784 11,003 14,000

Table-2

Average Figure: per public sector bank & per nationalized

bank:

As per estimates of 2005-2006

Rs. Crore

Total deposit 47368

Total Advances 26315

Total Income 5000

Net profit 737

Now assume that the state bank subsidiaries are merged with

state bank of India and other nationalized banks are merged with each

other and the number is reduced from exiting 19 to 8. The figure will

be as shown under:

Table-3

Consolidation will help drive down in intermediation costs

Operating Cost/Average Cost

(A) PSU. Banks

(i) Top 5 2.4

(ii) Next 10 2.52 Avg 2.45

(iii) Remaining 737

(B) Private Sector Banks:

(i) Top 5 1.59

(iii) Remaining 1.82 Avg 1.79

(A) Foreign Banks:

(i) Top 5 2.91

(iii) Remaining 3.03 Avg 3.01

[Source: RBI Mckinsey analysis]

No. of Banks Total Assets

[Source: IBA Bulletin Special Issue]

In India we have four category of banking players public Sector

Banks (PSU) old private Sector banks, new private banks and foreign

banks. There are 6 banks whose asset size is high than Rs.80000

crores such banks constitute 50% of the overall total assets of the

industry. 15 banks whose assets size between Rs.10000/- crores and

below Rs.25000/- crores constitute 14% and there are 12 banks whose

assets size below Rs.10000/- crores constitute only 4% form this it is

apparent a few banks managing a larger proportion of total banking

assets is evident.

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. India is a hugely over banked and under serviced country.

There are close to 100 scheduled commercial banks 4 non schedule

commercial banks and 196 regional rural banks.

The SBI and its seven associates have about 14465 branches; the

19 nationalized banks have 36927 branches; The RRBS have 14773

branches and foreign banks around 276 branches. So the scheduled

bank.

SBI 14465

National 36927

RBS 14773

Foreign Both 276

Other Schedule Bank 3363

Besides, there are a few thousand cooperative bank branches on

an average one bank branch caters to 15000 people. However only

one bank – State Bank of India is among the top 100 banks in the

world. Consolidation is this imperative in the Indian banking industry.

Despite gains in efficiency, consolidation can also pose

considerable challenges by way of integrating people, culture,

knowledge and common understanding to assimilate different style of

operations prevailed before consolidation. Fusing formal systems and

processes is a Hercules task and it become more complicated due to

disruption in existing system. Consideration through merger can be

easier if it is operational through rapid advancements in the

communicate system, rule base management system and universal set

of guidelines and standards.

Need for Consolidation of Banks:-

In banking literature, the concept of ‘Size’ is not uniformly defined.

Number of branches, volume of business asset size, capital and

reserves etc are interchangeably considered as the size of a bank.

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,

including the managerial efficiency, are affected by the bank size. On

the other hand, there is a limit to ‘scale economics,’ which allows the

average cost to fall and average revenues to rise with increase in size.

In other words the scale benefits are limited up to certain level of size.

Similarly the ‘scope economics’ allow a bank to divisibly its business

and product mix to maximize its revenue. However the scope

economics also to a certain extent can have a favorable influence on

the revenue. Managerial ability to control costs, which is more

important than scale and scope economies, is also deemed as critical

success factor that comes into play beyond size consideration for

banks.

The importance of size in the performance down-in of blanks can

be outlined as follows:

- For cost reduction, there is need to achieve economies of scale.

- Economics of scope can be achieved by enlarging the size and

introducing product diversification.

- Large size allows wide penetration and hence boosts revenue of the

bank.

- Risk diversification is possible with large size and larger

geographical reach.

- Fund mobilization and deployment will be easy with large size

leading to larger market share.

- Large banks can operate preferably with thinner margin

compensated by sheer volumes.

The literature on scale economies in banking is mostly confined

to the US economy,

Where it gained importance in early 1980, when large scale merger

and consolidation took place. In the US case most of the studies found

evidence of scale economics for small banks.

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

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.

The word ‘MERGER’ may be taken as abbreviation which means–

M – Mixing

E – Entities

R – Resource for

G – Growth

E – Environment

R – Renovation

Consolidation is inevitable and Need of the Hour:-

In the Indian context one of the earliest studies was conclude by

Keshari and Paul–1994 who took deposit as output. Ray and Sanyal.

1995 found large economies of scale in cost structure of banks, which

decrease with increasing size. Their estimates centered on PSBs and

cost of capital was not considered by the author. 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. Srivastava-1999 found that Indian banks,

particularly PSBs are operating at scale below the optimum size. Using

Ray scale economies and expansion path scale economies, Srivastava

concluded that large size provides gains to cost efficiency for in India.

In India top banks by size are also top by size of profit though

lagging behind in performance indicator. All over the world, the effect

of size of the bank has been widely discussed and in fact India is

relatively slow entrant into the subject. 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. Added to

this, the market power of the banking sector is increasing owing to

globalization. Banking is one among the largest and most profitable

industries in both domestic and global markets. This is hardly

surprising since the banking business has become global before

globalization becomes a buzz word. Now is has become imperative for

banking industry to get consolidated to with-stand storms and shocks

what-So-ever be so that they will not shiver and wither from being

shaken by the global market forces.

Refocusing the bank to grow the “good bank” and make enough

profits is the new mantra of banking sector. In a quest to achieve

there, banks are expanding their branch network, increasing their

technology investment and enlarging their business operations.

“Banking Industry: Vision 2010” document prepared by 1 BA in

Nov. 2003 clearly felt that consolidation in the Indian sector was

imminent. If the consolidation process has to take place smoothly it will

be necessary to look at the legal, regulatory, accounting, HR and

technology related issues proactively.

New Models for Restricting RRBs:

The 196 RRBs to gather have 14433 branches in 516 districts spread over 22 states

of the country. Thus they control about 37% of rural branches of all banks. They have

about 19% share in rural deposits and 21% shave in rural credit of all banks.

RRRS Nationalized Banks

SBI and Its associates

Foreign Banks

All SCBS

1. Cash Deposit Ratio

6.31 6.69 4.89 6.58 6.35

2. Credit + Investment Dep. Ratio

77.07 99.14 105.51 134.13 104.66

3. Ratio of deposit to total Liabilities

79.32 86.99 79.16 59.56 79.88

4. Ratio of Term deposit to Total Deposit

53.41 63.75 63.03 66.22 65.14

5. Ratio of secured advances to total advances

94.13 87.15 87.56 67.43 75.63

6. Ratio of Intt. Income to total Assets

9.02 8.86 8.66 7.85 8.71

7. Ratio of wages bills to Intermediation Cost

85.47 70.74 71.10 31.95 63.11

8. Ratio of wage 27.81 21.37 19.7 12.49 18.32

bills to Total costs Exp.

9. Ratio of wage bills to total Income

24.28 16.41 15.18 8.62 14.07

10. Return on Assets

1.04 1.04 0.96 1.59 1.05

11. Return on Equity

4.40 19.50 20.89 15.21 18.57

12. Cost of Deposits

6.43 6.21 7.02 5.31 6.46

13. Cost of Funds 6.43 6.20 6.88 5.26 6.20

14. Return on Advances

11.5 9.82 9.04 10.70 9.93

15. Return on Investments

12.98 10.18 9.74 8.28 9.80

16. Return on Advances adjusted to cost of funds

5.13 3.62 2.16 5.44 3.73

17. Return on Investments adjusted to cost of funds

6.45 3.99 2.86 3.02 3.60

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. 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.

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

failure. The benefits and synergies from bank consolidation are

obvious. The enlargement of banks through mergers would increase

the competitive strength and raise the efficiency of the system due to

economies of scale. 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 India merger and amalgamation of banks are not new between

1969 and 2005 a total of 26 banks were merged, largely on a voluntary

basis for strategic purposes. But in recent years particularly after 1991

even profit-making banks have been merged to achieve the number or

position. No one has studied the real benefits of such mergers. We

have not come across any study to shoe that during the post-merger

period transaction cost have fallen for customers or that the enlarged

banks have provided better services at the same cost prevailing before

merger. The general opinion is that only the corporate business class

and upper-mid-class can enter multinational banks or banks like ICICI

and HDFC.

There are a lot of small players in the Indian banking sector. The

industry structure is fragmented in India. 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. The average market capitalization on the

top there players in India is at $9 billion which is third from bottom.

Though China is the lowest now at $ 5 billion, things will change fast

after the new issuance from China. Now consolidation is the trend

which will take place sooner or later in India as well.

Larger the Better

Some indicators of performances of three Banks:-

Operating Expenses

(In crores)

S.No

Bank 02-03 03-04 04-05 05-06 06-07

1 HDFC 5771 810 1055 1691 2421

2 ICICI 2012 2571 3299 5001 6691

3 PNB 2051 2371 3278 3023 3326

Return on Assets

(In crores)

S.No

Bank 02-03 03-04 04-05 05-06 06-07

1 HDFC 1.52 1.45 1.47 1.38 1.37

2 ICICI 1.13 1.31 1.48 1.30 1.09

3 PNB 0.98 1.08 1.17 1.07 1.03

Business for Employee

(In crores)

S.No

Bank 02-03 03-04 04-05 05-06 06-07

1 HDFC 865 866 806 758 607

2 ICICI 1120 1010 880 905 1027

3 PNB 195.65 228.22 176.87 330.92 407.41

It is clear from the data table–10,11,12 that operating expenses as

90% of total assets for HDFC Bank went up from .93% in 1995-96 to

1.95% in 2002-03, in case of ICICI Bank the operating expenses

increased from 1.05% to 1.88% during the same period. In 2003-04 the

ratio increased to 2.05% but in case of PNB, there has been a slight

fall. Profitability too has been on the decline for both ICICI bank and

HDFC Bank. Thus merger policies of these banks have not resulted in

mitigation of operational cost. And it has not helped improve profits.

Though the business per employee had shown significant increase

which could very well be on account of longer working hours. This

becomes obvious when they are compared to PNB with substantially

lower level of business per employee. The PNB’s working hour maybe

much less than those in ICICI and HDFC banks.

But market forces are the driving force behind bank consolidation.

There is an increase in competition and quality and quality in services,

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. 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. Today we do

not know the project-wise exposure of leading private banks.

Depositors can’t spot whether or not banks are taking excessive risk in

the course of consolidation and restricting.

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, 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, post merger, will

have to treat at human resource equitably.

The presence of large banks in greater numbers in future would

make the supervision of these institutions to ensure that they are

healthy and are not taking excessive risk.

An uphill task of course though banks supervision and increase in

competition due to wide spread consolidation is certain to result in

higher levels of development and economic growth.

“Chorus for banking reforms gets louder.” Morgan Stanley says

India must join consolidation wave sweeping developing countries-

Economic Times Oct. 08-2005.

Table-18

Business for Employee

Population-Group 1995 1998 2001

Nationalized Banks -- -- --

Rural 14.48 13.02 13.39

Semi-urban 16.27 15.68 15.51

Rural+Semi urban 30.75 28.70 28.90

Urban 24.47 22.82 22.68

Metropolitan 44.76 47.92 48.90

Urban+Metropolitan 69.23 70.74 71.08

PSBs -- -- --

Rural 13.83 13.02 12.69

Semi-urban 18.50 18.40 17.99

Rural+semi-urban 23.33 31.42 30.68

Urban 24.56 22.92 22.74

Metropolitan 43.09 45.63 46.56

Urban+metropolitan 67.65 68.55 69.03

Chapter – 3

Business for Employee

Historical Perspective:

The banking system in India went through various stages before it

emerged into modern banking systems with increase in trading and

administration of East India Company. The early banking system of

banias, chetty, sahukaras, podars and shroffs was replaced by banks

established by English agency houses during the end of eighteenth

century. But almost of all them failed due to failure of parent agency

houses during the trading crisis of 1829-33 as they mixed bank with

trading.

The next set back by the banks was faced during 1862-65 during

American Civil War, which led to a speculating boom in the Indian

cotton trade, as a result of which many banks and Companies were

formed. Although almost all of them failed as soon as Civil war was

over and the boom collapsed. The three presidency banks set up by

respective Govt., also failed due to handicap of inexperience and their

inability to conduct foreign exchange business.

A list showing banks failed and mergers from 1720-1885 is

enclosed as Table-1.

Table-18

Business for Employee

Founded year

Failed year Merged F/M

Name of Bank Where Founded

1720 1770 F Bank of Bombay Bombay1770 1832 F Bank of Hindustan Calcutta1773 1775 F Bank of Bengal & Bihar Calcutta1784 1791 F Bengal Bank Calcutta1786 1791 F General Bank of India Calcutta1808 1920 M Bank of Calcutta/Bank of

Bengal 1808Calcutta

1819 1928 F The Commercial Bank Calcutta1824 1829 F The Calcutta Bank Calcutta1829 1848 F Union Bank Calcutta1833 1866 F The Agra & United

Service Bank Ltd.Agra

1835 1837 F The Bank of Mirzapore Mirzapur1840 1859 F North Western Bank of

IndiaMussoorie

1840 1920 M Bank of Bombay: Re-formed in 1868

Bombay

1841 1842 M Bank of Asia London1841 1849 M The bank of Ceylon Colombo1842 1884 F The oriental Bank

corporationBombay

1842 1863 F The Agra saving fund Agra

1843 1920 M Bank of Madras Madras1844 1850 F The Banaras Bank Banaras1844 1893 F Shimla Bank Ltd. Shimla1845 1866 F The commercial Bank of

IndiaBombay

1845 1851 F The conpore Bank Kanpur1846 1862 M Dacca Bank Dacca1852 1855 F Chartered Bank of Asia

Chartered Mercantile Bank of India London & China

London

1854 1857 F The London and Eastern Banking Corp.

London

1854 -- The Comptoir D’ Escompte of Paris

Paris

1860 -- Central Bank of Western India

Bombay

1862 -- Bank of Rohilkhand Rampur1863 -- Punjab Bank Ltd. Rawalpindi1863 -- Sind Punjab & Delhi bank

Corp. Ltd. Leading to Grindlays Bank

Calcutta

1865 -- Allahabad Bank Allahabad1881 1858 F The Oudh Commercial

BankFaizabad

Source: IBA Bulletin

Under the impetus of the Swadeshi movement, the hither-to slow

growth of Indian banking picked up pace and between 1900-1914 a

large number of new banks camp up. Further the growth of Indian

banks suffered its first and major set bank in 1913, during the worst

ever banking crisis in India, starting before the war and accentuated by

it followed by post war depression (1922-23) wherein the rate of bank

failure was very high and thereafter followed by incident of partition

during 1947.

Probably till that time no proper attention was paid to rescue

these banks besides proper controlling and monitoring, to check the

failures.

After 1951, with the emergence of RBI as a decisive factor armed

with new power it acquired in 1949 under banking companies Act to

intervene in the event of crisis in a bank, the picture totally changed.

The failure of Math bank created a panic among the depositors and

had it not been for the amalgamation of four banks in Bengal into

United Bank of India, there might well have been another major

banking crisis with the liquidation of two scheduled bank the Laxmi

Bank and the Palai Central Bank in 1960, several small and medium

sized banks experienced serious runs on them. It was the first and

appropriate tool to provide relief to ailing banks besides maintaining

public and depositors’ confidence in banking system in the country

hence, a new section 45 was inserted in banking companies Act in

Sept. 1960.

According to section 45, the RBI can submit a scheme to the

central Government for amalgamation of a banking unit with a well

managed bank with in a period of hot more than six months

moratorium granted by the govt. on an application made earlier in that

behalf by the RBI. One advantage of compulsory amalgamation over

liquidation is that the depositors get immediate credit to the extent of

readily realizable assets at the common of the amalgamation

additional payments being make as and when the remaining assets are

realized.

Thus in 1961 alone thirty banks were merged compulsorily with

other banks. As a consequence of improved atmosphere, banks failure

decreased, while the number of mergers amalgamation and transfers

in-creased from one in 1954 to twenty two in 1963 and seventy nine in

1964.

The idea behind this merger to strengthen the banking system,

small, weak and insufficient upon scheduled banks which could hardly,

if ever have become viable and eligible for a license, were being

merged with other scheduled bank. It is evident that the basic

objective of banks mergers of amalgamation in this period was to

check the frequent failure of banks and to save them from facing crisis

and maintaining public confidence.

A brief list of banks mergers, amalgamations transfers of assets

and liabilities are given in Table-2

Table-2

Year Voluntary Compulsory Other Transfer Total

Amalgamations under section 44-A

merger under section 45

mergers of Assets and Liabilities

1950 4 -- -- -- 41951 2 -- -- 1 31952 -- -- 4 -- 41953 -- -- 1 2 31954 -- -- -- 1 11955 -- -- -- 3 31956 -- -- -- -- --1957 2 -- -- 2 41958 4 -- 2 1 11959 4 -- -- 4 81960 2 -- -- 5 71961 1 30 2 3 361962 3 1 2 5 111963 2 1 4 15 221964 7 9 1 62 79Total 31 41 19 101 192

Source IBA Bulletion

Consolidation process:

The consolidation process of Indian banks has started in early

1960 itself. The rapid branch expansion resulted in stretching beyond

the optimum level of supervision and control. The banks were faced

with losses. Then there were a series of policy initiatives taken by the

RBI. As a result of these measures, there was marked showdown in the

branch expansion and attention was paid to improved housekeeping,

customer service, credit management, staff productivity and

profitability of banks. Steps were also taken to reduce the structural

constraints that obstructed the growth of banking industry.

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.

Besides these banks, from 1960 to June 1993 there were 21

voluntary amalgamations, 18 merges with the SBI or its associates and

132 transfers of assets and liabilities.

The following list of Banks merged since 1961 to Oct. 2005.

Table-3

Sr. No

Name of Bank Merged With whom merged

Date of merger

1 Prabhat Bank Ltd. National Bank of Lahore Ltd.

09.03.1961

2 Indo-Commercial Bank Ltd.

Punjab National Bank

25.03.1961

3 Bank of Nagpur Ltd. Bank of Maharashtra

27.03.61

4 New citizen bank Ltd. Bank of Baroda 29.04.615 Travancore forward bank

Ltd.State Bank of Travancore

15.05.61

6 Bank of Kerala Ltd. Canara Bank 20.05.617 Bank of Poona Ltd. Sangli bank Ltd. 03.06.618 Bank of new India Ltd. State bank of

Travancore17.06.61

9 Venadu bank Ltd. South Indian bank Ltd.

17.06.61

10 Wankaner bank ltd. Dena bank 17.06.6111 Seasia midland bank Ltd. Canara Bank 17.06.6112 Kotlayam orient bank

ltd.State Bank of Travancore

17.06.61

13 Bank of Konkan Ltd. Bank of Maharashtra

19.06.61

14 Poona investors bank ltd.

Sangli bank 28.06.61

15 Bharat Industrial bank ltd.

Bank of Maharashtra

01.07.61

16 Rayalaseema bank ltd. Indian Bank 01.09.6117 Cuttack bank ltd. United Bank of

India04.09.61

18 Pie Money Bank Pvt. Ltd. Syndicate Bank 04.09.6119 Moolky bank ltd. Syndicate Bank 04.09.6120 Merchants bank ltd. Tagore 04.09.61

permanent bank ltd.

21 Tezpur industrial bank ltd.

United bank of India

04.09.61

22 G. Raghunathmull bank ltd.

Canara Bank 04.09.61

23 Satara Swadeshi commercial bank ltd.

United western bank ltd.

06.09.61

24 Catholic bank ltd. Syndicate Bank 11.09.6125 Phaltan bank Sangli bank ltd. 07.10.6126 Jodhpur commercial

bank ltd.Central bank of India

16.10.61

27 Bank of citizen ltd. Canara banking corp. ltd.

17.10.61

28 Karur mercantile bank ltd.

Lakshmi commercial bank ltd

19.10.61

29 Peoples bank ltd. Syndicate bank 14.1.6130 Pratap bank ltd. Lakshmi

commercial bank ltd.

11.12.61

31 Unity bank ltd. State bank of India

20.08.62

32 Bank of Algapuri Ltd. Indian Bank 14.08.0333 Metropolitan bank ltd. United Industrial

bank ltd.06.02.64

34 Chochin Nayar bank ltd. State bank of Travancore

08.02.64

35 Salem Shri Knnukaparameshwari bank ltd.

Karur Vysya bank ltd.

01.06.64

36 Unnao commercial bank ltd.

Bareilly corp. bank ltd.

12.08.64

37 Latin Christian bank ltd. State bank of Travancore

17.08.64

38 Southern bank ltd. United industrial bank ltd.

24.08.64

39 Shri Jadeya Shankarling bank ltd.

Belgaum bank ltd.

26.10.64

40 Bareilly bank ltd. Banaras state bank ltd.

16.11.61

41 Thiya bank ltd. Lord Krishna bank ltd.

16.11.64

42 Allahabad trading & BKG corp. ltd.

State bank of India

16.11.64

43 Vettaikaran padur mahajan bank ltd.

Bank of madura ltd.

01.09.65

44 Malnad bank ltd. State bank of mysore

06.10.65

45 Josna bank ltd. Lord Krishna bank ltd.

13.10.65

46 Amrit bank ltd. State bank of Patiala

03.02.68

47 Chawla bank ltd. New bank of India

13.04.69

48 Bank of Behar ltd. State bank of India

08.11.69

49 National bank of Lahore ltd.

Do 20.02.70

50 Miraj state bank ltd. Union bank of India

08.11.69

51 Lakshmi commercial bank ltd.

Canara bank 24.08.65

52 Bank of cochin ltd. State bank of India

26.08.85

53 Hindustan commercial bank ltd.

Punjab National Bank

19.12.86

54 Traders bank ltd. Bank of Baroda 13.05.8855 United industrial bank

ltdAllahabad bank 31.10.89

56 Bank of Tamilnadu ltd. Indian overseas bank

20.02.90

57 Bank of Thanjavur ltd. Indian Bank 20.02.9058 Parur central bank ltd. Bank of India 20.02.9059 Purbanchl bank ltd. Central bank of

India29.08.90

60 New bank of India Punjab national bank

04.09.93

Some of banks merged after the reform process started are listed below:-61 Bank of Karad ltd. Bank of India 1993-9462 Kashinath Seth bank State bank of

India1995-96

63 Punjab corp. bank ltd. Oriental bank of commerce

1996-97

64 Bari Doab bank ltd. Do 1996-9765 Bareilly corp. bank ltd. Bank of Baroda 03.06.9966 Sikkim bank ltd. Union bank of

India22.12.99

67 Times bank ltd. HDFC Bank ltd. 26.02.00

68 Banaras state bank ltd. Bank of Baroda 20.07.0269 Nedungadi bank ltd. Punjab national

bank01.02.03

70 Bank of Madura ICICI Bank 200171 Global trust bank ltd. Oriental bank of

commerce24.07.04

72 Centurion bank Bank of Punjab ltd.

01.10.05

[Trends and Progress in Banking] Source-RBI

In the wake of globalization, 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.

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.

Further, lowering of entry barriers and inviting foreign investment

in the industry, the banking sector is already experiencing symptoms

of excess capacity. This trend is likely to be accentuated as more and

more national and international players are planning entry into and

already overcrowded turf.

This may force banks to consolidate into a smaller number of

larger banks. The bank for international settlements Reprt-1992 note, “

……….. forces are obliging may blanks to consolidate. Whether the

competition stems form within the industry or outside, it, ……….”. A

merger movement may become pronounced feature of the banking

industry, which may be viewed as a solution to excess capacity, a lack

of capital and to poor profitability. The 21st century may see the dawn

of “DARWINION BANKING” only the banks that could fulfill the demands

of their market and changing times would survive the prosper.

Size 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, bank of the size of SBI with world class standards, which will

enable them to respond to the stimulus to global opportunities. Size

enables banks to lend large sums to select corporate, thereby ensuring

a better quality asset book. After all state bank of India is after the

many M & A the only bank in India ranked among the top 100 best

banks in the worlds.

The Indian banking system would therefore see consolidation

through mergers and Acquisitions and a coexistence of both national

and international players. As we envisaged by the Narasimham

committee report (1991) the broad pattern of the structure of the

banking system in India as I foresee will be:-

- 3 to 4 large globally competitive banks

- 8 to 10 national banks with a network of branches throughout the

country engaged in ‘Universal’ banking.

- The remaining local banks and regional rural banks being the niche

players. As traditional competitive advantages vanish, the paced

with which banks accept the new paradigms of globalization would

determine winners and losers.

Structurally the banking sector displays a high degree of

fragmentation. The market share of the top 5 banks in India is

41.5%. The market share of the top 10 banks is 57%. 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

banking sector has become even more fragmented in the reform

year since 1992.

It is widely believed-based on empirical evidence sector.

Consolidation, 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.

Chapter – 4

Main Driver for the consolidations

Mergers & Acquisition

Looking the global trend of consolidation and convergence, it is

need of the hour to restructure the banking sector is India through

mergers and amalgamations in order to make them more capitalized,

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, such as Government share holdings of public sector

banks, 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.

In order to boost the mergers and acquisition, consolidation on

commercial considerations, following points should be taken case of:

1. An atmosphere conductive for M & A can be created from all sides

viz; Govt, Banks, Union and staff etc.

2. Mindset should be changed from superiority/inferiority, egoism

etc. towards friendly relations with a view to get best possible

results out of available resources.

3. Bank suiting to each other requirements on the basis of strengths

on the basis of capital, business, performance, system and

procedures, technological advancement, geographical presence

etc. should come up voluntary for mergers and amalgamations.

4. Cultural and human resource integration can be given top priority.

‘Cooperation and not competition’ need of the hour:

With the opening up of financial services under W.T.O. regime,

the process of globalization would gain momentum. In the banking

system all over the world the following changes are visualized:

i. Consolidation of players through mergers and acquisitions.

ii. Globalization of operations

iii. Development of new technology

iv. Universalization of banking

With technology acting as a catalyst, banking segment except to

see great changes in the coming years.

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. The public sector banks have

to compete both with the private banks and the foreign banks

both in terms of products and service parameters.

- To revive a loss making bank as it may not able to restore the non-

performing assets (NPA) on its own.

- To utilize the underutilized market power in terms of regional or

geographical coverage in best possible manner.

- To achieve some sort of diversification. This happens when the

merger is vertical or conglomerate.

- To limit competition and prevent. Overcrowding and mushrooming

up of many banks.

- To gain economies of scale and increase income in proportion to

less amount of investment.

- To utilize under utilize resources. The resources include human,

physical and managerial skills.

- To crave a nice for one self as a strategic empire builder and

amass vast economic power.

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. In their 1996

article, Spiegel and Govt. compiled a list of factors motivating bank

merger and acquisition activity:-

a. Revenue growth from a larger customer base

b. Efficiencies in operations

c. Ability to spread fixed costs over a larger customer base

d. Diversification of income from both products and geographic area

f. Optimal deployment of excess capital

g. The search for higher value of common shares.

(A) Revenue Enhancement:

Consolidation can lead to increased revenues through its effects

on firm size, firm scope i.e. through either product or geographic

diversification as market power. Research suggests that mergers may

provide some opportunities for revenue enhancement either from

efficiency gains or form increased marked power however, many

indicated that revenue enhancement due to increased size was a

moderately important factor motivating consolidation.

The merger of ICICI Ltd. and ICICI Bank clearly demonstrate in the

Indian context that consolidation can lead to increased revenue.

(B) Efficiencies in operations:

Mergers and acquisitions can lead to reductions in costs for a

variety of reasons. The existing research literate, which focuses on

cost saving attributable to economies of scale, economies of scope or

more efficient allocation of resources, fail to find much evidence

suggesting that cost saving constitute an important out-come of M As.

However, many pointed to economics if scale as a very important

motivating factor for consolidations.

(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. At the same time, 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 of income from both products and

geographic area:

The one area where consolidation seems most likely to reduce firm

risk is the potential for diversification gains, although even here the

possibilities are complex, such gains are most likely to arise due to

assets, Diversification across geographies; 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. On the other hand after

consolidation some firm’s shift towards riskier asset for folios and

consolidation may increase operating risks and managerial

complexities.

For example, organizational diseconomies institution become

larger and move may occur as financial complex if senior management

teams stray for their area of core competency. More broadly, there is

no guarantee that cost saving or efficiency gain will be realized.

(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.

The exit route for such banks will be to get absorbed by banks with

strong asset quality.

Average net N.P.A. %

Table-1 [Rs. crores]

Asset size

<1000 -- NPA Level 4.98%

25000-8000 -- -- 2.68%

>8000 -- 3.33%

[Source IBA Bulletin]

In the developed economies, the average NPA levels are at a level

of 1-2 percent and average for the Indian context around 2.5 percent is

width in the acceptable range. The average NPA level for the banks

whose size lesser that Rs.1000 crores is around 4.98% which

substantially high weaker asset quality necessitates infusion of

additional capital and hence Stabilization of asset quality is important.

(F) Changing environment – Capital allocation using Basle-II frame

work, requires a huge cost outlay:

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.

Effective credit risk assessment is fundamental in banking and it is

an especially important skill in India where credit satins and traded

security prices are less available as additional information for credit

risk managers. There are very limited data default histories. 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, because the economic environment in

which banks operate has changed so much since the mid–1990.

The New Basle-IICapital Accord

Minimum Supervisory MarketCapital Review DisciplineRequirement Process

Pillar-I Pillar-II Pillar-III

In fact, Basle-II expects banks to access those parameters on the

basis of a long period of time, preferably through a full economic cycle.

In such circumstance, the skills of credit risk manager are very

important.

Default probabilities and loss given default are terms used in the

context of Base-II‘s pillar one, the minimum capital requirements.

Basle-II however is more than just its pillar-I it is based on three pillars.

An important innovation of Basle-II is the incorporation of supervisory

review into the international framework.

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, including efforts by

banks to assess their capital adequacy. This is expected to result in

bankers and regulators engaging more focused discussions of risk

management pillar 2 recognizes that national supervises may have

different ways of entering.

While budgeting huge cash outlay is inevitable, the size of total

assets of the bank plays a critical for spreading the fixed cost over a

larger size of assets.

Hence under the changing environment of implementing Basel-II

framework, the small banks tend to lose out their competitiveness. 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.

(G) Search for high value of shares

Increased competition has helped to squeeze profit Margins,

resulting in shareholders pressure to improve performance.

Importantly, share holders have gained power relative to other

stakeholders in recent years. This development is expected to

continue, as it is the result of a structural move towards the

institutionalization of savings.

Table – 2

Average PAT (%) Across Asset Size

<Rs. 10000 crs. -- 18.66%

Rs.1000 – 25000 crs. -- 22.70 %

Rs. 2500-80000 crs. -- 25.35%

>Rs.80000 crs. -- 23.04%

IBA Bulletin Special

The bank has to remain rich in order to enhance its credibility

among the various stake-holders. There are several parameters under

which one could measure whether the business is really creating

shareholders value. One such important parameter is the profitability

of the overall business. It is not enough that net interest margin is

high, lower NPA etc. but in addition the share-holders look at learning

per share accusation year on year. It is interesting to note that almost

all size of banks are generating profit and hence the share holders

interest is currently taken care of completely, however the equity

market has reacted differently for different type of banking categories.

Suggestions:-

The banks having similar technology can be merged:

Table –3

Bank Core Banking Solution Vendor

Bank of India Finacle Infosys

PNB No Finacle Infosys

ICICI Bank No Finacle Infosys

IDBI Bank No Finacle Infosys

Axis Bank No Finacle Infosys

Bank of Rajasthan No Finacle Infosys

Bank of Punjab No Finacle Infosys

Alternatively the technology can be developed to convert the data

of the bank having different technology. There will not be much

problem on this account.

The large number of branches and the manpower can be controlled

through the upgraded technology. With the core banking solution

the more number of units will not matter. Further the manpower

can be managed by using technology.

The consolidation will take care of region-wise presence of banks,

there by addressing the problem of maintaining balance throughout

the country.

The productivity of the merged entity will improve and most of the

other problem will be solved automatically.

Imparting training to the employees. The training will help

improving knowledge and developing skills amongst the employees.

Their attitude can be changed through training. They can be

prepared for change and work in a new environment. They will

accept the change for their betterment, better remuneration, better

facilities, well furnished and decorated branches and better working

conditions.

Chapter – 5

Relevance of Consolidation, Mergers and acquisitions

Consolidation in Banks: Legal Problems and Solutions

Currently, the banking companies (Acquisitions) Act 1970, which is

popularly known as the bank nationalist ion Act, and the banking

regulation Act, 1949 govern nationalized banks. While SBI is governed

by the State Bank of India Act, 1955 and the seven associate banks of

SBI are governed by the SBI (subsidiary banks) Act, 1959, private

banks are covered under the Banking regulations Act 1949.

Section 44-A of the Banking

Banking Regulation (BR) Act allows a private Banks to acquire

another private Bank. 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. to

place banks under a moratorium and prepare a scheme for

amalgamation.

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. A committee

was formed (by Indian banks association) IBA for drafting a legal

framework for consolidation in the domestic banking sector. The

committee has already finalized the report and sent to the Govt. of

India for further action.

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, and all the private banks.

Emergence of two Scenarios

There could be two basic banking structures that could emerge.

1. It involves a big bank taking a smaller bank or a group of smaller

banks

2. It involves a merger of group of mid-sized banks to form a larger

institution.

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.

We are summing here an existing new private sector bank taking

over a smaller bank or a group of smaller banks.

When we took at the table No.1 it is an apparent that ICICI Bank emerges

at the largest player in the private sector bank. There is always a possibility for HDFC

Bank to merge with HDFC Ltd, and hence it could be reckoned as another large

player.

Private Sector Bank 31.3.07

ROA % NIM Total Assets (Rs.cr)

ICICI 1.09 2.6 344658

HDFC 1.33 4,32 360548

Source: ICICI Bank.com

HDFC Bank.com

Table–1

Private Sector Bank 31.03.04

Market Share %

ROA % NIM % Total Assets Rs.Cr.

1. ICICI Bank 6.87 1.09 2.6 344658

2. HDFC Bank 2.15 1.33 3.68 360548

3. UTI Bank 1.30 1.27 4.32 21882

4. Federal Bank

.81 1.00 1.00 13658

Source: ICICI Bank.com

HDFC Bank.com

Let us look at some of the key performance indicators: - namely-

return on Assets, profit margins and market share and growth.

It could be seen that though the ROA is almost same for ICICI Bank

and HDFC Bank, the NIM is much higher in the case of HDFC Bank and

this could be due to how cost of resources. It is also interesting to note

that the PAT (Profit after Tax) for ICICI Bank is 33% against HDFC Bank

at 28%. How could be a scenario, 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. The asset size is critical for the

profitability of the business and hence the asset size is below a

threshold limit, it could destroy share holders value.

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. For e.g. Technology

advancement for providing service meeting Basel-II requirements for

risk management would require additional infusion of funds. The fixed

could be spread over when the asset size is large and otherwise, this

will not be economical.

The scenario that could emerge will be that each of new private

sector bank such as ICICI Bank, HDFC Bank merged entity of IDBI Bank

absorbing 4 or 5 old private sector Banks.

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. 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.

The combined entity of the SBI group is currently holding close to

one third of the market share. SBI is already a player who is well

positioned to be on the global map. It is important for the group not to

lose the market share.

(B) Consolidation within the nationalized Bank:

A cluster approach could emerge in the Case of nationalized

banks. 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. In additional they could absorb one bank with size

less than Rs 25000 Crores. The ideal scenario will be that not more

than five banks among the nationalized banks to remain in the long

run. The process of M & A is comparatively for the nationalized banks

as the controlling interest is with the Govt. of India.

Source: RBI.org.in

Special-Jan-05

Charting the End objective:

While charting the end objective the consolidation strategies must

include:-

1).Whether the vision is to become a global player or a regional player

or a niche player.

2).Whether plans for foreign banks as joint venture partners or what is

the desired pattern of share holding.

3).Apply international accounting norms for computing capital

adequacy.

4).Create an operational efficiency frame work in order to achieve cost

efficiency in line with international benchmarks.

5). The desired business lines and product offers.

6). To have an aggressive acquisition strategy, but at the same careful

consideration for selecting the right candidate.

7). The weak banks have an exit strategy.

Is Relationship Banking at Risk?

Many believe that a consolidated environment may threaten

relationship. Borrowers might be tempted to switch to other banks, or

to the financial market. Borrowers, however face and equal challenges

how to benefit from competitive pricing without jeopardizing the

benefits of relationship. This is the relationship puzzle. The relationship

puzzle has no obvious solution.

What might be true is that a bank-dominated system invites

oligopolistic behavior such that completion is contained while a

market-dominated system suppresses competition less.

Chapter-6

Experience & Limitations of Mergers and

Acquisition

The current Scenario:

It appears to be an open season for the M & A in the stogy

world of public sector banks. With the merger of crisis ridden Global

Trust Bank (GTB) with Delhi based oriental Bank of Commerce, Bank of

Punjab Ltd. With centurion Bank a new chapter has begun in the

history of banking sector. According to the reports published in the

Economics Times, 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.”

M & A –Indian Experience:

Merger of Laxmi Commercial bank with Canara Bank of Karad

Ltd. Bank of India, Hindustan Commercial Bank, New bank of India,

Nedugandi bank with PNB, Global Trust Bank Ltd. With OBC, Bank of

Punjab with centurion Bank and IDBI Bank are not intended to create a

big bank, but the weak banks are merged with strong banks by

considering it as the better solution at that particular point of time.

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.

After the report of Marasimham committee, the new bank of

India-a nationalized bank, governed by banking (Regulation) Act 1949,

Banking (Acquisition and transfer of under takings) Act 1980 banking

nationalized Act 1970/80 was merged with PNB nationalized bank,

governed by the same acts, both having its has office at New Delhi.

RBI under its supervisory and controlling role observed that New

Bank of India was incurring heavy losses, NPA’s were becoming high,

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. RBI suggested to central govt. that it

could serve public interest if the said New Bank of India is merged with

another stronger nationalized bank. But due to various constraints viz;

non-clarity of legal provisions regarding adjustment and written off or

loss against capital/reserve, political uncertainty, relocation of

branches, redeployment of manpower, affect on seniority/promotion to

staff, cultural and systemic integration etc. number of cases were filed

in various courts, which took about 5/6 years to get finally resolved by

supreme court of India.

In spite of all these things the amalgamation of Bareilly

Corporation bank Ltd. With Bank of Baroda was mainly guided by need

of requirement of capital and net worth, which BCD Ltd, was advised to

maintain through RBI directives. 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.

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, rather

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.

M & A at international level

International experience:-

An important force of change taking place in the world wide

banking industry is consolidation. A major outcome of the financial

sector reforms in a large part of the developed world has been

consolidation of banking industries.

Table-1

Mergers & Acquisitions activity in banking industry in selected

country of the world 1991-1998

Numbers Value ($

billions)

Countries 91-

92

93-

94

95-

96

97-

98

91-

92

93-

94

95-96 97-

98

1. Austria 35 19 21 7 1.07 0.4 1.04 2.08

2. Belgium 22 18 12 7 1 0.6 04 5.01

3. France 133 71 49 24 2.4 .5 6.1 1.3

4. Germany 71 83 36 25 3.5 1.9 1.1 19.3

5. Itlay 122 105 94 24 5.3 6.1 6.2 8.7

6.

Netherlands

20 13 8 8 0.1 0.1 2.2 0.4

7. Spain 76 44 26 13 4.3 4.5 2 0.7

8. United

Kingdom

71 40 22 11 7.5 3.3 22.6 2.3

9. United

States

1354 1477 1083 628 56.8 55.3 114.9 107.6

10.

Switzerland

47 59 27 7 0.4 3.9 0.5 23

Source BIS working paper No-54

Table-2

Stage of Bank consolidation in different European countries

S. No Country Stage

1. Germany Starting

2. France Starting consolidation, political constrained

3. Italy Consolidation rapidly getting underway

4. Spain/Portugal Another round required to complete bank

consolidation

5. UK Still expect serval defining transactions to

complete bank consolidation

6. Austria Completing bank consolidation

7. Nordic Region High degree of domestic retail bank

consolidation-now cross border and

Bancassurance

8. Benelux Netherlands-substantially complete now

cross border in Belgium

9. Switzerland Substantially completed

Source-The Banker London,

An overview of the financial services industries in the world

indicate that steeps surge in the trends of consolidation is talking

place. The data in the table-1 shows that while in most of the countries

no. of mergers have reduced the value involved in them has increased

many folds.

Merger in Asia:-

Merger and acquisitions activities in Asian countries are not as

frequent as witnessed in America and Europe. Mergers and acquisitions

has already been started in countries like Philippines, Korea,

Singapore, Japan, Saudi Arabia and soon it will pick up the pace like

other countries of the world.

Merger:-An overview of performance would include an analysis of

important aspects of mergers among top 200 banks. A review of post-

merger performance and significance of size of banks that merger and

their performance discussed below.

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.

30% of total cases the target banks were having as low as up to

25% capital of the acquiring bank, while in case of 20%

difference between the capital of acquired and largest bank was

only 15%.

Assets of approx. 46% cases of the target banks was of the

range up to 50% of acquiring banks, while approx. 54% cases of

the target banks were having assets more than 50% of assets of

acquiring bank.

In 35% cases the target banks were having assets as low as

5.25% of acquiring bank. While 36% of the range of 75-120% of

acquiring bank.

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

nature and extent of synergy which they have.

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.

ii) Striving for bigness:-

It is matter of fact that size is taken to be the

most important yardstick for the measurement

of success. But beyond the particular size, the

economies of scale turn into diseconomies of

scale. Thus while evaluating a merger or

acquisition proposal, the focus should be on to

create or maximize the share-holders wealth

rather than increasing the size.

iii) Failure or integrate well:-

It is said that “sometimes even a best strategy

can be ruined by poor implementation.” A post

merger or post acquisition integration of the

two banks is must. Although this is an

extremely complex task-just like grinding east

and west together.

iv) Threats and effects of mergers:-

v) Whatever the motives driving M & As, many fear that the

quest for size is leading to the unhealthy creation of super

banks. 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

to bear the burn of its casts. 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,

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. However the failure of such huge banks would be of

such consequence that host govt. may be forced to use

taxpayers money to bail out any which encountered

difficulties because of the serious implications for the financial

system; consequently, this “virtual insurance policy” allows

large financial institution to pursue imprudent credit and

investment policies. It is the having ‘wounded giants’ which

carries systemic risk along with them.

Merging units tend to under-perform the industry in the

first merger years, mainly due to problems with credit quality

and below average generation, this merger driven

consolidation is raising important public policy concerns,

notably with respects to employment, indeed the

announcement of a merger is usually accompanied by an

announcement of cost-cutting redundancies context their

consumer gains and maintain that they only result in

employment losses and diminishing access to services.

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.

A merger or acquisition or takeover upsets the links

between implicit and explicit in a company based on trust

between managers and workers; between employers and

employees. Integration of links requires harmonization of

various aspects of terms and conditions of employment to

ensure common practice in the combined organization that

may change existing human resource management practices

of either or both organizations.

In some banks resistance from the community to the entry

of an investor bringing in fresh capital could well be less. A

few years ago Bank of Madura where the chattier community

held a lot of shares, was merged with ICICI bank, here the

community did not oppose the dial since the then chairman

KM Thyagarajan also chattier convinced the community

members to agree.

But in the absence of someone to play a decisive role,

many banks would be unwilling partners. For instance united

western bank will look at options like rights and may be

preferential allotment to pure financial investors, rather than

merge itself with another bank, perhaps the same holds true

for the Kerala based catholic Syrian bank. But bank like city

union bank or Rajasthan could be more open to a merger with

another bank.

According to a banker associated with the Lord Krishna-

Federal Bank merger deal there could be different

considerations at play. The Lord Krishna employees are not

unhappy since the deal will not unsettle their lives and

careers. If the bank was merged with a nationalized bank

hundred would have been transferred outside Kerala, while a

severance scheme would have followed if LKB was acquired

by a new generation private bank. It was an old private bank

acquiring another with a similar culture.

However, there is no thumb rule. A community which

associates itself with a bank, will not agree to merger with

another bank controlled any another community which share

similar feelings. Such a bank would perhaps approve of a

merger with a public sector banks. But in such cases the

present law does not allow a normal merger through

exchanges of shares. A PSU bank can acquire a private bank

only if the later is a basket case. The precondition is that the

private banks capital has been wiped out. Such mergers are

messy, draw bad press and could be politically embarrassing

since these are preceded by a moratorium on depositors

withdrawing funds.

Under the circumstances, the regulator, the regulator has

to wait till the bank slips to a point of no return. It is possibly

time that the central bank and the govt. push through a

change in law to a allow mergers of govt. and private banks

through the accepted share-swap route.

More so, because for many old, private, public sector banks

could be the only takes: first it would quicken consolidation in

the banking sector; second these banks would have more

options and certainly fetch a better price as the merger would

happen before the capitals eroded; and third this would not be

opposed even by the most hardboiled trade unionist.

The creation of very large banks also heightened concern

about systemic risk. The increased potential of systemic risk

created by large size banks also intensify concurs about there

being considered “To big to fail” (TBFT) strict prudential

norms and supervisory guidance assumes all the more

significance in such a converged and consolidated

environment.

RBI Lays down M & A Norms:-

Reserve banks lay down mergers and acquisitions norms for the

first time.

It can be said that bank merger must now pass through Mint-Street.

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.

A ‘Voluntary’ merger between two private banks must be

approved by two third of the total board members and not

those present alone.

The directors who participate in such meeting must be

signatories to existing corporate governance covenants.

Before merger proposal is put to vote by share holders.

The banks boards must disclose valuation details; financials

share price movements among other things to RBI.

RBI has said the guidance would also be applicable to mergers

between public sector banks which have been opposed by the

left parties significantly, this the first indication of the central

bank’s support to PSU Bank mergers. However, there is no

legal provision for paying off a dissenting share holder of a

PSU Bank.

Chapter-7

Findings & Suggestion

While consolidation is in many ways a natural response to our

rapidly changing banking environment, it will also facilitate financial

strength.

Weak banks that are threat to the system will be weeded

out.

Public sector banks have been relatively poorly valued as

against the private sector. Consolidation will ensure fair

valuation.

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, Geographic expansion allows

banks to diversify risks by exploring more avenues for

profitable business in the global market. Port folio risk on

the asset side and funding risk on the liability side would

be reduced.

Indian banks would also have a presence at both ends of

the transition of the Indian business expanding overseas.

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.

Thus Indian banking industry expects consolidation

to set in motion several future benefits arising out of

synergies between business. However there are risks

involved in realizing this synergy value primarily related to

technology, integration, work culture and human

resources. These issues head to be sorted out very early

for the same success of any M&A.

Technology is the fundamental force driving the

merger wave but the benefits of the technology revolution

accrue optimally only to large scale banks. Technology

enables the banks to share customer wallet, lowering the

cost of servicing a customer and increased profitability of

even smaller branches.

However, critical areas that need careful

consideration for integration of different technology

platforms and software which not only have process and

control implications but may involve substantial costs in

terms of money and time and retraining of personnel.

The process of mergers and acquisitions required the

assimilation of two different cultures and managing the

integration process of such diverse cultures is the greatest

problem that the banks are facing today in the post merger

of New Bank of India with PNB highlights the complexities

involved in such integration process.

Consolidation-Critical size to succeed in business:

The issue of consolidation merger and acquisitions in the

Indian banking sector has been debated for many years and intensified

recently given the large number of political and regulatory

announcements related to ownership, governance and merger

acquisition activity among banks.

Some myths associated with consolidation and

private/foreign ownership pertinent to the Indian banking industries

are as under:

Myth-I: Consolidation will “reduce” competitive and

competitive forces:-

Competitive forces are influenced less by existing competition

and more by new entrants taking away market share through

product development and innovation.

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-2: Consolidation will create people

redundancies.

This is true but only partially.

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, marketing product, development, customer services) and

in new industries including the out sourcing industry.

Myth-3: Consolidation will “hurt” consumers on price

and service parameters

Larger organizations have greater ability to invest in technology,

thereby improving efficiency and quality of service to consumers.

Larger organizations by virtue of scale have a lower cost,

benefits of which can be passed on to consumers.

Myth-4: Consolidation will reduce flow of credit top

priority sectors.

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.

Large, 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, risk-reward environment

and not a large number of players in fragmented industry.

Take the example of the pioneering work being done by Yes

Bank a new generation private sector bank in the area of

agriculture and rural banking.

Myth-5: Indian Banks need a few more years before

they ready to face global competitive. 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.

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.

Myth-6: Consolidation will result in the creation of

“Large Financial conglomerates” which will be

difficult to supervise.

Consolidation will considerably reduce the span of supervision for

regulators. Larger and better capitalized entities will also reduce

systematic risks.

Whilst complexity associated with the diverse lines of business

and scale of inter-linked exposures will increase, effectively

policy making and closer supervision will be more easily possible

with fewer players rather than in a fragmented market.

A good although extreme example would be the dramatic decline

of the cooperative banking in last few years.

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. The need for size and hence consolidation is

being driven by 4 global trends in the industry.

1) Need to invest in and continuously upgrade technology:-

Technology is expensive to procure and implement.

Size and scale helps justify investments in up to date technology

through larger productivity gains.

2) Rapid communization of products resulting in shrinking margins:

Banking products are normally not amenable to ‘patenting and

hence a very limited window of exclusively exits.

Rapid replication by many competitors has resulted in shrinking

margins and commoditization.

To survive in such a market size and scale becomes imperative.

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.

This implies considerable investment in product development-

people, infrastructure and investments.

Risk of merge-in-a-lization and disinter mediation is also high

with a single or limited product set.

It is difficult to ‘build’ product if you are a late entrant-

particularly in light of commoditization and shrinking margins.

The “buy” option to full product gaps has a shorter time to

market.

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.

Consolidation of weaker banks with stronger banks is the only

real alternative. The question is whether these should be market

determined or driven by the govt.?

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.

Given the existing structure of market participants this can

be achieved only through a consolidation of the existing players.

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.

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.

Setup a wholly owned subsidiary

Operate as a branch of the foreign parent.

Align voting rights in private banks (Currently capped at 10%)

with economic interests.

Ensure RBI and govt. speaks in the same voice on FDI policy in

banks.

Ensure clarity on ownership and governance policy vis a vis

private sector banks.

Allowing fulfledged M & A in banking sector, in particular govt.

Banks where there are major deterrents over a specific time

frame (Minimum 51% govt. holding 1% voting right and 20% FII

limit) leveling the playing field between domestic and foreign

banks is particularly important for a competitive setting. 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.

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 question is not consolidation to cover weaknesses, but

to build stronger financial sector. Though each bank and brand

can be effective and progress too, but the combined assets

systems technology platforms of the corporate parent will

mitigate the risks and extend the credit, which a singular

particular bank could have taken.

Today in the world’s top 1000 banks, there are many

domestic banks from the developed countries than from the

emerging economies. According to the banker 2004 out of the

top 1000 banks globally, over 200 are located in USA, just above

100 in Japan, over 80 in Germany over 40 in Spain and around 40

in the UK. Even China has as many as 16 banks with in the top

1000, out of which as many 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, which is the main

framework on which modern banking is based it is imperative

that we restructure our financial and banking sector to make it

more globally competitive with domestic as also global

consolidation.

The finance minister’s recent quote seems appropriate for

ensuring that more than 6 Indian Banks are represented

amongst the top 500 banks of the world “to attain global

aspirations and greater banking synergy, banks have to

consolidate.”

Supportive Role by the Government:

The Govt. has been planning for the consolidation of public

sector banks, regional rural banks and private sector banks. The

present govt. wants merger and acquisitions of the PSBs, 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. Now idea has

been picking up very fast and the govt. 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.

The decision of merger has been left to the Board of the banks

and the govt. would play a supportive role. After the merger and

amalgamation of all the banks it will be possible to have 2-3 banks of

international standards and 6-8 banks of National standards and 10-12

banks of regional levels

It is the present context that the world bank funding arm, IFC has

planned to fund the upcoming consolidation in the Indian banking

Industry in case of need. This could involve financing the tier (ii) capital

of banks by providing long term dept. this is also a step towards

improving the capital adequacy of the banks.

The consolidation of banks will be a win-win situation

for all the parties as under:-

i) Banks:-

Sound financial position large Business, Large assets,

Benefits of core banking solution, networking and the state

of the art technology, large profit, improved investor

confidence.

ii) Customers:-

Better and competitive pricing of all products including

services and better improved and upgraded technology.

iii) The Govt. of India and RBI:-

It helps in Better monitoring, interaction with less number

of CEO’s, easy implementation of policies and convenience

in surveillance due to better and undated technology

higher dividends.

iv) Rating Agencies:-

Better or improved rating of Indian Banks.

v) Foreign institutions/investors/depositors/NRIs:-

Ultimate safety of funds better investment opportunities

negotiable environment, Indian banks of international

standards.

vi) All other entities dealing with the Indian banks:-

Sound and large Indian banks, no risk in performance

of the contracts and obligations, safer investments and

higher dividends better deal.

Thus the process of consolidation on Indian banking

is a must. 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. The

banks should be of an ideal size and strength to offer

competitive pricing of the products and to sustain in a

competitive banking atmosphere.

It is oblivious that only large bans can offer the

lowest cost for the lending of funds and also providing

diversified services. Not only this they can also afford the

huge expenditure to be uncured for transformation and

ongoing technology up gradation. They will be ready to

face any future unforeseen challenges which may arise and

appear in future. The issue of credit risk, market risk and

operational risk will also be addressed as the consolidated

entity will be able to meet all the parameters of

international standards.

Measures have already been announced to grant

complete managerial autonomy at the public sector banks

in keeping with the clearly delineated ownership role. The

area where it is possible to make further improvement

have been identified by IBA (Indian bank association) as

remuneration package for retaining the top management

delegation of powers to the respective boards for

appointing statutory central auditors and doing away with

the jurisdictions of CBI/CVC over the offers of PSBs.

We are examining these issue but they have to

examine in the context of the implications for the public

sector as a whole. 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.

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.

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, utilization of

assets blocked up in the weak/unviable banks and adding

constructively to the prosperity of the nation through increased below

of funds.

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. The small and medium sized banks are working under

threats from economic environment which is full of problem for them,

VIZ. Inadequacies of resources, out dated technology/non systematized

management pattern, faltering marketing efforts and weak financial

structure.

To remove sickness from the banking industry,

consolidation/merger/acquisition is one of the best available

alternatives which require attentions from all concerns. It is rightly

said, “ United we stand-divided we fall” in a way corporate mergers

takeovers, amalgamation and damagers are bound to change

drastically and rapidly the economy in size and quality performance

through recognized corporate undertakings, combined resources and

united efforts of experience executives and skilled work force.

As the entire banking industry is witnessing a paradigm shift in

system process, strategies it would warrant creation of new

competencies and capabilities on an on-going basis for which an

environment of continuous learning would have to be created so as to

enhance knowledge and skills. There is every reason to welcome the

process of creating globally strong and competitive banks and let the

big Indian banks create big thunders internationally in the days out

come.

In order to achieve the Indian Vision-2020 as envisaged by

hon’ble president of Indian Sh. A.P.J Abdul Kalam much require to be

done by the banking industry in this regard.

With the international banking scenario being dominated by

larger banks, it is important that Indian too should have a fair

number of larger banks which could play a meaningful role in the

emerging economies. Indian has only one where as China has

five and Brazil has six banks among the top twenty banks in

emerging economies.

The performance of banks in India indicates that certain

performances catachrestic are not restricted to a particular bank.

Therefore consolidation of banking industry is critical from

several aspects. Mainly the reasons for mergers and acquisitions

can include motives for value maximization as well as non-value

maximization. The factor including mergers and acquisitions

usually include technological progress, excess capacity,

emerging opportunities, consolidation of international banking

market and deregulation of geographic, functional and Product

restriction. Policy inducements such as the govts’ incentives that

could accrue to the top managers are also other important

factors which may determine the pace of consolidation.

It is found that in all major economies banking industry undergoes

some sort of restructuring process. The economy which delays this

process leads to stagnation. 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 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, telecommunication, outlays and to

streamline human resources and skills in tune with the emerging

competitive environment.

The international experiences reveal a wide range of processes and

practices involving consolidation, their impact on the banking

market and the trend in post merger performance of banking

institutions. These experiences could provide useful inputs to the

banking policy in India.

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. 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, consolidation increase the market power and does

not cause any damage to the availability of services to small

customers.

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, profitability and productivity of banks

since increase in capital and steep reduction in non-performing

assets cannot be entirely left to the individual banks in the present

scenario. Consolidation in the banking industry is of great relevance

to the economy.

A diagnostic performance evaluation study would reveal out

important aspects of divergence in the performance of the domestic

banking institutions. 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, so

that, 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.

Consolidation can also be considered critical from the point of view

of quantum of resources required for strengthening the ability of

banks in asset creation. It indicates that restructuring in Indian

banking may not be evolved across the bank groups.

Indian banks have the unique character in displaying similar

characteristics of performance despite consisting of different size

and ownership. This trend further substantiates the scope for

consolidation across the bank groups.

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.

It is strongly felt in the Indian banking circles that a suitable

consolidation process through merger and acquisitions is long due to

address some of the structural problems that are being faced by the

banking industry in India. Sooner the process takes off, greater the

benefits to the economy as a whole.

Thus, the message a clear-consolidation and merger of India

public sector banks is around the corner and such a situation, 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.

Indian banking is changing its shape its shape and color. It has to

retain its human face such that the current effort gear fruit for a large

number of people.

BIBLIOGRAPHY

Reference:

1) UNI – Europe study analyze of response 2000

2) Justin Paul – “Strategic Management of Merger Decision and Swap Ratio Valuation.: Case study of Bank to Madura Merger with ICICI Bank. IBA Bulletin special issue of 2003.

3) IIB Journals – Various issues and volumes.

4) RBI Bulletins – Various issues and volumes.

5) Shyamji Aggarwal – Merger and Acquisitions of Commercial Bank in India Context.

6) Mohan Rakesh (2002), A Decade after 1991: New Challenges Facing the Indian Economy.

7) Reddy, Y.V. (2000), “Future of Rural Banking.

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15) Triplett, J.E. (1990), “Banking output.

16) Sahoo, R.K. (2003), “Branch Expansion in Post Reform Period”

17) Ravi K. (2002), “Rationalizing Bank Branches – some issue”.

18) Puri, L. (2002), “Re–orienting Structure ‘Proceeding of the Bank Economics.

19) Govt. of India (1998), “Report of the Committee on banking sector reforms”

Newspapers

1) The Hindu Business Line

2) Economic Times Daily

3) Business Sandard

4) Business India, Bombay

5) Time of India

Reports

1) IBA Report “Banking Industry Vision 2010

2) Govt. of India (1991) Report of the committee on Financial Sector reforms (Sh. M. Narasimham).

3) Govt. of India (1998) Report of the Committee on Banking Sector Reforms (Sh. M. Narasimham).

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Web Sites

1) IBA.org.in

2) RBI.org.in

3) HDFCBank.com

4) ICICIBank.com

Books

1. Killy E.M. Profitability to Growth Through Mergers University Park, The Pennsylvania.

2. Verma JC Corporate mergers Amalgamations & Takeovers (2002)

3. Rao, K.S. Public Sector banks in India and productivity question.

4. Chatterjee G. “Scale economies in banking-Indian experience in deregulated era”. RBI occasional papers 18/1/97.

5. Dr. P. Lakshminarayanan–restructuring Indian Banking.