Bank merger in India-issues and challenges
Mrs Sunindita Pan,
Lecturer in Economics,
Loyola Academy Degree and P.G. college, Alwal,Telangana
Abstract
The banking sector is one of the pillars of the Indian economy. It is imperative to build banks as
engines of finance to achieve sustainable and high levels of growth. Globally, the financial
system is experiencing a phenomenon of consolidation through the process of Mergers and
acquisitions (M &A). M&A have been primarily in response to the necessities of competition or
the environment. It has become the most acceptable route to quick growth in the international
banking sector. This article gives an insight into the course of M&A in largest bank of India and
evaluates it pros and cons. In today’s competitive economic environment and business scenario,
size is critical in surging ahead of the competition and staying there. With India’s economic
environment, the climate is conducive to strategic bank merger activity, which will be enabler of
global competitiveness in the Indian banking sector. Bank mergers offer host of advantages if
based on well thought out strategies and implemented in planned manner.
Keywords: Mergers and acquisitions, banking sector, growth.
Introduction
The banking sector is the lifeline of any modern economy. It plays significant role in the success
of an economy-mobilization of deposits and disbursement of credit to various sectors of the
economy. In India, commercial banks are kingpin of the financial system. Restructuring and
consolidation is one of the major routes through which the commercial banks could bring in
competitiveness. This restructuring strategy is known as Mergers and Acquisitions, joint
ventures, spin off, divestitures. A merger is a combination of two companies where one
corporation is completely absorbed by another corporation. The less important company loses its
identity and becomes part of the more important corporation, which retains its identity. It may
involve absorption or consolidation. Merger is also defined as amalgamation. Merger is the
fusion of two or more existing companies. All assets, liabilities and the stock of one company
stand transferred to transferee company
Bank mergers are taking place all over the world in past few years, India being no exception.
India’s economic growth is getting a boost with domestic drivers and is poised to be 7.4% in
2017-18.Economic liberalization or globalization has great influence on the bank mergers.
Mergers and amalgamation are normal business phenomena. Mergers take place between a weak
bank with a stronger bank to improve its functioning and widen its capital base. Similarly two
equally strong banks come together to improve their market share.
Survival of the fittest has become a reality in the case of commercial banks in India. In the era of
globalization, banks will have to be competitive to face challenges and leverage opportunities,
based on Basel committee recommendations on banking supervision (Basel II), commercial
banks are required to follow prudential norms and maintain sound financial ratios like higher
capital adequacy ratio (CAR) and low non-performing assets (NPA). This implies that small is
no longer beautiful in Indian banking industry.
Objective of the study: the aim of this study is to understand the merger and acquisition in
Indian banking industry and examine the reasons for these mergers and analyze the major factors
involved for being successful on mergers and acquisitions operations in banking industry in
India.
Research methodology: the choice of data collection methods for this study includes secondary
data from websites, reports, books, newspapers and journals. Exploratory research has been done
and for this secondary data has been used.
Bank mergers in India
The advent of M&A started with the financial sector reforms that took place in 1992-93. In 1998,
20th Century finance merged with Centurion Bank. In 1999, there were two mergers- Bareilly
Corporation Bank merged with Bank of Baroda and Sikkim Bank merged with Union Bank of
India. In 2000, Times Bank merged with HDFC Bank and in 2001, Bank of Madurai merged
with ICICI bank. ICICI Ltd. Merged with ICICI bank on March 31, 2000 and converted itself
into a Universal Bank. The Benares State Bank Limited was merged with Bank of Baroda on
June 20, 2002. Three mergers were made in 2002-rajasthan Bank financial Services Limited
merged with the Bank of Rajasthan Ltd; Andhra Bank Housing finance Ltd merged with Andhra
Bank and Bank of India Finance Ltd and BOI Asset Management Company Ltd merged with
Bank of India. All branches of global Trust Bank were merged with Oriental Bank on august 14,
2004 and IDBI merged with IDBI Ltd on January 1, 2005. In 2005 PNB acquired Nedungadi
Bank. During 2005-06, the Ganesh Bank of Kurundwad Ltd was amalgamated with the Federal
Bank Ltd as its net worth had turned negative. There was voluntary amalgamation between Bank
of Punjab Ltd and Centurion Bank Ltd. On 3 October 206, Union Western Bank Ltd was
amalgamated with Industrial Development Bank Ltd. The Samgli Bank and the Bank of
Rajasthan were merged with ICICI Bank on 19 April, 2007 and May 2010.
A distinction should be made between prudential regulation of banks by RBI and competition
regulation of the whole economy, including financial sector, by CCI. Prudential regulation is
centered on laying and enforcing rules that limit risk-taking of banks, ensuring safety of
depositor’s funds and stability of the financial sector. Thus, regulation of M&A by RBI would be
determined by these benchmarks. Competition regulation of M&A in the banking sector is
different. This is aimed at ensuring that banks compete among themselves infighting for
customer by offering the best terms, lower interest rates on loans and higher interest rates on
deposits.
Rationale for bank mergers in India
Financial sector reforms, 1991 have greatly changed the face of Indian banking industry, it has
moved from a regulated environment to a deregulated market economy gradually. Indian banks
are going for consolidation of players through mergers and acquisitions, globalization of
operations, development of new technology and universalisation of banking. With the
international banking scenario being dominated by larger banks, it is important that India should
have a fair number of large banks, which could play a meaningful role in the emerging
economies. It is found out that in all the major economies, banking industry undergoes some sort
of restructuring process. The economy which delays this process, leads to stagnation. Thus, it is
important form the point of view of long term prospect of an economy, the consolidation process
should be given importance.
Indian banks have unique character in displaying similar characteristics of performance despite
consisting of different size and ownership. This trend further substantiates the scope for
consolidation of banks. Higher capital adequacy and lower nonperforming assets explain the
growth, profitability and productivity of banks since increase in capital and steep reduction in
non-performing assets cannot be left to individual banks. Since, public sector banks account for
the large scale of banking assets and lower performance ratio reflect the entire banking industry.
Mergers among the banks will be one of the ways to increase market power and increase revenue
generation of banks.
The Union cabinet’s decision to merge and consolidate India’s public sector banks is in direct
opposition to the post 2008 crisis consensus that big banks are systemic risk to their national
economies. The term” too important to fail” (TITF) is increasingly used in mainstream media
coverage of the global economy. Once banks get to the TITF stage, they realize that they will be
bailed out by respective government even if their risks backfire. The case for bailing a reckless
bank becomes even more compelling when they are systemically important banks (SIBs). The
SBI has been already denoted as an SIB by the RBI. Increasing the size of SBI is a poor banking
policy. Merger proposals to largely constitute factors such as capital strengths, geographical
presence, asset quality, IT compatibility and human resource transition of the banks.
Objective behind mergers and acquisitions
The probable objectives behind mergers and acquisitions in banking industry may be highlighted
as follows:
To overcome the problem of slow pace of growth and profitability due to widening of
banking industry.
To revive a loss making banks as it may not be able to resote the non-performing assets
are it s own.
To utilize the underutilized market power in terms of regional geographical coverage in
the best possible manner
To achieve some sort of diversification
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 underutilized human resources, physical resources or managerial skills.
Merger of SBI with its associates
The Union Cabinet on 15 February 2017 approved the merger of the State Bank of India with
five of its associate banks and Bharatiya Mahila Bank. The merger proposal was announced in
May 2016 and was scheduled for March 2017. The competition Commission of India (CCI) in
the last week of November 2016 approved the merger of Bhartiya Mahila Bank Ltd (BMBL)
with the country’s largest lender State Bank of India. The combination is in the form of
amalgamation whereby the business of BMBL will be acquired by SBI. While SBI has global
presence, BMBL is a nascent bank set up in November, 2013. The board of SBI had cleared the
merger of BMBL and that of five associate lenders with itself in August 2016.
On 17 May 2016, SBI had informed the Bombay Stock Exchange that it is seeking in-principle
sanction of the Union Governement to enter into negotiation with its 5 subsidiaries and BMBL.
The five subsidiaries are- state bank of Bikaner and Jaipur, state bank of Hyderabad, state bank
of Mysore, state bank of Patiala, state bank of Travancore. The merger will create a bank with a
projected asset book of Rs 37 lakh crore by 31 March 2017. With this merger, SBI will join the
league of top 50 banks globally in terms of assets. In addition, its likely to result in recurring
savings estimated at more than Rs 1,000 crore in the first year, through enhanced operational
efficiency and reduced cost of funds. The customers of subsidiary banks will benefit from access
to global network. The total customer base of the bank will reach 37 crores with branch network
of around 24,000 and nearly 59,000 ATMs across the country. The merged entity will have a
deposit base of more than Rs 26 lakh and advances level of Rs.18.50 lakh crorore.SBI first
merged state Bank of Saurashtra with itself in October 2007and in 2010, State Bank of Indore
was merged with it.
BMB, setup in 2013, has 103 branches with its presence in almost all the states. The total
business of the banks is about Rs1600 crore with Rs 1000 crore of deposits and Rs 600 crore of
advances, majority of which is retail business. The consolidation was part of the Indradhanush
package. Among the associate banks, State Bank of Bikaner and Jaipur, State Bank of Mysore
and State Bank of Travancore are listed on bourses. The State Bank of India is a public sector
banking and financial services company with assets of Rs. 30.72 trillion, 2016-17. It makes it the
largest banking and financial series by assets in India. It is a government-owned corporation. Its
headquarters are located in Mumbai, Maharashtra.
Factors: Although it’s difficult to draw up a comprehensive list of factors for consolidation in
Indian banking sector, the common motives behind bank mergers can be enumerated as
To achieve economies of scale and stable asset quality for smaller banks.
To acquire proper size to meet competition
To cut cost through branch and HR replacement and rationalization.
To achieve geographical diversification and to diversify risk.
To acquire outstanding management or personnel.
To eliminate an acquirer’s liability on account of tax benefit.
To increase the market share steadily
To achieve better technological strengths for greater customer orientation and to
have wider array of low priced products for customer.
Challenges
There are certain disadvantages and dangers form mergers and acquisitions of banks
Objections of creditors of merging banks
Regional flavours that the banks enjoy will be destroyed.
Different customers engaged
Judicial interpretations and elucidations
Service quality will suffer
Fees and other charges will rise
Problem of low credit availability for small and medium enterprises will worsen
Human issues-uncertainty and insecurity for the employees, human relations between the
two banks employees, difference in the service conditions, difference in the promotional
policies etc.
Operational issues-interest rates of deposits, loans and advances, asset quality or NPA
levels, variations in the services and facilities, difference in the competency level of the
employees, undisclosed items.
To overcome the challenges and threats posed at present and in future and give a new direction
to Banking reforms, government is considering merging the existing public sector banks. So the
government’s step to amalgamate 27 banks into six large institutions is intended to adequately
bolster the state-owned banks capital base. Until there is clear visibility on the merger process,
including which entities would merge with and the terms of such a merger, banks will continue
to have difficulty accessing the equity capital markets as investors demand clarity on these
details. We believe that capital infusions from the government remain key to improving these
banks’ capital levels.
Issues in the M & A process
Legal issues-examining documents of assets, ownership and associate liabilities.
Financial and tax issues-examining the accounts records and reports to determine whether
the targets companies are in compliance with generally accepted accounting priniciples.
Marketing issues-this includes strength and weaknesses of products and services provided
by the bank and their competitors.
Cross-border issues-this includes foreign currency exchange risks, foreign laws and
regulations, investments promotional agency and investment incentives foreign banks and
credit agencies, accounting principles and tax rules
Cultural and ethical issues-this covers cultural differences between the acquirer and target
bank, the degree of compliance with the acquirer, ethical guidelines and exposure to
liabilities and legal proceeding on unethical conducts.
Integration planning-the areas that need to be integrated after a deal is signed between the
acquirer and a seller are organization and staffing plans, product strategies, supply chain
management strategies, information system, marketing strategies, accounting systems,
HRM systems.
The Finance ministry is leaning on state-run banks to explore options for consolidation and
identify synergies across various platforms, including business operations and geographical
spread. Paving way for fast-tracking consolidation in PSU banking space, the government
has exempted mergers of nationalized banks from seeking fair trade watchdog Competition
Commission of India’s approval. Banks will have to gear up to meet stringent prudential
capital adequacy norms under Basel II as they compete with banks with greater financial
strength. So consolidation in the banking sector in India is inevitable.
Conclusion
At the global level, merger of banks is for the purpose of consolidation, increasing size
and increasing the very scope of the bank. In India most of the mergers are for the purpose of
bailing banks out. This underlines the basic difference of the nature of the financial sector
between Indian and the developed nations. In a dynamic market scenario where factors affecting
the risks to overall financial system change continuously, evaluation of the impact becomes
necessary. Hence, all mergers and acquisitions need monitoring and evaluation in the post-
merger or acquisition period.
References
Dr(CA) Mahesh Bhiwandikar (2010)”Mergers and acquisition of Urban Cooperative
Banks”
Amit K Kashyap (2014) “Indian Banking: contemporary issues in law and Challenges”
H.R.Gupta (2011)”Practical Banking in India”
Economictimes.indiatimes.com
www.financialexpress.com
www.thehindubusinessline.com
Indianexpress.com>business
www.business-standard.com
