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Bachelor of Commerce Banking & Insurance Semester V [2013-2014] Guided by Mrs. Celsa Submitted by-Minal.v.Dalvi Roll No. 06



Bachelor of Commerce Banking & Insurance Semester V Submitted In Partial Fulfillment of the requirements For the Award of Degree of Bachelor of Commerce Banking & Insurance By Minal.v.Dalvi Roll No. 06 ST. GONSALO GARCIA COLLEGE Vasai, Dist. Thane


This is to certify that Shri. Minal.v.Dalvi Roll No. 06 student of ST. Gonsalo Garcia College has completed the Project on CHALLENGES AND CONSOLIDATION OF BANKS IN INDIA in the year 2013-2014 in fulfillment of B.Com. Banking & Insurance. He has successfully completed the project under the guidance of Mrs. Celsa





I hereby declare that the Project report titled CHALLENGES AND CONSOLIDATION OF BANKS IN INDIA is my original work to the best of my knowledge and has not been published or submitted for any degree, diploma or other similar titles elsewhere. This has been undertaken for the purpose of partial fulfillment of B.Com. Banking & Insurance at St. Gonsalo Garcia College.


Signature of Student:-

Name of the Student: - Minal.v.Dalvi Roll No. : - 06

It is really a matter of pleasure for me to get an opportunity to thank all the persons who contributed directly or indirectly for the successful completion of the project report, Employee Turnover and Retention in Banks. First of all I am extremely thankful to my college St. Gonsalo Garcia college for providing me with this opportunity and for all its cooperation and contribution. I also express my gratitude to my Project mentor and guide Mrs. Celsa I am highly thankful to our respected project guide for giving me the encouragement and freedom to conduct my project. I am also grateful to all my faculty members for their valuable guidance and suggestions for my entire study.

Minal.v.Dalvi Roll No.: 06



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Executive Summary
Consolidation is the present banking industry scenario; banking sector is heading towards a more compact and consolidated shape. This project has been taken to understand the need of consolidation from Indian banks perspective. Consolidation activity in Indiaboth domestic and cross-borderhas explosive growth in recent years. Along with it there are certain organizational & strategic issues that has to be taken care of before this sort of consolidate move. "Consolidation alone will give banks the muscle, size and scale to act like worldclass banks. We have to think global and act local and seek new markets, new classes of borrowers. It is heartening to note that the Indian Banks' Association is working out a strategy for consolidation among banks." The consolidation on the profitability, efficiency and synergistic effect in banking industry. It includes conceptual definition by different scholars and reviews of international, national empirical research papers, where-by a lot of conclusions of studies on the impact of consolidation in different areas of the banking industry have been reviewed.

Objectives Of Consolidation
As seen above, each business unit in the same bank has multiple applications and in addition, these applications overlap among other business units as well. There is a strong business case for a consolidation exercise to rationalize them within each business units. The objectives could be rationalization of overlapping applications among Business Units, rationalization of applications within each Business Unit, decommissioning applications which are rarely used or obsolete and retaining or replacing with more efficient applications which are specific to the Business Unit and has no overlap either with the Business or other Business Units improve the underlying strength of the economy, attempt to ensure against future crises and further the fundamental developmental; Objectives of growth with equity and self reliance.

Overview Of Banking
Evolution of banking in India
Modern banking in India could be traced back to the establishment of Bank of Bengal (Jan 2, 1809), the first joint-stock bank sponsored by Government of Bengal and governed by the royal charter of the British India Government. It was followed by establishment of Bank of Bombay (Apr 15, 1840) and Bank of Madras (Jul 1, 1843). These three banks, known as the presidency banks, marked the beginning of the limited liability and joint stock banking in India and were also vested with the right of note issue. In 1921, the three presidency banks were merged to form the Imperial Bank of India, which had multiple roles and responsibilities and that functioned as a commercial bank, a banker to the government and a bankers bank. Following the establishment of the Reserve Bank of India (RBI) in 1935, the central banking responsibilities that the Imperial Bank of India was carrying out came to an end, leading it to become more of a commercial bank. At the time of independence of India, the capital and reserves of the Imperial Bank stood at Rs 118 mn, deposits at Rs 2751 mn and advances at Rs 723 mn and a network of 172 branches and 200 sub offices spread all over the country. In 1951, in the backdrop of central planning and the need to extend bank credit to the rural areas, the Government constituted All India Rural Credit Survey Committee, which recommended the creation of a state sponsored institution that will extend banking services to the rural areas. Following this, by an act of parliament passed in May 1955, State Bank of India was established in Jul, 1955. In 1959, State Bank of India took over the eight former state-associated banks as its subsidiaries. To further accelerate the credit to fl ow to the rural areas and the vital sections of the economy such as agriculture, small scale industry etc., that are of national importance, Social Control over banks was announced in 1967 and a National Credit Council was set up in 1968 to assess the demand for credit by these sectors and determine resource allocations. The decade of 1960s also witnessed significant consolidation in the Indian banking industry with more than 500 banks functioning in the 1950s reduced to 89 by 1969. For the Indian banking industry, Jul 19, 1969, was a landmark day, on which nationalization of 14 major banks was announced that each had a minimum of Rs 500 mn and above of aggregate deposits. In 1980, eight more banks were

nationalized. In 1976, the Regional Rural Banks Act came into being, that allowed the opening of specialized regional rural banks to exclusively cater to the credit requirements in the rural areas. These banks were set up jointly by the central government, commercial banks and the respective local governments of the states in which these are located. The period following nationalization was characterized by rapid rise in banks business and helped in increasing national savings. Savings rate in the country leapfrogged from 10-12% in the two decades of 1950-70 to about 25 % post nationalization period. Aggregate deposits which registered annual growth in the range of 10% to 12% in the 1960s rose to over 20% in the 1980s. Growth of bank credit increased from an average annual growth of 13% in the 1960s to about 19% in the 1970s and 1980s. Branch network expanded significantly leading to increase in the banking coverage. Indian banking, which experienced rapid growth following the nationalization, began to face pressures on asset quality by the 1980s. Simultaneously, the banking world everywhere was gearing up towards new prudential norms and operational standards pertaining to capital adequacy, accounting and risk management, transparency and disclosure etc. In the early 1990s, India embarked on an ambitious economic reform program me in which the banking sector reforms formed a major part. The Committee on Financial System (1991) more popularly known as the Narasimham Committee prepared the blue print of the reforms. A few of the major aspects of reform included (a) moving towards international norms in income recognition and provisioning and other related aspects of accounting (b) liberalization of entry and exit norms leading to the establishment of several New Private Sector Banks and entry of a number of new Foreign Banks (c) freeing of deposit and lending rates (except the saving deposit rate), (d) allowing Public Sector Banks access to public equity markets for raising capital and diluting the government stake,(e) greater transparency and disclosure standards in financial reporting (f) suitable adoption of Basel Accord on capital adequacy (g) introduction of technology in banking operations etc. The reforms led to major changes in the approach of the banks towards aspects such as competition, profitability and productivity and the need and scope for harmonization of global operational standards and adoption of best practices. Greater focus was given to deriving efficiencies by improvement in performance and rationalization of resources and greater reliance on technology including promoting in a big way computerization of banking operations and introduction of electronic banking.

The reforms led to significant changes in the strength and sustainability of Indian banking. In addition to significant growth in business, Indian banks experienced sharp growth in profitability, greater emphasis on prudential norms with higher provisioning levels, reduction in the non performing assets and surge in capital adequacy. All bank groups witnessed sharp growth in performance and profitability. Indian banking industry is preparing for smooth transition towards more intense competition arising from further liberalization of banking sector that was envisaged in the year 2009 as a part of the adherence to liberalization of the financial services industry.

Structure Of The Banking Industry

According to the RBI definition, commercial banks which conduct the business of banking in India and which (a) have paid up capital and reserves of an aggregate real and exchangeable value of not less than Rs 0.5 mn and (b) satisfy the RBI that their affairs are not being conducted in a manner detrimental to the interest of their depositors, are eligible for inclusion in the Second Schedule to the Reserve Bank of India Act, 1934, and when included are known as Scheduled Commercial Banks. Scheduled Commercial Banks in India are categorized i n five different groups according to their ownership and/or nature of operation. These bank groups are (i) State Bank of India and its associates, (ii) Nationalized Banks, (iii) Regional Rural Banks, (iv) Foreign Banks and (v) Other Indian Scheduled Commercial Banks (in the private sector). All Scheduled Banks comprise Schedule Commercial and Scheduled Co-operative Banks. Scheduled Cooperative banks consist of Scheduled State Co-operative Banks and Scheduled Urban Cooperative Banks.

Banking Industry at a Glance

In the reference period of this publication (FY06), the number of scheduled commercial banks functioning in India was 222, of which 133 were regional rural banks. There are 71,177 bank XIV offices spread across the country, of which 43 % are located in rural areas, 22% in semi-urban areas, 18% in urban areas and the rest (17 %) in the metropolitan areas. The major bank groups (as defined by RBI) functioning during the reference period of the report are State Bank of India and its seven associate banks, 19 nationalized banks and the IDBI Ltd, 19 Old Private Sector Banks, 8 New Private Sector Banks and 29 Foreign Banks.

During FY06, two domestic banks were amalgamated - Ganesh Bank of Kurundwad with Federal Bank Ltd and Bank of Punjab Ltd with Centurion Bank Ltd to become Centurion Bank of Punjab Ltd, while one foreign bank UFJ Bank Ltd merged with Bank of Tokyo-Mitsubishi Ltd. ING Bank closed its business in India. In Sept, 2006, The United Western Bank Ltd was placed under moratorium leading to its amalgamation with Industrial Development Bank of India Ltd. in Oct, 2006. On Apr 1, 2007, Bharat Overseas Bank an old private sector bank was taken over by Indian Overseas Bank and on Apr 19, 2007, Sangli Bank, another old private sector bank was merged with ICICI Bank, a new private sector bank.

Key Challenges Faced By Indian Banking Industry

The banking industry in India is undergoing a major change due to the advancement in Indian economy and continuous deregulation. These multiple changes happening in series has a ripple effect on banking industry which is trying to be organized completely, regulated sellers of market to completed deregulated customers market.

Deregulation. Modified new rules. Efficiency. Diffused customer loyalty. Misaligned mindset. Competency gap. Market Discipline and Transparency Global banking Employees retention Customer retention

1. Deregulation:
This continuous deregulation has given rise to extreme competition with greater autonomy, operational flexibility, and decontrolled interest rate and liberalized norms and policies for foreign exchange in banking market. The deregulation of the industry coupled with decontrol in the interest rates has led to entry of a

number of players in the banking industry. Thereby reduced corporate credit off which has resulted in large number of competitors battling for the same pie.

2. Modified New rules:

As a result, the market place has been redefined with new rules of the game. Banks are transforming to universal banking, adding new channels with lucrative pricing and freebees to offer. New channels squeezed spreads, demanding customers better service, marketing skills heightened competition, defined new rules of the game pressure on efficiency. Need for new orientation diffused customer loyalty. Bank has led to a series of innovative product offerings catering to various customer segments, specifically retail credit.

3. Efficiency:
Excellent efficiencies are required at banker's end to establish a balance between the commercial and social considerations Bank need to access low cost funds and simultaneously improve the efficiency and efficacy. Owing to cut-throat competition in the industry, banks are facing pricing pressure, have to give thrust on retail assets.

4. Diffused customer loyalty:

Attractive offers by MNC and other nationalized banks, customers have become more demanding and the loyalties are diffused. Value added offerings bound customers to change their preferences and perspective. These are multiple choices; the wallet share is reduced per bank with demand on flexibility and customization. Given the relatively low switching costs; customer retention calls for customized service and hassle free, flawless service delivery.

5. Misaligned mindset:
These changes are creating challenges, as employees are made to adapt to changing conditions. The employees are resisting to change and the seller market mindset is yet to be changed. These problems coupled with fear of uncertainty and control orientation. Moreover banking industry is accepting the latest technology but utilization is far below from satisfactory level.

6. Competency gap:
The competency gap needs to be addressed simultaneously otherwise there will be missed opportunities. Placing the right skill at the right place will determine success. The focus of people will be doing work but not providing solutions, on escalating problems rather than solving them and on disposing customers instead of using the opportunity to cross sell.

7.Market Discipline and Transparency:

Transparency and disclosure norms as part of internationally accepted corporate governance practices are assuming greater importance in the emerging environment. Banks are expected to be more responsive and accountable to the investors. Banks have to disclose in their balance sheets a plethora of information on the maturity profiles of assets and liabilities, lending to sensitive sectors, movements in NPAs, capital, provisions, shareholdings of the government, value of investment in India and abroad, operating and profitability indicators, the total investments made in the equity share, units of mutual funds, bonds, debentures, aggregate advances against shares and so on.

8.Global Banking:
It is practically and fundamentally impossible for any nation to exclude itself from world economy. Therefore, for sustainable development, one has to adopt integration process in the form of liberalization and globalization as India spread the red carpet for foreign firms in 1991. The impact of globalization becomes challenges for the domestic enterprises as they are bound to compete with global players. If we look at the Indian Banking Industry, then we find that there are 36 foreign banks operating in India, which becomes a major challenge for Nationalized and private sector banks. These foreign banks are large in size, technically advanced and having presence in global market, which gives more and better options and services to Indian traders.

9.Employees Retention:
The banking industry has transformed rapidly in the last ten years, shifting from transactional and customer service-oriented to an increasingly aggressive environment, where competition for revenue is on top priority. Long-time banking employees are becoming disenchanted with the industry and are often resistant to perform up to new expectations. The diminishing employee morale results in decreased revenue. Due to the intrinsically close ties between staff and clients, losing those employees completely can mean the loss of valuable customer relationships. The retail banking industry is concerned about employee retention from all levels: from tellers to executives to customer service representatives because competition is always moving in to hire them away. The competition to retain key employees is intense.

Top-level executives and HR departments spend large amounts of time, effort, and money trying to figure out how to keep their people from leaving.

10.Customer Retention:
The major determinants of customer satisfaction and future intentions in the retail bank sector. They identified the determinants which include service quality dimensions (e.g. getting it right the first time), service features (e.g. competitive interest rates), service problems, service recovery and products used. It was found, in particular, that service problems and the banks service recovery ability have a major impact on customer satisfaction and intentions to switch.

Over the years, it has been observed that clouds of trepidation and drops of growth are two important phenomena of market, which frequently changes in different sets of conditions. The pre and post liberalization era has witnessed various environmental changes which directly affects the aforesaid phenomena. It is evident that post liberalization era has spread new colors of growth in India, but simultaneously it has also posed some challenges. This article discusses the various challenges and opportunities like rural market, transparency, customer expectations, management of risks, growth in banking sector, human factor, global banking, environmental concern, social, ethical issues, employee and customer retentions. Banks are striving to combat the competition. The competition from global banks and technological innovation has compelled the banks to rethink their policies and strategies. we can say that the biggest challenge for banking industry is to serve the mass market of India. The better we understand our customers, the more successful we will be in meeting their needs. In order to mitigate above mentioned challenges Indian banks must cut their cost of their services. Apart from traditional banking services, Indian banks must adopt some product innovation so that they can compete in gamut of competition. The level of consumer awareness is significantly higher as compared to previous years. Now a days they need internet banking, mobile banking and ATM services. Expansion of branch size in order to increase market share is another tool to combat competitors. Therefore, Indian nationalized and private sector banks must spread their wings towards global markets as some of them have already done it.

Introduction Of Consolidation
The trends towards globalization of all national & regional economies has increased the Intensity of consolidation, in a bid to create more focused, competitive, viable, larger players in Banking industry. The recent liberalization of the earlier state controlled, sluggish Indian Economy has made mergers more necessary and acceptable. The Narsimha committee on banking sector reforms suggested that merger should not be viewed as a means of bailing out weak banks. They could be a solution to problem of weak banks but only after cleaning up their balance sheets. The government has tried to find a solution on similar lines and passed an ordinance on September 4,1993 and took the initiative to consolidate New Bank of India (NBI) with Punjab National Bank (PNB). Unfortunately, this turned out to be an unhappy event. Following this, there was a long silence in the market till HDFC Bank successfully took over Times Bank. Market gained confidence and subsequently witnessed two more mega consolidation, consolidation of bank of Madura with ICICI Bank and Global Trust Bank with UTI Bank. After consolidation, the latter emerged as UTI-Global bank. Consolidation is the new buzzword in the public banking sector, accounting for more than 80% of the banking sectors net income and net profit. Consolidation has dramatically altered the structure of banking .The number of banks has plummeted and larger banks spanning ever wider geographic areas have become more prevalent. Given the epic dimensions of this structural change, it is surprising that research finds little evidence that bank consolidation results in systematic improvements in cost efficiency. Consolidation is needed for customers also. Intermediation costs in India remain high because there is relative inefficiency in the system. Whether it is

the small and medium segment or the mass-market retail segment or even the agricultural segment all are under-served. We have sub-scale banks that cannot invest and serve their customers. Finance minister P Chidambaram recently reiterated that India's mantra for banking reforms would be consolidation, competition &convergence to enable Public sector Banks to become stronger, bigger and globally competitive. The logic behind is to create a few solid banks capable of operating and competing internationally. The Indian banking sector is crowded with nearly 100 public, private and foreign banks and 200 regional rural banks. Consolidation in PSU banking sector will ensure the existence of 5 to 6 public sector banks. Countries like Argentina and Brazil too have gone for consolidation and reduced the number of their banks from 118 to 80 and 253 to 180 respectively. In India so far there has been merger and acquisition activity between private and public sector banks with strong PSU banks. Since the advent of the era of new generation private banks, Times bank merged with HDFC bank in February 2000, ICICI bank acquired Chennai based Bank of Madura in December 2000 and Benares State bank merged with BOB in June 2002. Continuing the above trend RBI merged Kozhikode-based Nedungadi bank, an old generation private bank with Delhi based PNB in Feb. 2003.Lately, Global trust bank, a private sector bank merged with OBC.

Legal Specifications:
1 a) Any two or more banks doing business in this state may, with the approval of the department in the case of resulting state bank, consolidate or merge into one bank, on terms and conditions lawfully agreed upon by a majority of the board of directors of each proposing to consolidate or merge. b) This section does not permit a bank or a bank holding company located in another state to acquire by consolidation any bank or branch bank in this state. c) A bank organized under the laws of this state may, with the approval of the department in the case of a resulting bank, consolidate with a savings association located in this state and may, upon the consolidation, maintain the branch and savings association. 2) Upon consolidation, the corporate franchise, the corporate life, being and existence, and the corporate rights, powers, duties, privileges, franchises, and obligations, including the rights, powers, duties, privileges, obligations as trustee, executor, administrator, and guardian and every right, power, duty, privilege, and obligation as fiduciary, together with title to every species of property, real, personal, and mixed of consolidating banks, are, without necessity of any

instrument of transfer, consolidated and continued in and held , enjoyed ,and assumed by the consolidated bank. The merged bank has the right equal with any other applicant to appointment by the courts to the offices of executor, administrator, guardian, or trustee under any will or other instrument made prior to the consolidation and by which will or instrument the consolidating bank was nominated by the maker to the office.

3) Upon consolidation, the consolidated bank shall designate and operate one of the prior main banking houses of consolidating banks as its main banking house and the bank may maintain and continue to operate the main banking houses of each of other consolidating banks as a branch bank. 4) Upon consolidation, the resulting bank, including all depository institutions that are affiliates of the resulting bank, may directly or indirectly control more than 22% of the total amount of deposits of insured depository institutions and credit unions located in this state.

The Agreement of Consolidation

National banks proposing to consolidate should advise with the Comptroller of the Currency and apply for his approval. If the consolidation seems advisable and the terms of it are not objectionable, the Comptroller issues instructions for procedure. The directors of the two banks enter into an agreement covering the terms of the consolidation, that is, with respect to the charter to be used by the consolidated bank, the title, the capitalization, the distribution of shares to the present stockholders of the two banks, the assets to be contributed by each and at what valuation, the disposition of such assets as are not desired for the consolidated bank, the continuance of the present boards of directors for the remainder of the year, and the provision for votes of approval by the stockholders. This agreement may provide for an increase of capitalization in excess of the aggregate capitalization of the two banks, or for payment of cash to equalize the contributions of assets of the two banks - the payment of these sums in cash to be certified to the Comptroller by the officers. If by the terms of consolidation the capitalization is reduced, it is necessary to secure the consent of the Federal Reserve Board. The agreement having been approved by the Comptroller, signed by the directors, and acknowledged before a notary public, it is submitted to a special meeting of the shareholders of each bank, four weeks' notice having been given in the public press and a registered mail notice sent to each registered shareholder at least ten days prior to the meeting. To ratify the consolidation, the vote of shareholders owning two-thirds of the shares of each bank is required. A certificate of the ratification is sent to the Comptroller, and he then issues his certificate approving the consolidation.

Approval of Consolidation
The bonds held by either bank in excess of the amount of the capital of the consolidated bank must be withdrawn prior to approval of the consolidation by the Comptroller. These are released upon deposit of lawful money to retire the outstanding circulation. The other bonds of the two banks lodged with the United States Treasury will be transferred to the consolidated bank for security for its notes. If some shareholder objects to the terms of the consolidation, he may, by giving notice to the directors of his bank within twenty days of the approval of the consolidation by the Comptroller, be entitled to receive the value of his shares, ascertained by a committee of three persons, one representing the directors, one the shareholders, and the third chosen by these two. In case the shareholder is not satisfied with this appraised value, he may appeal to the Comptroller for final determination. These shares are then sold at public auction.

Methods Of Consolidation
Consolidation may be effected by placing one or both of the banks in liquidation, to which end three methods are in use: 1. Without an increase of the capital the directors of the absorbing bank may contract with the directors of the liquidating bank to purchase its assets, assume its liabilities, and pay the value of assets purchased in excess of liabilities, less any expenses incident to liquidation. 2. By increasing the capitalization of the absorbing bank by an amount equal to that of the liquidated bank the additional shares may be sold to stockholders of the latter. This requires the previous consent of the stockholders of the absorbing bank. The directors of the absorbing bank then proceed to contract for the purchase of the assets and the assumption of the liabilities of the liquidated bank. 3. Having first placed both the interested banks in voluntary liquidation, the interested officers may proceed to organize a new bank under a different corporate title and acquire the business of the liquidating banks. In any of these three methods there should be a contract covering the transfer of assets and assumption of liabilities, and an examination of the assets to be taken over will be made by a national bank examiner the expense of the bank acquiring the assets.

Concept Of Bank Consolidation

Bank consolidation is viewed as the reduction in the numbers of banks and other deposit taking institutions with a simultaneous increase in the size and concentration of the consolidation entities. It is most motivated by technology innovation, deregulation of financing services, enhancing intermediation and increase emphasis on shareholders value, privatization and international competition. The process of consolidation has been argued to enhance bank efficiency through cost reduction revenue in the long run. It also reduces industrys risk by elimination of weak banks and acquiring of the smaller ones by the bigger and stronger bankers as well as creates opportunities for greater diversification and financial intermediation. The pattern of banking system consolidation could be viewed in two different perspectives namely: market driven and government led consolidation. The market driven consolidation which is more pronounced in the developed countries sees consolidation as a way of broadening competitiveness with added corporate advantage in the global context and eliminating excess capacity more efficiently than bankruptcy or other means of exit. On the other hand, government-led consolidation stems from the need to resolve problems of financial distress in order to avoid systematic crisis as well as to restrict inefficient banks. One of the general effects of consolidation of banks is to reduce the number of banks, especially weak ones and moving the industry forward for sectorial and national development.

What is 'Consolidation'? Bank consolidation is the process by which one banking company takes over or merges with another. This convergence leads to a potential expansion for the consolidating banking institution. The levels of resistance and support within the consolidation are created through the upper and lower bounds of the stock's price. Once the price of the asset breaks through the identified areas of support or resistance, volatility quickly increases and so does the opportunity for short-term traders to generate a profit. Consolidation usually refers to debt, and it involves combining all of your debts into one debt. Debt-consolidation companies perform this service by paying off all of your existing debts and allowing you to repay them in one monthly payment. This may sound like the best option to many debtors. Consolidation, however, has disadvantages that should be considered along with its advantages. Consolidation or amalgamationis the act of merging many things into one. In business, it often refers to the mergers and acquisitions of many smaller companies into much larger ones.

Reasons for Bank Consolidation

One reason for banks to consolidate is to alleviate competing institutions. Consolidation may also occur when a banking house wants to gain domestic or international capital power. The larger a company is, the more potential it has to compete with other mega banks. Another motivation for banks to consolidate is the ability for firms to expand their providing services while decreasing the cost of operating two institutions.

Example of Bank Consolidation

On September 26, 2008, Washington Mutual, once the sixth largest bank in America, declared Chapter 11 bankruptcy. JPMorgan Chase promptly purchased the banking subsidiaries from the Federal Deposit Insurance Corporation. Since then, Washington Mutual has been managed as a part of JPMorgan Chase.

Consolidation In Global Banking Sector

In the global arena the deregulation of the banking sector had a wide impact on the banking sector .This process started in from 1980s in United States .The deregulation resulted in price competition in the banking sector and also disintermediation .As a result of this profit of the banks suffered heavy brunt. They started to look at the avenues to increase their returns and one of the ways was consolidation. In the global banking scenario the consolidation has been used for cutting costs and increasing the revenue This trend took pace from 1998 onwards when more than fourth of the merger deals involved banks .(The Economist ,1999).Even thought this trend started in US but now it has spread to other economics of the world. The reasons for the consolidation in US banking sector were mainly the regulatory changes which allowed interstate ownership of the banks, this gave the banks an avenue to scale up their branches and reap the benefits of the economies of scale and geographical diversification. As the legislature allowed the banks to have other investment services as well, this resulted in increased competition and this was also a prime reason of mergers and acquisition in the US banking sector. In Japan the reasons of consolidation were driven by technology .The banks wanted to scale up their technology and it did not make sense to buy a very costly technology for only a single small operation bank. This drove the banks to consolidation and which rationalized their purchase of the costly technology .Also this was kind of the safe wall creation to safe guard themselves from the competition which the foreign banks would create when they enter into the Japanese markets. In the European markets the banking sector is highly concentrated and as the result the European banks are doing a lot of cross border consolidation. Consolidation is a key word in the banking sector in al economies with somewhat varying reasons or motives of consolidation.

Bank Consolidation Through Merger And Acquisition

Consolidation is achieved through merger and acquisition. A merger is the combination of two or more separate firms into a single firm. The firm that results from the process could take any of the following identities: Acquirer target or new identity. Acquisition on the other hand, takes place where a company takes over the controlling shareholding interest of another company. Usually, at the end of the process, there exist two separate entities or companies. The target company becomes either a division or a subsidiary of the acquiring company .While consolidation involves merger and acquisition of banks, convergence involves the consolidation of banking and other types of financial services like securities and insurance. Anecdotal evidence indicates that the commonest form of mergers and acquisitions found in the financial services industry involves domestic firms competing in the same segment (for instance, bank to bank). The second most common type of merger and acquisition transactions involves domestic firms in different segments (e.g. bank-insurance firms). Cross-border merger and acquisition are less frequents particularly those involving firms in different industry segments.

SWOT analysis of consolidation of banks in Indian

Liquidity has been a traditional strength of the Indian banking system. Banks are required to keep a stipulated proportion of their total demand and time liabilities in the form of liquid assets which affect their liquidity position. RBI has been easing the requirements with several rounds of reduction in the Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR).Sound banking systems: The banking system in India has generally been stable and sound in terms of growth, asset quality and profitability. It is because of healthy, prudent and well capitalized policies and practices implemented by the RBI from time to time. The same is evident from the remarkable resilience of the Indian financial sector to the global financial turmoil which erupted during 2008-09.

Competition from foreign banks: Foreign banks will be soon allowed to spread their business in India which will create intense competition for Indian banks. The RBI Report on Currency and Finance presents the view that mergers are the only way to face competition from foreign banks. High cost of intermediation: Intermediation cost (operating expenses as a proportion of total assets), an indicator of competitiveness, is higher in India as compared to international levels. High level of fragmentation: There is a high level of fragmentation, especially among cooperative banks, as compared to some of the advanced economies of the world, which poses a serious threat to their profitability and viability in conducting business. About 1, 00,000 entities in the cooperative sector share just 4 percent of the total banking assets in the economy. Lack of product differentiation: The financial products offered by banks in India are similar across the industry with no distinctive features, thereby leading to unhealthy competition. Low penetration:

There is an uneven distribution of banking services in the country. It is limited to few customer segments and geographies only. Of the total 611 districts in the country, 375 districts are under-banked. There is a need for banks to open branches at these locations and establish connectivity with the help of a core banking solution. According to a report on banking sector consolidation by Ernst & Young, the country would require 11,600branches by 2013 and an additional 20,300 branches by 2018 in order to achieve the desired penetration levels of 74 per cent and 81.5 per cent in 2013 and 2018 respectively. No competition at international level: Indian banks are not able to compete globally in terms of fund mobilization , credit disbursal, investment and rendering of financial services. The main reason behind it is the size of the industry. State Bank of India (SBI), is the worlds 57th largest bank in the list of the top1,000 banks in the world carried in the July 2009 issue of The Banker based on its tier-I capital, or equity and reserves, for the fiscal year ended March 2008. Similarly, in terms of assets, SBI is now the worlds70th largest bank. On the other hand, ICICI Bank Ltd, the largest private sector lender has attained the150th position. Based on assets, ICICI Banks world ranking is 148th. None of the other Indian banks featured among the top 200 banks in the world-in terms of tier-I capital. In 2008, there was only one Indian lender SBI, at eighth place among the top 25 Asian banks. Industrial and Commercial Bank of China, the biggest Asian bank and the worlds eighth biggest bank, is four times bigger than SBI, both in terms of tier-I capital as well as assets. Another recent study Report on Currency and Finance released by the RBI reveals that the combined assets of the five largest Indian banks - SBI, ICICI Bank, Punjab National Bank, Canara Bank and Bank of Baroda are just about half the asset size of the largest Chinese bank, Bank of China. The bank is 3.6 times larger than SBI in terms of assets, branches and profits.

Advanced technology: New generation private sector banks and foreign banks are technologically more advanced in terms of management information systems, delivery mechanisms, etc. These systems and processes require substantial investments which may be possible after consolidation. Cutting-edge technology may lead to acceleration of service delivery and broadening of customer relationships. Basel norms: Basel II requires banks to meet tougher and higher capital adequacy norms such as capital allocation towards operational risk, in addition to credit and market risks. Many Indian banks, especially public sector banks, cooperative banks and regional rural banks are unprepared for this implementation due to capital inadequacy. According to the report, every category of bank has to arrange additional capital from its own internal sources. To maintain the 51 per cent minimum government share, PSBs cannot collect additional capital directly from the public and with this view it promotes bank mergers. Consolidation may be a route for smaller banks to infuse funds to strengthen their capital base .Cost cutting: Many branches and ATMs of various banks are congregated in the same areas leading to pointless outlay on premises, manpower and maintenance facilities. Consolidation may lead to redeployment and

rationalization of such infrastructure, human resources and other administrative facilities thereby undercutting the cost factor. Consolidation will lead to cost efficiency which will enhance profitability. Enhancement in risk absorption ability: The risk management capabilities of the banks may improve. Larger size improves the risk bearing capacity of a bank and strengthens its balance sheet. Biger organizations have inherent advantages and they are too big to fail. Enlarged customer base: The combined customer base may increase the volume of business. The enhanced rural branch network may lead to increase in microfinance activities and lending to the agriculture sector. Geographical spread: Banks can diversify

the risk of concentrated lending through mergers. They can also have a greater market access thereby widening the deposit base. The RBI has imposed strict licensing norms for opening of new branches and hence via consolidation, the acquirer will have access to ready physical infrastructure. Pan-India presence of the combined entity may enhance convenience for the customers. Improvement in operational efficiency: The operational efficiency of banks may improve owing to bigger size. There may be increase in financial capability greater resource/deposit mobilization, output and better pricing of products. Product diversification: Merger creates the opportunity to cross-sell products and leverage alternative delivery channels. Old generation banks can merge with the new generation private sector banks and foreign banks to diversify their credit profile. They can sell technologybased innovative products. Tax shields: In case of bailout mergers, the accumulated losses and unabsorbed depreciation of the amalgamating bank can be carried forward and set off against the future profits of the amalgamated bank.

Alignment of technology: The technology infrastructure, system platforms (Finance, Flex cube, etc), network architecture, database vendors and IT-enabled synergies (customer service, payroll, back office operations, risk management, etc) should be compatible in banks desiring to merge. Most of the public sector banks are at different stages of technology implementation. It would pose a stiff challenge to such merging entities to integrate their technology and working platforms. Assimilation of systems and processes: The cost of integrating diverse systems and processes should be paid due attention. Bancassurance is one of the areas where merging entities may face problems. Customer dissatisfaction: The change in the nature and quality of financial products may dissatisfy the customers, even if the products are better. In some cases customers may be deterred by the

acquiring company for various reasons which may affect brand loyalty of the combined entity. Integration of people: The acquirer bank may have to absorb the entire workforce of the target bank which may push up the wage cost. It also requires the integration of the heterogeneous work cultures. The views of the employees towards various aspects of the new organization, management styles, training, leadership, etc are to be considered in a critical manner. The varied aspects of the work environment, if not handled properly, may lead to resentment and shrinkage in productivity. Marginalization of small customers: Larger entities may neglect small customers and concentrate on affluent customers or High Net worth Individuals

(HNIs).Regulatory hurdles: Some of the legal barriers need to be removed to make PSBs, which still control about 68 per cent of the Indian banking sector, active participants in the consolidation process. It will help realize the true benefits of consolidation. These hurdles include bringing down the government ownership from the statutory 51 per cent and amending certain clauses in acts governing these banks to facilitate either merger. On the cooperative banking side too, issues of dual control should be resolved to facilitate a smoother consolidation exercise. They may give rise to monopolistic structures and lower competition. Monopolistic entities may charge higher fees for services rendered in case there is no effective competition. The motive should be to increase the size but not in isolation. Size should be measured in terms of efficiency with which interests of

various stakeholders are adequately met. In order to leverage the benefits of bigger size, geographic expansion, huge loan portfolios, improved technology, product diversification and reduced transaction costs, Indian banks are gradually but surely moving from a cluster of large number of small banks to small number of large banks. Consolidation will positively amplify the business prospects of the industry

in the domestic as well as international market place. References: 1. RBI Annual Report, 2007-08, 2. RBI deputy governor, V Leeladhars speech on Consolidation in the Indian Financial Sector, 3. RBI Report on Currency and Finance, 200608(Source: The Indian Banker, a publication of Indian Banks Association)

Mission & Vision Of Consolidated Banks

Our Vision
To be the Bank of choice offering pleasant and convenient services.

Our Mission
To provide flexible financial solutions that support our customers achieve success.

Our Core Values We are guided by the following core values in our day to day activities:

Customer focus- The customer is at the centre of our service delivery. Integrity- We undertake to operate with the highest degree of honesty and integrity

Professionalism- We adheres to high professional and personal standards in the conduct of our business.

Team work- We work as a team and nurture a performance driven culture. Innovation- We continuously make product improvements to serve the evolving needs of our customers.

Flexibility We are dynamic and progressive bank. We offer flexible financial solutions that are innovative and in touch with our customers needs.

Customer First We are driven by our customers needs. We serve them with a personal, friendly and human touch while always being responsive and build close working relationship with them. Partnership We have the same goals as our customers to grow. We view our customers as partners and always strive to facilitate and support them as we mutually grow and achieve success.

Caught In A Tug-Of-War: Bank Consolidation In India

Considering the growth prospects of India, it can easily be said that banking and financial services will be of key importance to fuel the growth in the future. Currently there are around 34 listed banks catering to the needs of the nation and about 70% of the market share rests with government-owned banks. However, in a world where size is equated to financial soundness, Indian banks are mere pygmies. Indias largest commercial bank, the State Bank of India stands in the 57th place in the list of top 1,000 commercial bank s ranking by Fortune. Its assets are a tenth of the worlds biggest bank, Citigroup. Even Chinese banks are far larger than banks in India. The Industrial and Commercial Bank of Chinas (ICBCs) deposit base is eight times that of SBI. According to a recent study by Associated Chambers of Commerce and Industry (Assoc ham), consolidation in the Indian banking sector is necessary to enhance global competitiveness. Presently, banks are not able to compete in the global arena in terms of fund mobilization, loan disbursal, investment and rendering of financial services due to the fragmented nature of the industry. Given that international competition is rising, the government has time and again brought up the issue of consolidation among public sector banks without much success. The issue of consolidation thus is high on the agenda of the UPA-led government. This is not the first time that the Centre has expressed the need for consolidation. In fact, consolidation has been on the policy agenda ever since the Narasimham

Committee-II recommended the creation of four or five large banks to take on international competition in 1997. Although there were occasions when the government tried to force the agenda, not much progress has been made so far. Any merger dictated by the government met with opposition from trade unions and independent banking experts, who opined that the costs far outweighed the likely benefits. Of late, the government has taken the position that the initiative for consolidation should come from the boards of the banks concerned and its own role, as the majority shareholder, would be a supportive one. In this context, Finance Minister Pranab Mukherjee has said: If someone decides to merge, if we see it is in conformity with our policy and if we find that parameters are being followed as per SEBI and RBI guidelines, then the government would play a supportive role. He has, however, maintained that the government itself has not taken any initiative to ask public sector banks to go for a merger and maintained that it did not intend to interfere in their routine activities. The Reserve Bank of India is, however, not in favour of consolidation of banks just as yet, citing reasons such as need for greater financial inclusion and the need to strengthen capital base to carry out better risk management, as more pressing requirements of the day. Despite the adverse stance on consolidation, the finance ministry continues its push and has asked the top five public sector banks to come up with ideas on banking consolidation by the end of the current fiscal.

All these banks have been asked to submit a detailed road map and also do due diligence of the smaller banks they could acquire. The government may appoint consultants and chalk out a road map if the banks fail to come up with their views by the deadline, a finance ministry official has indicated. The banks that are likely to be merged with larger banks include Dena Bank, Corporation Bank, Andhra Bank, Bank of Maharashtra, Central Bank of India, Punjab & Sind Bank, UCO Bank, Allahabad Bank and United Bank of India, which is unlisted. The finance ministry officials are expected to meet the heads of these banks by next month. The government will take into account the preference of the board and shareholders of the small banks which would come up for acquisition. Though the governments urgent push for consolidation is on the grounds of improving financial stability and increase its global competitiveness, global experts remain unsure whether the likely benefits stated will actually accrue, state banking industry experts. For instance, the argument that a merged entity will be in a better position to raise capital than individual banks may not be correct. Government-owned banks will have to always reckon with the condition that their majority shareholder will not let its shareholding fall below 51%. Some of the public sector banks (PSBs), including SBI, are near that floor. Other banks may have some leeway, but they too will soon be constrained. A merger between two such entities will not help.

Other routes to raise capital such as divestment in India or sale to overseas investors are ruled out for now, as denationalization has not found favour with any government. And for a good reason. In India, government ownership has stood the banks in good stead during the financial sector crisis. Further, the merging of PSBs is a highly complex task. Many legal hurdles will have to be crossed and parliamentary approvals obtained. The government will have to do a lot of preparatory work. Even if practicable, the time horizon is likely to be long. Most importantly, the merger advocates ignore the fact that beyond a point, size does not increase efficiency. Creating behemoths from two already large banks will not help in either facing competition or raising capital. On the other hand, several more layers will be added to the existing bureaucratic structures in government owned banks. Also there are crucial issues such as rationalizing manpower and branch network after bank mergers. In the reform era, the strengths of public sector banking, the branch network and superbly trained manpower have been initially discounted. Yet todays urgent tasks of the financial sector social banking and financial inclusion require these strengths to be harnessed to an even greater degree than before. Bank consolidation will create redundancy, demotivate staff and make the financial sector less inclusive. says a banking industry expert. Further, cultural issues and regional strengths are not discussed when mergers among banks are discussed. Almost all banks in India have grown from specific

regions and have retained certain unique strengths despite some of them coming under the government fold. The consolidation of such institutions with another bank would whittle down the strength. Why, then, this emphasis on consolidation? The reason is simple. Privatization is a political impossibility, so consolidation is a politically feasible, albeit second-best option. However it is good to remember that bank consolidation in India is very different from moves to consolidate companies in specific industries or segments. For all the excitement it evokes, consolidation is a slow process and is best not dictated by the government.

How Would Consolidation Help Indian Banks?

As of today, Indian banks are not able to compete internationally in terms of funds mobilization, credit disbursal, investments & rendering of financial services due to their relatively small size. Indian banking industry is highly skewed and almost 80 banks have a less than 2.0% market share in India Though the top five occupy more than 50% market share in India, they are much smaller by global standards. Many Indian banks are unprepared for Basel II implementation due to capital inadequacy. Banks also need to consolidate to improve their risk management capabilities. Indian corporate are fast globalizing and our banks need to keep pace to service them. A bigger player can afford to invest in requisite technology and play globally to take advantage of global opportunities. Because for going global a bank needs to upgrade its technology, MIS, syste ms & processes and strategies, to compete effectively and consolidation could facilitate this. The confidence of international investors in Indian banks has increased manifold in recent times and this offers our banking sector a good opportunity to restructure itself.

Consolidation Processes
Consolidation processes consist of the assembly of smaller objects into a single product in order to achieve a desired geometry, structure, or property. These processes rely on the application of mechanical, chemical, or thermal energy to effect consolidation and achieve bonding between objects. Interaction between the material and the energy that produces the consolidation is a key feature of the process. This interaction can be either beneficial or detrimental to the final product. In some cases, the consolidation energy enhances the structure or properties of the material and is an integral part of the process. For example, in the forging of powder performs, the mechanical energy not only consolidates the powder but also imparts macroscopic geometry to the part while improving the microstructure of the material. In other cases, the energy used to effect consolidation is detrimental to the structure or properties of the product. For example, in fusion welding, the heat of melting achieves bonding between the objects but also can create an undesired microstructure in the heat-affected zone of the joint, causing distortion and detrimental residual stresses. Consolidation processes are employed throughout the manufacturing sequence, from the initial production of the raw material to modification of the final assembly. One group of consolidation processes involves the production of parts from particulate or powders of metals, ceramics, or composite mixtures. These consolidated products are typically semi finished and require final thermal or machining processes. In some material systems, consolidation of powders produces feedstock billets for extensive processing into continuous mill products of bar, rod, wire, plate, or sheet. Other consolidation processes produce composites, with either polymer, graphite, metal, or ceramic matrices. Welding and joining processes, a

unique group of consolidation processes, are used to combine subcomponents, often of dissimilar materials, into permanent assemblies. The performance of the final component is often governed by the quality of the joining process. This chapter presents an overview of the research needs

Consolidation Trends Observed in India

Improving the operational performance and cost efficiency has always been a priority in Indian banking sector and has been a major issue of discussions in the policy formulation by the government of India in the consultation and with the central bank (Reserve Bank of India). Several committees have also been formed in order to suggest structural changes to achieve this objective. Some of the major committees formed are Banking Commission, 1972 Chairman R.G Saraiya, 1976 chairman: Manubhai Shah Committee for the functioning of public sector banks, 1978 chairman: James S Raj These committees have suggested the restructuring of the Indian banking system with an objective to improve the process of credit delivery and also suggested the idea of having around 3 to 4 large banks which have a pan India presence and the rest of the bank should be present at the regional level. The major thrust on consolidation started with the Narasimham committee in 1991. It emphasized and embarked upon consolidation and merger in order to make the Indian banks huge in size and also comparable to the global banks. A second Narasimham committee was also formed in 1998 which suggested mergers and consolidation among the strong banks in public as well as private sector and also with other financial institutions, NBFC (Non Banking Financial Companies). Now we will have a look at some of the recent trends in consolidation in Indian banking.

Cross country experience:

The banking systems of many emerging economies are fragmented in terms of the number and size of institutions, ownership patterns, competitiveness, use of modern technology, and other structural features. Most of the Asian banks are family owned whereas in Latin America and Central Europe, banks were historically owned by the government. Some commercial banks in emerging

economies are at the cutting edge of technology and financial innovation, but many are struggling with management of credit and liquidity risks. Banking crises in many countries have weakened the financial systems. In this context, the natural alternative emerged was to improve the structure and efficiency of the banking industry through consolidation and mergers among other financial sector reforms. The motive for consolidation in Central Europe is market driven whereas in many Latin American countries the government has taken up several initiatives to restructure inefficient banking systems. Consolidation has become a vital exercise in Korea and Southeast Asian countries due to serious banking crises. In all these countries different models have been adopted for consolidation. Several research studies have critically analyzed various issues in each consolidation case which serves as a useful lesson for the banks and policymakers who are pursuing the agenda of consolidation. Some of the important studies in this context are: The European Savings Bank Group Report on 9European Banking Consolidation (2004), impact of mergers on bank lending relationship in Belgium (Degryse et. al., 2004) and Italy (Sapienza, 2002), Polish banking sector (Havrylchyk, 2004), emerging market economies (Bank of International Settlements, 2001), Hungarys experience with privatization and consolidation (Abel and Sikeos 2004), emerging markets (Gelos and Roldos, 2004), Japan (Brook et. al., 2000, and Tadesse, 2006), and European countries (Boot, 1999). An ILO study reports that as a consequence of the recent merger wave in the US, the number of banking organizations decreased from 12333 to 7122 during the period 1980 to 1997 (ILO, 2001). In Europe, between 1980 and 1995, the number of banking establishments fell, particularly significantly in Denmark (by 57 per cent) and France (by 43 per cent). The European mergers have so far been mostly domestic, directed at creating domestic behemoths. However, subsequent to the formation of a single financial market under the European Union (EU), consolidation across the EU area has

gained momentum and cross border mergers have taken place. The study quotes Jacques Attali, former President of the European Bank for Reconstruction and Development in 20 years, there will be no more than four or five global firms in each sector. Alongside, there will be millions of small temporary enterprises subcontracted by the large ones.

Indian experience:
Improvement of operational and distribution efficiency of commercial banks has always been an issue for discussion in the Indian policy milieu and Government of India in consultation with Reserve Bank of India (RBI) have, over the years, appointed several committees to suggest structural changes towards this objective. Some important committees among these are the Banking Commissions, 1972 (Chairman: R.G. Saraiya) and 1976 (Chairman: Manubhai Shah), and the Committee for the Functioning of Public Sector Banks, 1978 (Chairman: James S. Raj). All these committees have emphasized on 10restructuring of the Indian banking system with an aim to improve the credit delivery and also recommended in favour of having three to four large banks at the all India level and the remaining at regional level. However, the thrust on consolidation has emerged with the Narasimham committee (1991) emphasizing on convergence and consolidation to make the size of Indian commercial banks comparable with those of globally active banks. Further, the second Narasimham Committee (1998) had also suggested mergers among strong banks, both in the public and private sectors and even with financial institutions and Non-Banking Finance Companies (NBFCs). In what follows, we review some recent trends of consolidation in Indian banking.

1. Horizontal Consolidation
Consolidation is designed to increase overall efficiencies and profits. Horizontal consolidation signals that a particular industry has reached a new stage within its life cycle. Of course, consolidation is not to be confused for monopoly power. Identification

Horizontal consolidation occurs when firms offering similar products combine through mergers and acquisition. Horizontal consolidation may also represent an extension of product lines. Clothiers can consolidate horizontally to combine casual menswear, suits and cologne beneath one institution. Benefits

Horizontal consolidation enables firms to pool resources into one entity. Consolidation strengthens the financial position of the new company, so management may negotiate better terms with creditors and suppliers. Savings are passed down to consumers in the form of lower prices. Considerations

Growing industries consolidate prior to reaching a mature stage of development. This consolidation occurs when emerging companies purchase start-ups to expand market share. Conversely, older industries consolidate to survive. Struggling companies are often forced to sell out---or go bankrupt.


Horizontal consolidation differs from vertical integration. Vertical integration happens when companies expand across their supply chain. Vertically integrated oil companies purchase oil drillers, refineries and gas stations. Risks

Horizontal consolidation that leads toward monopoly draws criticism from consumers and the government. The Federal Trade Commission enforces monopoly law and blocks anti-competitive mergers.

2. Vertical Consolidation
Vertical consolidation is a term that is frequently discussed in the business world. There is much debate over whether vertical consolidation is a wise change for a company to make. However, before these decisions can be made, it is important to know exactly what vertical consolidation is and what advantages and disadvantages can occur with this system. History

Vertical consolidation has been around for many years. The 1800s were the first century to heavily employ the use of vertical consolidation. The industrial revolution brought the need for companies to control many aspects of the same production and distribution process. Economics of scale was the primary reason for vertical consolidation in the 1800s. The 1900s saw a shift in the reason companies chose vertical consolidation. The consolidation was used to ensure companies received a steady supply of inputs that were vital to operations. Late in the 20th century vertical consolidation was employed as a cost-saving measure. However, at the end of the 20th century and into the early part of the 21st century, companies

were forced to eliminate much of their vertical consolidated structure due to competition. Features

Vertical consolidation is the process by which a company absorbs a distribution center or supplier into its own value stream. This can occur when a company purchases a new supplier or when a company begins to offer the same services as a third-party supplier themselves. This process is also referred to as vertical integration. An example of vertical consolidation is when an oil company purchases gas stations to sell their oil products or when the same oil company conducts exploration for new oil sources.


The purpose for vertical consolidation is so that a company can eliminate as many different parties as possible to streamline a business process. Another reason to use vertical consolidation is to save money by having processes completed all under one company name. If processes are completed by the same company that sells the products, then third-party convenience payments do not have to be made. There are two types of vertical consolidation: forward consolidation and backward consolidation. Backward consolidation is when a company purchases the suppliers and manufacturers of a product. Forward consolidation is when a company purchases the distributors of a product.


There are many benefits to vertical consolidation. Vertical consolidation can reduce transportation costs if local suppliers and distributors are in the same area. It can greatly improve supply chain coordination. The control over inputs is much greater. The expansion of core services and competencies is easier to achieve. It is possible to receive profits from upstream and downstream processes. Greater amounts of distribution channels are available. It is even possible to block competitors if rare supplies can be obtained.


There are also some drawbacks to the vertical consolidation system. The bureaucratic end of a company becomes much more difficult. There is often an issue of capacity balance. The upstream suppliers may not be able to match the demand of the downstream distribution centers. Adding additional services to a company may cause an overall quality loss. Costs might become higher due to the lack of competition in the market. Product variety is much reduced. There is also the chance of reduced company flexibility because of the added processes.

Challenges of consolidation

People issues: the mergers of bank pose human resourses management

problems.the cross cultural integration are an important post merger issue to be handled by the management of the two banks.

Technology integration: integration of technology platforms poses a stiff

challenge the merging banks use different working platforms and are at different stages of technology implementation. 1. Brand Implication: With regards to branch implications, the new entities that will come from the dust of consolidation will need to deal with brand

There will be a change of name if two or more banks come together and decide not to adopt any of the participating bank name.

The logos which were formally used by each of these banks will be dropped and another one adopted.

There will also be the evolution of a new brand culture for the emerging banks after consolidation.

The brand message of the consolidated banks will also be changed. The place of information communication technology (ICT) in the bank will be changed, that is, banks software as the new banks will go for the best to meet up customers demand.

2. Structure Implication: The recapitalization of banks will leave in its wake,

a number of structural issues which will have direct impact on staff, customers and the entire banking sector. They include:

The reduction in the number of banks in the country The closure of many small banks, especially those in the rural areas with poor capital deposit.

Increased competition due to better incentives and rendering of banks services.

Acquisition digestion issues which will include loss of jobs, consolidation of branch locations and tackling of inefficiencies and bureaucracies. Reconstitution of management and board of the banks.

Why Consolidation In Banking Industry

Financial Sector Reforms set in motion in 1991 have greatly changed the face of Indian Banking. The banking industry has moved gradually from a regulated environment to a deregulated market economy18. The pace of changes gained momentum in the last few years. Globalization would gain greater speed in the coming years particularly on account of expected opening up of financial services under WTO. Banks in India are gradually going for1) Consolidation of players through mergers and acquisitions, 2) Globalization of operations, 3) Development of new technology and 4) Universalisation of banking. With the international banking scenario being dominated by larger banks, it is Important that India too should have a fair number of large banks; this could play a meaningful role in the emerging economics. Among the top twenty banks in the emerging economics, India has only one, whereas China has five banks and Brazil had six banks. The performance of banks in India indicates that certain performance characteristic is 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 maximizations well non-value maximization. The factors including mergers and acquisitions usually include technological progress, excess capacity, emerging opportunities, consolidation of international banking markets and deregulations of geographic, functional and product restrictions.

Policy inducements such as the governments 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 economics, 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 prospect 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, etc. which require huge financial outlays and to streamline human resources functions and skills in tune with the emerging competitive environment. The international experience reveals a wide range of processes and practices involving consolidation, their impact on the banking market and the trends 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 consolidation between big and small banks led to greater gains as compared to consolidation between equals. It is also observed from past experiences that if the merger follows business aided by appropriated technology and diversified product range, it could lead to greater gains for the banking industry as a whole. Similarly, consolidation increases 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 nonperforming 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 evolution study would reveal out important aspects of divergence in the performance of the domestic banking institutions. A high degree of variations is found in the performance of various groups of banks. Since, public sector banks account for the large scale of banking assets and the 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 the large number of banks of other groups will be 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 assets creation. It indicates that restructuring in Indian banking may not be viewed from the point of particular group rather it can be evolved across the bank groups. Indians 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 across banks group. As per the Quantitative Impact Study published by Basel Committee in May 2003, there would be increase in capital requirements by 12% for banks in developing countries on the implementations of the Basel II Accord. Mergers among the banks

will be one of the ways to increase market power and thereby increase the revenue generation of the Banks. The Reserve Bank of India (central bank) has set up an experts committee to implement Basel II accord by 2006 to strengthen the financial health of banks by adopting globally accepted norms for capital adequacy. The RBI also wants all banks in India to have a capital base of Rs 300 crore (Rs 3 billion) over the next three years. This will bring about number of acquisitions in the banking industry. Over the last two years, the RBI has stopped issuing branch licenses to cooperative Banks, after the unbridled growth of co-operative banks during the last decade. For Cooperative banks to expand there is no alternative to go for consolidation. The Mumbai-based Saraswat Co-operative Bank is now poised to take over Maharashtra based Maratha Mandir Co-operative Bank which is in trouble. This could mark the beginning of voluntary mergers of cooperative banks after the Reserve Bank of India (RBI) unveiled for mergers and amalgamations among urban co-operative banks. The other suitor for Maratha Mandir was Pune-based Cosmos Co-operative Bank. Last but most important reason for consolidation in any industry is tax saving and this thing is true for the banking industry also.

Case Title: Consolidation In Indian Banking Industry: A Case On State Bank Of India
The State Bank of India (SBI) is ruling the Indian banking sector with its largest market share. In order to further consolidate its position, the bank laid down the proposal of merging all its associate banks. The expansion strategies pursued earlier by SBI had been jettisoned and the group had to initiate consolidation strategies for a bigger fit. With the completion of the proposed merger, SBI's asset base will become more than double that of ICICI Bank, its closest competitor. But, the strategy of consolidation took a major set-back when the employees of the Bangalore-headquartered State Bank of Mysore (SBM), one of the oldest banks of India, resorted to a nationwide agitation. The protest eventually spread to the rest of the associates with more than 35,000 employees of the associate banks deciding to observe a day-long strike on 27 September 2007 in protest against the proposed merger. The employees perceived that the merger would only lead SBI to be a monolithic bank that would slowly shed its social responsibility. Moreover, there are some internal factors, which could be a major set-back for its consolidation strategy. This case intends to make a study on different financial and behavioral issues in this proposed merger. Moreover, this case endeavors to provide a futuristic study of the effect of this merger in the Indian banking scenario.

Pedagogical Objectives:

To an overview of the transformation that took place in the Indian banking industry through a series of reforms.

To identify the need for consolidation in the Indian banking industry. To analyze the reason for consolidation of the State Bank of India (SBI) with its associate banks.

To analyze whether SBI would be able to cope with the various internal and external challenges arising out of the consolidation proposition.

Keywords : India, Banks, State Bank of India (SBI), Consolidation, Nonperforming assets (NPA), Reserve Bank of India, Basel II Accord, Debt Recovery Tribunal (DRT), All India Bank Employees Association (AIBEA), Voluntary retirement scheme (golden handshake), Parivartan, Asset

reconstruction companies (ARC), Bombay Stock Exchange (BSE), Prime lending rate (PLR), Urban Co-operative Bank (UCB)

Case Study - Punjab National Bank And New Bank Of India:

In year 1970 fourteen banks including PNB were nationalized. In 1980 six more banks including New Bank of India were nationalized. Both these banks were consolidated in 1993 by the Central Government. The New Bank of India was incurring losses and by the year 1991-92, its financial position had become so bad that its capital and deposits completely stood eroded. Punjab National Bank commenced its operations on April 12,1895 from Lahore with an authorized capital of Rs. 2 lakhs and working capital limit of Rs. 20,000/- . The Bank has more than 100 years of history and has faced many financial and other crises in the Indian financial system over these years23. New Bank of India was a comparatively small bank among the nationalized banks. It had around 600 branches all over the country with12, 400 employees and was having 2,500 crores of deposits and advances Rs. 970 crores. The PNB and NBI consolidation has not been a marriage of convenience. It had the seeds of long-term detrimental effect to the health of PNB. The most ticklish problem which the amalgamated entity faced was the complete absorption of the sizeable NBI workforce into its own work culture. The NBI was notorious for rampant indiscipline and intermittent dislocation of work due to fierce inter-union rivalries.

Impact Of Consolidation
Since the consolidation process has not gone very far in India, its impact has not been significant. Consolidation of certain foreign banks at the global level has also not affected the Indian market, as their market share is currently very low. However, the deregulation process has brought in more competition in the banking sector, resulting in delivery of innovative financial products at competitive rates. The consolidation of banks may not significantly affect the functioning of various segments of the financial markets. In a liberalized environment, the mere size of the bank may not be an enabling condition for distorting the pricing mechanisms or liquidity in the market. The presence of large banks would result in more competition and narrowing spreads.

Impact On Branch Network Of The Consolidation

It may be mentioned here that one of the likely effects of consolidation in the banking sector may be the rationalization of the branch network of the banks concerned, resulting in the likely closure of certain branches of the merging banks, where there might be an overlap in their catchment area. The merged entity is likely to prefer closure of the rural semi urban branches. However, the current regulatory regime for branch authorization does not generally permit closure of the rural branches of the banks. Such a requirement is in tune with the philosophy of financial inclusion which emphasizes increasing penetration of the banking services in the unbanked and under-banked areas of the country.

Motives For Consolidation Of Banks

The primary motive for consolidation is maximizing shareholders value. In the absence of capital frictions, all actions by the firms including consolidation activities would be geared toward maximizing the value of shares owned by existing shareholders the preferences of other shareholders would be taken into account only in so far as they affected the value of shares through the cost of funds, supply of labor or other factors of production, or the demand for services. In practice, however managers and government affect consolidation decisions more directly.

We outline and review the literature on the value maximizing andnonvalue maximizing motives for financial consolidation. We then identify some types of changes in the economic environment that may have led to the recent accelerated consolidation.

The Value-Maximization Motive

Financial service firms can maximize value in one of the two main ways through consolidation by increasing their market power in setting prices or by increasing their efficiency. It is difficult to determine the goal of merger and acquisition participants, but there is evidence consistent with the nation that some mergers and acquisitions are designed to increase market power which lead to increase in profit. Studies suggests that in market merger and acquisition that subsequently increase market consolidation may increase market power in setting prices on retail services which will increase profit. Presumable, this was an expected consequence of many of these merger and acquisition and provided at least part of the motivation. Also

supporting this presumption are the findings that about half of the Indian bank mergers and acquisitions are in market and European bank mergers and acquisitions are of this type as well, suggests that merger and acquisition may increase efficiency, consistent with the presumption that expected efficiency improvements provide part of the motivation for consolidation. In addition, a number of studies have found that in a substantial proportion of merger and acquisition, a large, more efficient institution tends to take over a smaller, less efficient institution, presumably at least in part to spread the expertise or operating policies and procedures of the more efficient institutions over additional resources. In the Indian acquiring banks appear to be more cost efficient than target banks on average.

Non Value Maximizing Motives

As noted above, stakeholders other than shareholders may have a direct effect on consolidation decision we consider here the roles of managers and governments, who appear to have more influence over consolidation decisions for financial institutions then for non financial firms.

Managers Role
Managers may be pursuing their own objectives in consolidation decisions, particularly in banking where corporate control may be relatively weak. Banking regulations in India weak corporate control market by generally allowing only banks to acquires banks. The regulatory approval/disapproval process may also deter some acquirers. In addition, most India banks are small and are not publicly traded. Perhaps as a result of these conditions, hustle takeover that replace management are rare in Indian banking. However, corporate control appears to

improve when interstate and interstate banking deregulation increases the number of potential acquirers, which has been found to increase market discipline, reduce the market share of poorly run banks, and generally raise profitability.

Governments Role
The government plays a direct role in consolidation decision through restricting the types of merger and acquisition petted and through approval/disapproval decisions for individual consolidation. In part, this to limit governments liability and prevent exploitation of TOO BIG TO FAIL and expansion of the safety net. Regulatory review of bank merger and application in the US attempts to prevent consolidation in which excessive increases in risk are expected. Regulators also prevent in market consolidation if he increases in concentration are expected to result in excessive increase in market power.

Technological Advancement
Technological progress may have increased scale economies in producing financial service, creating opportunities to improve efficiency and increase value through consolidation, new tools of financial engineering such as derivative contracts, offbalance sheet guarantees, and risk management may be more efficient produced by larger institutions. Some new delivery methods for depositor services such as phone center, ATM, and online banking may also exhibit greater economies of scale than traditional branching networks. The new tools of financial engineering, advanced depositor, delivery services, or payments technologies may be distributed to small financial institution through correspondent banking systems, through franchising or outsourcing to firms specializing in the technologies, shared ownership or mandatory sharing of payments networks etc

Excess Capacity Or Financial Distress

Consolidation may also be an efficient way to eliminate excess capacity that has arisen in the consolidating firms industry or local market. When there is excess capacity, some firms may be below efficient scale, have an inefficient product mix. Consolidation may help solve the efficiency problems. Consolidation help remove excess capacity more efficiently than bankruptcy or other means of exit in part by preserving the preexisting franchise value of the Consolidation firms.

Consolidation Of The Development Financial Institutions (DfIs)

It may be recalled that the DFIs were set up in the country in the postindependence era for providing long term finance to the industrial projects to facilitate industrial development, in the absence of alternative sources oblongterm funds. Hence, to enable the DFIs to play this role, they were also provided access to certain concessional sources of funds by way of allocation of SLR Bonds and lending from the Long Term Operation Funds of the RBI. However, with the onset of financial sector reforms, and pursuant to the recommendations of the First Narasimham Committee, the access by the DFIs to the traditional concessional sources of funds was gradually phased out. Consequently, the raising of resources at market-related rates, increased their cost of funds, thereby, affecting the very viability of their business model, coupled with increasing competition from the banks. The DFIs came within the regulatory purview of the RBI in 1991 for the first time, and the regulatory domain of the RBI, till recently, extended to the seven Term-Lending Institutions (TLIs EXIM Bank, ICICI Limited, IDBI, IDFC Limited, IFCI Limited, IIBI Limited, and TFCI Limited) and three Re-Financing Institutions(RFIs NABARD, NHB and SIDBI). he Committee on Banking Sector Reforms (Second Narasimham Committee) had recommended n 1998 that the DFIs over a period of time should convert themselves into banks and there should be only two forms of intermediaries banking companies and non-banking finance companies, and if a DFI does not intend to become a bank with a banking license, it should be categorized as an NBFC.The Working Group for Harmonizing the Role and operations of DFIs and Banks (Khan Working Group KWG),was also of the view that a full banking license be eventually granted to the DFIs. Based on

these recommendations, the RBI had released a Discussion Paper (DP) in January 1999 soliciting wider public debate on the issue. The DP had, inter alia, envisaged a transition path for the DFIs for becoming either a full-fledged NBFC or a bank. Based on the feedback received on the DP, the Monetary and Credit Policy for the year 2000-2001, outlined the broad approach proposed to be adopted for considering the proposals in the area of Universal Banking. The Policy stated that the principle of "Universal Banking" was a desirable goal and any DFI, which wished to transform into a bank, should have the option to do so, provided it was able to fully satisfy the prudential norm applicable to the banks. For the purpose, such a DFI was expected to prepare a transition path for consideration of the Reserve Bank. Thus, in due course, the recommendation of the Narasimham Committee to have only banks and the restructured NBFCs in the system, could be operationalised.Accordingly, in April 2001, the FIs were advised several operational and regulatory issues relevant in evolving their transition path to a universal bank and for formulating a road map forth purpose. In the light of the RBI guidance, two leading term lending institutions viz., the erstwhile IDBI and ICICI Limited got converted into a commercial bank, each. The four term-lending institutions (IDFC Ltd., IFCI Ltd., IIBI Ltd. since wound up, TFCI Limited) which were in the category of NBFCs, are now regulated as per the norms applicable to the NBFCs. However, the EXIM Bank and the three RFIs (NABARD, NHB and SIDBI) continue to be under the regulatory domain of the RBI and are regulated as per the norms applicable to the financial institutions.

There is a need to convert large number of small banks to small number of large banks to make them more competitive in the open regime. India require big banks but it should be noted that small banks co-exist it is essential to conduct a due diligence before embarking upon consolidation. Indian banking industry is presently at a crucial juncture. With increasing globalization in sight, there have been calls for greater consolidation in the industry from both the government as well as regulator.