“Consolidation of Indian Banking Sector”

Submitted By: Nipun Trikha (58/2008)

Submitted To: (Dr.Harish Handa)





Certified that NIPUN TRIKHA has successfully completed Project Study entitled “Consolidation of Indian Banking Sector” under my guidance. It is his original work, and is fit for evaluation in partial fulfillment for the requirement of the Two Year (Full-Time) Post Graduate Diploma in Management.

Nipun Trikha Handa (Signature) (Signature)

Dr. Harish



The satisfaction and joy that accompany the completion of this task is incomplete without mentioning the people who made it possible. And so, I would like to thank all those who have supported and guided me to successfully complete this project. I would like to acknowledge the support, co-operation, and guidance of all those who have helped me to complete this project successfully. I would like to extend my sincere gratitude towards Dr. Harish Handa for helping me to undertake this project study and providing me the guidance, advice, and direction that is required to carry out a project, and for helping me with the intricate details of the project at every step of the way.


Executive Summary
"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." - P. Chidambaram

Consolidation is the buzz word in 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 bank’s perspective. To find out the “the management’s perception about the Mergers & Acquisitions among banks and simultaneously to analyze these activities from investor’s view-point as well. Consolidation through Merger and Acquisition activity in India—both domestic and crossborder—has exhibited explosive growth in recent years. Many companies look Merger and Acquisition as a way of growth. There have been studies which say that M&A activities add value to shareholders while at the same time there are studies which negate these results. Along with it there are certain organisational & strategic issues that has to be taken care of before this sort of consolidatory move This project has been done with the help of empirical study that was applied on the historical financial data of the banks which merged in order to analyze investor’s standing in such consolidatory situations. To understand management’s perception, a survey was conducted


Table of content
Serial No. 1. 1. 2. Content Executive Summary Introduction Banking Industry at A Glance Literature review
2.1 2.2 2.3 Methods of Consolidation Forces encouraging consolidation Introduction Forces discouraging consolidation Introduction

Page No. 4
6 9

3. 4. 5. 6.

Objective Methodology How do we calculate EVA Discussion & Analysis
10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 Centurion Bank and Bank of Punjab Deal Centurion Bank and Lord Krishna Bank ICICI Bank and Bank of Madura Limited ICICI Bank and Sangli Bank HDFC and Times Bank Oriental Bank of Commerce and Global Trust Bank Federal Bank and Ganesh Bank of Kurundwad Ltd Bank of Baroda and Benares State Bank Ltd

22 24 25 26 27 28

29 30 30 30 31 32 33 33

7. 8.

Conclusion Annexure Bibliography

36 38



Indian Banking Sector


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 in 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) Nationalised 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 nationalised banks and the IDBI Ltd, 19 Old Private Sector Banks, 8 New Private Sector Banks and 29 Foreign Banks. Table 1: Indian Banking at a Glance

Source: Reserve Bank of India Table 2: Number of Banks, Group Wise

Source: Indian Banks’ Association/ Reserve Bank of India. * Includes Industrial Development Bank of India Ltd.


Table 3: Group Wise: Comparative Average

Source: Reserve Bank of India.

Deposits and Credit II.1 Credit Deposit Ratio
The credit-deposit ratio (C-D ratio) provides an indication of the extent of credit deployment for every unit of resource raised in the form of deposits. The C-D ratios of all scheduled commercial banks decreased gradually from 63.3 per cent in 1980 to 49.3 percent in 2000. This declining trend has been reversed in the recent years, with the ratio increasing to 62.7 per cent in 2005. The foreign bank group recorded the highest CD ratio (87.1 per cent) and State Bank Group the lowest (56.3 per cent) in 2005. The CD ratios of all the bank groups had fallen drastically in 2000, except for foreign banks. With respect to domestic private sector banks group, this ratio was high at 70.5 per cent in 2005. With respect to State Bank Group and nationalised bank group, the C-D ratios were lower at 56.3 per cent and 61.3 per cent, respectively, which were less than the CD ratio of all scheduled commercial banks at 62.7 per cent in 2005.


Capital To Risk-weighted Assets Ratio (CRAR)
The capital to risk weighted assets ratio (CRAR) is an indicator for assessing soundness and solvency of banks. Out of 92 scheduled commercial banks, 75 banks could maintain the CRAR of more than 8 per cent during the year 1995-96, when the prescribed CRAR was8 per cent. During 1999-2000, 96 banks maintained CRAR of 9 to 10 per cent and above when the prescribed rate was 9 per cent. In 2004-05, out of 88 scheduled commercial banks, 78 banks could maintain CRAR of above 10 per cent and 8 banks between 9 and 10 per cent.

Distribution of scheduled commercial banks by CRAR




Methods of consolidation
In general terms, consolidation of the financial services sector involves the resources of the industry becoming more tightly controlled, either because the number of key firms are smaller or the rivalry between firms is reduced. Consolidation may result from combinations of existing firms, growth among leading firms, or industry exit of weaker institutions. This chapter focuses primarily on the first of these causes. There are several alternatives for firms combining with each other. Each has its strengths and weaknesses and may be particularly appropriate in certain situations. two classes of methods: (1) mergers and acquisitions and (2) joint ventures and strategic alliances. The primary methods of consolidation employed by firms are mergers and acquisitions. With both of these methods, two formerly independent firms become commonly controlled. the terms merger and acquisition are used interchangeably to refer to transactions involving the combination of two independent firms to form one or more commonly controlled entities. The distinction between a merger and an acquisition i somewhat vague. A merger is often defined as a transaction where one entity is combined with another so that at least one initial entity loses its distinct identity. Thus, full integration of the two firms takes place and control over a single entity can easily be exercised. An acquisition is often classified as a transaction where one firm purchases a controlling stake of another firm without combining the assets of the firms involved. Relative to acquisitions, mergers provide a greater level of control, because there is only one corporate entity to manage. Acquisitions are most appropriate when there are operational, geographic or legal reasons to maintain separate corporate structures. Mergers and acquisitions are also sometimes distinguished by defining mergers as transactions involving two firms that are of essentially equal size, while acquisitions are transactions where one party clearly obtains control of another. A partial, or noncontrolling, acquisition is similar to an acquisition of a controlling interest, except that, as the name implies, the acquiring firm does not establish control. Such deals encourage cooperation between potential rivals, because they establish a common interest among the firms. Partial acquisitions may also serve as a first step for firms before engaging in more complete consolidations of control. Joint ventures and strategic alliances enable firms to work together without either firm relinquishing control of its own operations and activities. Strategic alliances are partnerships between independent firms that involve the creation of tangible or intangible assets. The level of collaboration is often fairly low and focused on a well-defined set of activities, services or products. Strategic alliances may be most appropriate for the exchange of technical information and sophisticated knowledge or when there are legal, regulatory or cultural constraints making a more thorough collaboration difficult or illegal.


Moreover, relative to mergers and acquisitions, strategic alliances generally involve lower formation and dissolution costs. Like partial acquisitions, strategic alliances may enhance cooperation among firms or serve as a first step towards a merger or acquisition. A joint venture, which may be viewed as a type of strategic alliance, occurs when two or more independent firms form and jointly control a different entity, which is created to pursue a specific objective. This new entity typically draws on the strengths of each partner. Joint ventures facilitate consolidation, because they enable firms to develop strong ties. Joint ventures may also serve as a precursor to more comprehensive consolidation such as mergers. Mergers and acquisitions in the financial sector are undertaken for a wide variety of reasons. In any given case, more than one motive may underlie the decision to merge. Motives may vary with firm characteristics such as size or organisational structure, over time, across countries, across industry segments, or even across lines of business within a segment. In the framework used in this chapter, the motives for mergers and acquisitions are broken down into two basic categories: value-maximising motives and non-value-maximising motives. In a world characterised by perfect capital markets, all activities of financial institutions would be motivated by a desire to maximise shareholder value. In the “real” world, while value maximisation is an important factor underlying most decisions, other considerations can, and often do, come into play. Value-maximising motives The value of a financial institution, like any other firm, is determined by the present discounted value of expected future profits. Mergers can increase expected future profits either by reducing expected costs or by increasing expected revenues. Mergers can lead to reductions in costs for several reasons, including: • economies of scale (reductions in per-unit cost due to increased scale of operations); • economies of scope (reductions in per-unit cost due to synergies involved in producing multiple products within the same firm); • replacement of inefficient managers with more efficient managers or management techniques; • reduction of risk due to geographic or product diversification; • reduction of tax obligations; • increased monopsony power allowing firms to purchase inputs at lower prices; • allowing a firm to become large enough to gain access to capital markets or to receive a credit rating; • providing a way for financial firms to enter new geographic or product markets at a lower cost than that associated with de novo entry. Mergers can lead to increased revenues for a variety of reasons, including: • increased size allowing firms to better serve large customers;


increased product diversification allowing firms to offer customers “one-stop shopping” for a variety of different products; • increased product or geographic diversification expanding the pool of potential customers; • increased size or market share making it easier to attract customers (visibility or reputation effects); • increased monopoly power allowing firms to raise prices; • increased size allowing firms to increase the riskiness of their portfolios.

Non-value-maximising motives Managers’ actions and decisions are not always consistent with the maximisation of firm value. In particular, when the identities of owners and managers differ and capital markets are less than perfect, managers may take actions that further their own personal goals and are not in the interests of the firm’s owners. For example, managers may derive satisfaction from controlling a larger organisation or from increasing their own job security. Thus, they might engage in mergers designed to increase the size of the firm or reduce firm risk, even if such mergers do not enhance firm value. Managers may acquire other firms in order to avoid being acquired themselves (defensive acquisitions), even if being acquired would benefit the firm’s owners. In some cases, managers may care about the size of their firm relative to competitors, leading them to engage in consolidation simply because other firms in the industry are doing so.

Forces encouraging consolidation

This section is concerned with the external forces that have encouraged consolidation in the financial services industry. More generally, much of the ongoing restructuring in financial services has been a strategic response on the part of market participants to changes in the competitive environment. Among the major forces creating pressure for change are: • Technological advances; • Deregulation; and • Globalisation of the marketplace. 1. Technological changes Technology has both direct and indirect effects on the restructuring of financial services. Direct effects of technology may include: • Increases in the feasible scale of production of certain products and services (eg. credit cards and asset management); • Scale advantages in the production of risk management instruments such as derivative contracts and other off-balance sheet guarantees; and • Economies of scale in the provision of services such as custody, cash management, back office operations and research 2. Deregulation Governments influence the restructuring process in a number of ways: • Through effects on market competition and entry conditions (eg placing limits on or prohibiting cross-border mergers or mergers between banks and other types of service providers); • through approval/disapproval decisions for individual merger transactions; • through limits on the range of permissible activities for service providers; • through public ownership of institutions; and • through efforts to minimise the social costs of failures 3. Globalisation Globalisation is in many respects a by-product of technology and deregulation. Technological advances have lowered computing costs and telecommunications, while at the same time greatly expanding capacity, making a global reach economically more feasible. Deregulation, meanwhile, has opened up many new markets, both in developed and in transition economies. As a factor encouraging consolidation, globalisation largely affects institutions providing wholesale services

Forces discouraging consolidation

When two banks merge into one then there is an inevitable increase in the size of the organization. Big size may not always be better. The size may get too widely and go beyond the control of the management. The increased size may become a drug rather than an asset. Consolidation does not lead to instant results and there is an incubation period before the results arrive. Mergers and acquisitions are sometimes followed by losses and tough intervening periods before the eventual profits pour in. Patience, forbearance and resilience are required in ample measure to make any merger a success story. All may not be up to the plan, which explains why there are high rate of failures in mergers. Consolidation mainly comes due to the decision taken at the top. It is a top-heavy decision and willingness of the rank and file of both entities may not be forthcoming. This leads to problems of industrial relations, deprivation, depression and de-motivation among the employees. Such a work force can never churn out good results. Therefore, personal management at the highest order with humane touch alone can pave the way. The structure, systems and the procedures followed in two banks may be vastly different, for example, a PSU bank or an old generation bank and that of a technologically superior foreign bank. The erstwhile structures, systems and procedures may not be conducive in the new milieu. A thorough overhauling and systems analysis has to be done to assimilate both the organizations. This is a time consuming process and requires lot of cautions approaches to reduce the frictions. There is a problem of valuation associated with all mergers. The shareholder of existing entities has to be given new shares. Till now a foolproof valuation system for transfer and compensation is yet to emerge. Further, there is also a problem of brand projection. This becomes more complicated when existing brands themselves have a good appeal. Question arises whether the earlier brands should continue to be projected or should they be submerged in favour of a new comprehensive identity. Goodwill is often towards a brand and its sub-merger is usually not taken kindly





Problem:Now with the end of the financial crisis, there shall be resurrection of banks and financial institutions all over the world. Indian banking industry was the least affected from this crises because of strong fundamentals and prudent policymakers and thus it shall be the fastest growing banking sector. This scenario along with the increased FDI limits in the private banks shall intensify the level of competition in the banking industry. Though there are 290 banks operating in our country but still none of them is among the top 50 banks at global level, SBI the largest Indian bank is ranked 52nd globally with other 5 banks among top 1000 banks. Out of these 290 banks, 80 banks are catering to only 2% of the industry. As per the chairman of SBI, “India needs atlest 3 globally reputed banks and 5 banks equivalent to the size of SBI. This shows the need of consolidation of Indian banking industry.

The main objective of the project is: “To study process and consequences of consolidation of banking sector of India” However, the specific objectives can be stated as: • • To understand the present scenario & upcoming trends in Indian banking system. To analyze the basic needs for reforms in banking system, and of consolidation particularly. • To find out & analyze management’s perception about the consolidation through Merger & Acquisitions. • To evaluate some of the recent cases of consolidatory activities in the banking sector and to analyze them from the customers and investors perspectives. • To evaluate the pros and cons of consolidation in the banking industry .



MethodologyAnd Data Analysis


After doing the literature review and understanding the motives of the merger of banks in India and benefits achieved there by. It is tried to validate with help of the data if the benefits of the merger are there in the Indian banking sector .For this study I have chosen the time period from 1999 to 2006 .The data for 8 significant deals which have happened during this period has been collected as the time series data. In all the deals which have been selected between the banks a caution has been taken so that only those deal are selected for which only 2 banks are involved in the merger. After collection of data various empirical methods have been applied on the data to validate or refute the arguments stated in the literature review section and then giving the conclusion on the basis of the observed results .The data required for the analysis is: 1. Returns of the stock of the banks 2. Expected Rate of return for the stock 3. Cumulative abnormal return Returns of the stock have been calculated by comparing the closing stock price on the t day (Day zero) to the closing stock price of the stock on t-1 day. The expected rate of the return is calculated using the using the capital asset pricing model. The expected return is calculated as follows: Expected return = _ + _ * RM α + β: these are aspects which are related to a individual stock, RM return of market α alpha is an intercept of minimum rate of return. β is a beta which implies the systematic risk of a stock. α & β are calculated by running a linear regression and then Abnormal returns are calculated Abnormal Return = Actual stock – Expected Return on Stock After a T-TEST is run at confidence level of 95% to verify if there is any significant change in the CAR calculated. It is this which will indicate the effect of the merger. Also another test which has been applied to check the financial performance of the banks is the EVA method .Economic Value Added is a measure of the financial performance of the banks .EVA method is the invention of the Stern Steward and Co which was launched in 1989.


How do we calculate the EVA?
EVA is a methodology which links the finance to the competitive strategy framework. It is also an indicator of the value which is created in the stocks of the company. EVA = Net operating profit of the company (NOPAT) – (Cost of the capital * Total capital employed) This formula will give us a positive or a negative EVA number. Positive EVA number means that the company is going to create value for its shareholders and negative EVA number means that it is destroying the value of the shareholder .The concept it is build upon is that till the time the business does not give out profits which are more that the cost of the capital till that time business is not profitably and it is making losses. We first calculate the NOPAT which has been calculated as • NOPAT = EBIT * (1- tax rate) • Cost of the capital has been calculated as WACC which is weighted average cost of capital. This is the weighted sum of the cost of debt and cost of equity. • Total Capital Employed has been calculated as the total debt and total equity


This report till now talks about the merger and its benefits in Indian context .To check how many mergers have been profitable to the banks in India the paper has short listed 8 deals which have happened in the Indian banking sector from the period 1999 to 2006. The deals which have happened in 2007 have not been included because it would not be possible to study the effect of merger due to the less number of time periods available after 2006 .that is post merger years. Also only deals where only two banks have been involved have been selected.


After selecting the deals we applied two empirical methods on it. To study the short term impact we applied the t-test and for long term impact we applied EVA (Economic value added method). T-Test To study the T-Test on the data we selected a time series data of the closing prices of the stock from 1999 to 2007 and then found the return of these stocks. We found the intercept and the slope of these stocks and by applying the CAPM formula we found the expected return on the stocks. Then this expected return was subtracted from the actual return to arrive at the abnormal return .Over the period of 30 days pre and post merger the abnormal returns where found and t-test was applied on these abnormal returns .If the value given by the t-test is less than .05 then the hypothesis which is that the data sets are similar over the period of study is rejected and we conclude that the significant effect of merger is prevalent. To study the long term effect of merger another indicator is the EVA. We calculated the EVA pre merger, in the year of merger and post merger which gives us the idea of the efficiency of the merger. All the data has been analysed from the acquiring banks perspective. 23

EVA gives us a clear understanding of the values which the banks create over a period of time .It connects the theories of Finance with the strategy of competitive markets given by Michael Porter. For the operations of the banks the EVA is used as a common measure by many banks like Citi Bank, Barclays etc .Many Indian banks also use EVA to calculate their profits by EVA method like ICICI Bank, HDFC etc which in itself justifies the reason of using EVA for our methodology for calculating the profits of the banks .Whenever the benefits of the decisions taken by the banks are more than the cost involved in its structure, it creates the value for the Bank. Most of the strategies of the banks create value for the bank over a period of some -time which may be in distant future and thus when ever profitability of the bank’s merger is to be calculated it should be done through EVA method. There are two sensitive drives of the value creation in the banks .Firstly how fast the funds are moved and how much of these funds create further value which is more than the cost factor of generating these funds which clearly given by the EVA of the banks Another important thing to be understood in terms of the mergers of the banks is difference between the projects and strategies. For projects it is best to calculate the NPV or IRR to check for the feasibility of the projects .For strategies one should check the EVA and the decision of the merger should be based on the EVA calculated from estimation of the strategies of the merger. Limitation of ratios Many accounting fundaments such as Price Earnings, Return of Equity, Return of Net, Book Value do not give a clear understanding of the major variables which are the value drives .These all ratios are prone to window dressing by the mischievous management .Also these measures use the historical data to arrive at the conclusions .EVA also very beautifully raises the point of how the shareholders of the bank expect a certain rate of return for taking the risk of investing in the bank


Chapter 5 RESULT Discussion and analysis


Discussion and Analysis
Centurion Bank and Bank of Punjab Deal
Bank of Punjab in order to meet the credit requirements sold 15 % of its shares and this led to a sharp decrease in the stock price of Bank of Punjab .This happened in Feb. 2005. As the basic concept of the merger whenever the company’s stock prices drop down drastically then it becomes the target for a acquisition .In this case finally the Centurion bank which wanted to expands its arms in northern part of India and more so in the agricultural belts of Punjab acquired the Bank of Punjab in June, 2005. The combined entity was known as Centurion bank of Punjab and it had 235 outlets with a customer base of 2.2 million .This deal was perceived by the market as the good deal because of the cost factor and the synergies of merger in terms of geographical expansion .To measure the benefits of this deal we ran the t –test on this deal with the time period of t+30 ,t-30 ,t .This was to check the effect of the merger before and after using the CAPM and t-test and to establish that has merger shown any effect over a short period of time .As per t-test which was done on a sample from time period 1999 – 2007 .The value of t-test for this deal for t+30 ,t-30 is coming out be .96 which is quite high and accepts our hypothesis that the merger has not had a significant effect on the abnormal returns of the bank pre merger and post merger . Cumulative abnormal returns have also not changed over a period of time interval t + 30 and t-30.This shows that over a short period of time merger did not effect the returns .Then we studied effect of merger over a long period of time that is one year .This was done through the method of EVA .The deal took place in 2005 so we calculate the economic value added by the merger in the year 2004 ( the year before the merger ) ,2005 the year of the merger and 2006( the post merger year ) .As per the data observed in Table -1 for the Centurion bank which is acquirer bank had an EVA value of negative 50.49. .In the year of the merger its value increase to 154.61 which is a clear indication that the even the news of the merger of the two banks did create an upsurge it its profitability. To see the long term effect of the merger we observed that the 1 year post merger the value of EVA was 421.31. This was a tremendous increase in the Economic value of the bank which had an intermingled effect of merger news with Lord Krishna Bank which the bank was going to go through. The positive effects of this merger was validated even by the stock market with increase in its stock price by 2.1 percent when the news of merger broke out .This is an indication that merger was successful.


Centurion Bank and Lord Krishna Bank

The merger between the lord Krishna bank and Centurion bank was more of a RBI driven merger to safe guard the interests of the depositors .This deal took place finally on 0409-2006. As has been talked about in this paper above that many mergers in Indian banking scenario also happen due to the managed M & A activity by legislature or more clearly RBI .In this case as well we studies the effect of the merger on returns by t-test for time period t, t+ 30 and t-30 days where in t stand for the date of the merger. The value which we get from the t-test is .305 .As the t-test has been done on 95 % confidence level this accepts the hypothesis that the merger did not show any significant effect on the bank’s returns. For the significant returns to be shown and to reject the null hypothesis of t-test we should get the value of .05 or below for the t-test. Also the cumulative abnormal returns 30 days prior to and post merger did not show any change .This shows that the within a short period of 30 days the merger did not show any signs .Also the news of the merger did not create any significant ripples in the market .To understand the effect of the synergy derived over a long period of time we applied the EVA test on this merger as well .The EVA for the year before the merger that is 2005 is 154.61 for the year of the merger it is 421.31 which is a very high value .Even though the banks spend the money for the merger and the economic value should have ideally either remained same or marginally increased .But in this case we see a very high value of EVA .This is contributed due to dual effect .The market had very well accepted the merger with Lord Krishna bank and this increased the credit worthiness of the merged entity .But the main factor for such an increase in the EVA was the post merger gain with the Bank of Punjab which had started to show the effect .This compound effect really pulled the EVA value high for Centurion bank .The Centurion Bank become the 4th largest bank after the deals and in the post merger year 2007 its EVA continued to be good and upwards which is an indication that the merger was successful.


ICICI Bank and Bank of Madura Limited
This deal too place in the month of December 2000 .At that time ICICI bank did not have very strong holdings in southern part of India .This deal was done to increase the presence of ICICI in southern India. ICICI bank paid $70 mn min in share swap to buy Bank of Madura limited .This deal made ICICI bank 33 percent bigger than HDFC ,its rival .This deal provided ICICI bank with the synergies that enhanced its brand image ,branches and gave it additional 2.6 million customer and 263 branches in southern India. The author of this paper checks the short term gains and to gauge the market reaction using the t-test over short period .The t –test give us a value of .27 which again accepts our hypothesis that the merger did not show gains over a short period of 30 days pre and post merger and that the abnormal returns where almost similar .Even though the value of the t-test is coming out to be .27 which is low and some variation is abnormal returns can be seen but it is not significant enough in term of merger point of view. Also the cumulative returns given in the table -3 below shows that the values have not changed much which is an indication that within short period of 30 days there was no abnormality of returns pre and post merger. But the gains from the merger were high over the long period of time.

ICICI Bank and Sangli Bank

The deal between ICICI Bank and Sangli Bank took place in Dec 2006 which is exactly 6 years after the deal of ICICI bank with Bank of Madura Limited .Sangli Bank was a non listed bank .The deal structure was in the ratio of 1 share of ICICI for 9.25 shares of Sangli Bank .By the market value the deal size was 302 crores .Sangli bank was held 30 % by Bhate family of Sangli . On the analysis of the returns of 8 years and applying t – test we get a value of .772 which accepts our hypothesis that the merger has did not created any change in the returns over a short period of 30 days .The cumulative returns over a short period of 30 days turned negative from positive value which was pre merger. Details of which can be seen in table -3 To study the effort over the long period of time through the calculation of the EVA for the given deal pre merger , on the year of the merger ,post merger and which is shown in table -1 which is 3191.919 for the pre merger year ,2688.00 for the merger year and 5293.31 for the post merger year .This EVA gives us a clear understanding how the value has been created for the ICICI by this merger over a long period of time .Synergies from this deal have realised over a period of 1 year .During the year of merger the EVA had gone down due the extra shares which the company had to release and money spend over the deal which had effected the bottom-line of the bank and over the period of the one year the economics of scale benefits where realised and the EVA jumped up to 5293.31.This was due the inroads which the ICICI could get into the interior of Maharastra state in India through the branches of Sangli bank where had a major customer base in these places. This merger of the Indian bank was also a success. and the benefits talked about in the beginning 28

sections of this pape have been achieved which have resulted in adding the economic value for the bank.

HDFC and Times Bank
This was the first deal which took place in the Indian banking sector which was market led .Total market value of the deal was 5775.75 Million Rs and it was a total stock deal .As this deal was a friendly deal and was market led so the market perceived it to be a very good deal which would benefit HDFC in a big way .On analysis of the data we check that the deal has created value and shown the effect of the merger even within the short period of 30 days .We studied the stock returns from a period 1999-2000 and applied the t-test on the data to check the abnormal return pre merger and post merger and the value of the t-test came out to be .055 which is indication that the hypothesis is rejected that the pre merger and post merger the abnormal returns have been the same and thus merger has created a significant change in abnormal return .Also t-30 days cumulative abnormal return is -0.14462 and t+ 30 days the value of the cumulative abnormal return is 0.451292 which is clear indication of the value added due to the merger over a short period of time .The abnormal returns turn out to be from negative to positive.

Oriental Bank of Commerce and Global Trust Bank

This takeover of the Global Trust Bank by Oriental Bank of Commerce took place in last week of July .Before this the Global trust bank‘s operations where suspended by the Central bank of India .The GTB‘s bad loans accounted for about fifty of its 32.7 billion rupees of deposits .This deal was driven by the Central bank .At that time OBC was looking for merger options with other banks and RBI decided to merger GTB with OBC to safeguard the interests of the depositors. So at that time OBC took this opportunity and decided to acquire GTB and turn it around in one and a half year .GTB had 103 branches in southern part of India and has a strong retail products in the market which proved to be a value adds for the synergy of the deal .As stated by the bank authorities that the bank deal will have a impact on the bottom-line of the bank and they will turn around the bank in the one and a half years time .This was checked by the author of this paper by using the t-test over a period of 30 days i.e. t - 30 and t + 30 .The cumulative abnormal returns turned from 0.159725 ,30 days pre merger, to -0.15102 post merger 30 days .The markets reaction immediately to the deal was not good and they thought that it will effect the bottom-line of Oriental Bank of Commerce .On doing a t-test the merger did not show any gains in the short period run .To understand the gain over a long period and to see if the Oriental Bank was able to turn around the bank in the stated period of time and enjoy the benefits of the merger author calculated the EVA 1 year before merger ,in the year of merger and 1 year after merger and the values as given in table 1 are 654.42, 618.27 and 850.27 .The EVA of the Oriental bank of commerce is a clear indication that due to the merger its EVA had suffered due to the losses of the GTB .But the bank was successful to turn around its acquired bank GTB with in a short period of time and started to reap the benefits of the profit made from the merger due to which its 29

EVA increased to 850.27.This is also a clear indication that banks do benefit over a long period of time from merger

Federal Bank and Ganesh Bank of Kurundwad Ltd
This was a small merger in the Indian banking context .The Ganesh Bank of Kurundwad was a bank of Maharashtra which was under moratorium to safeguard the investors money.So at that time Federal Bank which was a private bank asked the RBI to permit them to merge Ganesh Bank of Kurundwad with it .Even though Ganesh Bank of Kurundwad had only 32 branches but this was a strategic decision for Federal bank as it gave federal bank in roads into the agricultural belt of Maharastra. In the short run the Federal Bank did not have any change or gain from the merger as could be seen by the ttest done over t-30 and t + 30 days whose value is coming out to .735 .This suggests that the hypothesis is accepted that the bank has not benefited over a short period of time .To see the effect of the merger over a long period of time we could see that the merger was really very effective .The Federal bank could capitalise on the inroads which it got from the Ganesh Bank of Kurundwad in the agricultural sector of Maharastra and its Economic value one year prior to merger ,in the year of the merger and post merger was 185.18 ,259.30 and 406.52. Merger is beneficial if it is sustained and in this case it was sustained as well .The data shows clearly the benefit of the merger and the value added.

Bank of Baroda and Benares State Bank Ltd
This deal between the banks took place in 2002. Benares State Bank Ltd was a bank in Uttar Pradesh in India with the 105 branches and 2.35 billion rupees .As at that point of time most banks in India where trying to expand their customer base and thereby increase the consumer banking business. Benares State Bank helped Bank of Baroda in this aspect. On Analysis of the deal to understand the benefits of merger of these bank, i carried out the t-test which gave a value of .277 which is indication that the hypothesis has been accepted and the merger has not shown any benefits over a short period of time .On doing a long term analysis of the merger of the bank by calculating the EVA of the banks before the year of merger ,during the year of merger and after the year of merger which can be seen from the table below as 906.92,1181.21,1063.83 respectively which is the indication that even though some benefits where achieved due to the merger process but they could not be sustained as the benefit of the merger seen through EVA value has dropped down .




Chapter 6 Conclusion


This paper attempted to provide an analysis of ongoing merger trends in Indian banking from the view point of two important stakeholders of a banking firm—stock holders and managers. The trend of consolidation in Indian banking industry bas so far been limited mainly to restructuring of weak banks and harmonization of banks and financial institutions. Voluntary mergers demonstrating market dynamics are very few. We strongly support the view that the Indian financial system requires very large banks to absorb various risks emanating from operating in domestic and global environments. We argue that the challenges of free convertibility, Basel-II environment, widening of financial services activity, and need for large investment banks are the prime drivers of future consolidation. More voluntary mergers are possible, provided the benefits of mergers are derived by all the stakeholders of the banks. Currently the forced mergers may be protecting the interests of depositors but shareholders of both bidder and target banks are not, necessarily perceived as beneficiaries of the merger. The event study analysis results, show that both bidder and target banks' market value of equity bas been reduced on the immediate announcement of mergers. In the case of voluntary mergers, the results are mixed. Our survey shows that bank managements are strongly in favour mergers. However, they opine that there are several critical issues, which are to be bandied carefully to make a merger successful. These are valuation of target bank loan portfolio, valuation of equity, integration of IT platforms, and issues of human resource management. Banks are optimistic about realizing the merger gains such as exploration of new markets and reduction in operating expenses. Based on these results, on the policy side, we suggest that RBI should activate the Prompt Corrective Mechanism that helps in identifying the sick banks and advance the timing of the merger to avoid total collapse of the bank. This will also help the bidder banks to formulate appropriate strategies, which may mitigate the dilution in market value of equity consequent upon merger. To ensure the availability of financial services to all segments of the population, RBI should approve voluntary mergers, conditional upon the disadvantaged segments being unaffected by the process, and approval should be linked to specific plans offered by the acquirers to mitigate the extent of financial exclusion. The ongoing consolidation trends in Indian banking raise some important questions. Is it fair and desirable on the part of RBI to merge the weak banks with well performing banks, which destroys the wealth of bidder banks? Being a majority shareholder, the Government of India appears to be ignoring the interest of minority shareholders. This is a serious concern of corporate governance. In the case of two forced mergers, viz., GTB with OBC, and Bharat Overseas Bank with Indian Overseas Bank, the share prices of these two acquired banks have not shown any significant increase even after a substantial time gap from the merger. In the post-reform period almost all the public sector banks have improved their performance in terms of profitability, low NPAs and raised fresh equity from the capital markets at a good premium. Forced mergers may be detrimental to the further growth of these banks. Dilution of government ownership may be a prerequisite to improve operational freedom 34

and to devise performance linked incentives for public sector employees, which are essential to tackle the post-merger problems arising out of forced mergers. Another issue, which is completely ignored, is the impact of consolidation on customers, especially small borrowers who are dependent on the banking channel. The other consolidation model, which is simultaneously in progress, is operational consolidation among banks. The largest public sector bank, State Bank of India is being operationally integrated with its subsidiaries in providing various banking services. Above all, we firmly believe that certain corporate governance issues are to be solved on a priority basis before implementation of merger agenda





Consolidation in Financial Sector (Summary Report) through Competition, consolidation and systemic stability in the Indian banking industry by - S P Talwar Bank Mergers – Possibilities and Preparation - Dr. Meera Sharma Fama, E F; Fisher, L; Jensen, M C and Roll, R (1969).The Adjustment of Stock Prices to New Information. International Economic Review. Chakrabati, Rajesh (2008). Do Indian Acquisitions Add Value?. ICRA Bulletin - Money & Finance. Asquith, Paul; F Bruner Robert; W Mullins, David Jr (1983). The Gains to Bidding Firms from Merger. Journal of Financial Economics. Franks, J; Harris, Robert; Sheridan, Titman; (1991). The Post Merger Share Price Performance of Acquiring Firms. Journal of Financial Economics. Rau, P R and Vermaelen, T (1998). Glamour, Value and the Post-Acquisition Performance of Acquiring firms. Journal of Financial Economics. Pilloff, Steven J. (1996). Performance Changes and Shareholder Wealth Creation Associated with Mergers of Publicly Traded Banking Institutions. Journal of Money, Credit, and Banking. Prowess database (LBSIM, New Delhi)


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