Globalisation of Indian economy has resulted into innovations in banks in India.

The
importance of sophisticated or high technology for improving customer service,
productivity, and operational efficiency of banks is well recognized. As a part of their
action plans, Indian banks have introduced many new techniques and a considerable
degree of mechanization and computerization in most of their operations. Banks have set
up exclusive data network for communication known as BANKNET. For this they have
established SWIFT (Society for Worldwide Inter-bank Financial Telecommunications),
through which the banks can communicate with their branches or other banks in national
and international network.

Another change that is taking place is the large scale use of cards in place of cash for
settlement of financial transactions. Banks are slowly adapting to provide non-cash based
services. Transactions through electronic mode are gaining importance.

Globalisation coupled with technological development has shrinked the boundaries.

Trade has become transational from international. Due to this, there is no difference
between domestic and foreign currency. As a result, innovations and improvement
assumed greatest significance in institutional performance. This trend of global banking
has been marked by twin phenomena of consolidation and convergence.

The honorable President of India, Dr.Abdul Kalam, emphasizes the fact that India is in a
situation of an ascending trajectory, and he suggests the banks should play an active role
for the national development. He expresses that India has two great resources-natural and
human resources. He emphasizes on the fact that the need of the hour is proactive
partnership of bankers in the national development missions.

Consolidation is an inevitable process in the banking sector as banks seek to reap

economies of size. Mergers and acquisitions are considered useful to achieve the requisite
size in the short run.
The 21st Century may see the dawn of “Darwinion Banking”. Only the banks that could
fulfill the demands of their markets and changing times would survive and prosper.
The banks are no longer physical buildings, but they have become a global business and
they need to think globally to be successful.

This paper tries to bring the journey of Indian banking and the road ahead.
Indian Banking: The Road Ahead
Geetha Rajaram,
Faculty-Finance,
ICFAI National College,
Malleshwaram

Financial markets are a part of the changing business paradigms, across the globe. In fact,
the financial markets are the first to unleash the creativity and imagination and lead the
revolution. Today, globalization of competencies, thinking and perspectives has been the
part of Strategic Action Plan of all the major players in the financial markets, globally.
The cut throat competition across the market operators and the pressure to perform by the
stakeholders have resulted in competition being fiercer than ever before. Both the
business landscape and chemistry of the competition has changed significantly over the
period of time. All around, there is a fresh thinking on the financial products, structure of
market players and possibilities for value creation. Financial markets are being
redefined, reinvented and reconfigured on a persistent basis.

1.1a Changing paradigms of the banking services

The forces of change unleashed in the Indian economy over the last decade have
transformed the operating environment across the entire spectrum of businesses. This
coincided with rapid developments in technology that created both an opportunity and a
challenge for businesses worldwide – the opportunity to innovate in product offerings to
customers and improve operating efficiency, and the challenge of keeping pace with
change and gaining first-mover advantage. These two developments catalysed significant
shifts in the structure of the Indian economy, perhaps the most visible and far-reaching of
which was the increased share of the services sector in the economy. The liberalisation of
the financial sector, which formed a key part of the overall liberalisation process, blurred
the distinction between various financial intermediaries and promoted greater efficiency
and competitiveness in the financial markets. The structure of the financial markets itself
began to change – with the growth of the debt capital markets and the entry of new
market participants like mutual funds, disintermediation gradually set in. This started the
process of evolution of the financial intermediary into a provider of services in addition
to an originator of credit. The fundamental changes taking place in the Indian economy
and the financial sector are due to the twin forces of liberalisation and technological
development and put in place certain basic requirements necessary to build a platform
that would enable the economy to capitalise on the emerging opportunities and meet the
challenges of the competitive environment. These included a strong focus on human
capital and proactive adoption of technology.
Today, financial markets are turbulent, globally. Traditional business models, when
businesses were clearly differentiated (Banks conducted banking, insurance companies
offered risk covers and securities companies offered investment opportunities), have
become the footnotes of the finance literature. Today, insurance companies are exploring
values in the banking and investment products and vice versa. It is no more a bank
competing with another bank and insurance company competing with another insurance
company, but an insurance company competing with bank s and what not. Hence, the
most precious word today is the “convergence” of the opportunity zones in financial
markets from concept to culmination.

The competitive dynamics of market has changed phenomenally. The players in the
market compete in one segment and co-operate in other segment the competition
mounting across the opportunity zones because that encourages people to improve and
deliver better values to the market leading to growth of overall productivity of the nation.

The structure of the players in different opportunity zones is also changing on continuous
basis. Corporate marriages, exchanges mergers, clearing corporations alliances,
regulators integration globally, bear testimony to it. Convergence of the financial
products is also apparent, everywhere.

The investors are perceived as not just as the investors but buyers of the financial
solutions. The philosophy of customer being king is driving the financial markets. It is no
more customers chasing the products; it is the appropriateness of options chasing the
customers. The financial institutions are co-designing the products/services with their
customers and striving to provide them with global solutions.

They provide all the services to its customers including checking account to savings
account to housing loan to car loan to credit card etc…with a single bank account.
Technology is also helping market players redefine the way they have been operating in
the market. Strategic alliances between the market participants across the segments are
quite apparent in the market.

In this era of fierce competition, it has become extremely imperative to weave clear cut
strategy to deal with these changing dimensions of the business landscape in financial
services. The businesses are no more businesses, these are battles of competencies.
Indeed, there is a competition for the competence in the market. The success or failure of
a market player in this battle for competence determines his potential for growth and the
competitive differentiation. Hence companies need to strategize and re-strategize almost
on the continuous basis.

The financial system is the lifeline of any economy. The changes in the economy get
mirrored in the performance of the financial system, more so in the banking system.
Consolidation in the financial sector is an open challenge across the world. The thirst for
global aspirations will compel the system to invent invisible synergies in the near future.
A decade of reforms in the Indian financial sector has created a landscape for
consolidation. Globalization, technological changes, market deregulation and
liberalization have driven the mergers and acquisitions wave across the world.

Banking scenario since 1991 has been a process of transformation and consolidation.
With financial sector reforms implementation, the microenvironment of banking sector
has undergone a radical change. Almost all insulations to commercial banking have been
peeled off and it has been susceptible to all types of exposures now. There has been
paradigm shift in operational, functional, environmental, technological spheres. The
reforms emphasized the “commercial character” of the banking system and helped the
banks to stand on a firm footing. The first phase of reforms directed mainly towards the
operational efficiency has brought concepts like prudential accounting norms,
Deregulation of Interest Rates, Credit Delivery, Transparency, Capital Adequacy Norms,
Autonomy in Management etc. Banks started cleansing their balance sheets, competition
led to improvement in their efficiencies and profit concept being recognised as a test of
commercial viability. The transparency made them to realise their own strengths.
Further, bank’s balance sheets have become more vulnerable to external shocks. The
cross-border diversification of assets and liabilities has thrown up the potential
mismatches. The opening up of Indian economy and globalisation has severely exposed
the Indian Industry to multifaceted risks. For instance, the industries like Steel, Cement,
Paper industries etc. The major looser in such failures are the Bankers, who are the
financiers.
The South-East Asian Crisis and the earlier economic turmoil in several developing
nations demonstrated that strong banking system is critical. Throughout the world,
banking industry has been transformed from highly protected and regulated to
competitive and deregulated.
Globalisation coupled with technological development has shrinked the boundaries.
Trade has become transational from international. Due to this, there is no difference
between domestic and foreign currency. As a result, innovations and improvement
assumed greatest significance in institutional performance. This trend of global banking
has been marked by twin phenomena of consolidation and convergence. The trend
towards consolidation has been driven by the need to attain meaningful balance sheet size
and market share in the face of intensified competition. The trend towards convergence is
driven by a move across industry to provide most of the financial services under one roof.

The concept of Corporate restructuring, commonly known as mergers and acquisitions

(M&As) in Asian countries took its birth in America somewhere in 1890.In India, with
the liberalization of FERA, MRTP and industrial licensing, the corporates are seriously
thinking over the mergers and acquisitions to compete both nationally and internationally.
Earlier this was confined to only business corporations. However with the boom in
service sector, this concept has crept into the banking sector also.
The honorable President of India, Dr.Abdul Kalam, emphasizes the fact that India is in a
situation of an ascending trajectory, rising foreign reserves, global recognition of technical
competence, energy of 540 youth and many developed countries to invest in Indian
Engineers and scientists and have set up R&D centers. He focuses upon the challenges that
India is facing to lift the 260 million people below poverty line. He emphasizes that banks
have an important role to playing re-inforcing the economy of the nation. He further says
that the banks should undertake financing such projects which channelise their effort and
investment leading to national prosperity. In his concluding remarks he suggests the banks
should play an active role for the national development. He expresses that India has two
great resources-natural and human resources. He emphasizes on the fact that the need of the
hour is proactive partnership of bankers in the national development missions.

The Finance Minister clearly brings out the fact that the aspirants in the Indian banking
sector should be prepared for global competition. The Indian banks should diagnose their
competitiveness. Indian banks who aspire to become truly global players, should be
prepared to face full force global competition on their home ground. He stresses the fact
that to attain global aspirations and provide greater services, banks have to consolidate.
Banks should consolidate with entities, which maximize synergies and create larger
banking entities, to compete globally. However he cautions that while consolidating
special care should be taken to satisfactorily address the HR issues in the overall context
of technology introduction and rationalization of branches. He expresses that Indian
banking has made a vital contribution to the nation’s development. To achieve global
aspirations, the banks need to meet many difficult challenges and emerge as global
leaders in the near future.

Objectives of Merger

Mergers are well-recognised commercial practices for the growth and diversification of
manufacturing, business and service activities.
The factors that motivate mergers are, to –

(a) diversify the areas of activities; achieve optimum size of business;

(b) remove certain key factors and other bottlenecks of input supplies;

(c) improve profitability

(d) serve the customer better

(e) achieve economies of scale and size, internal and external

(f) acquire assets at lower than market price;

(g) bring separate entities under single control;

(h) grow without gestation period; nurse a sick unit and get tax advantages by acquiring a
running concern.

There could be other influencing factors that lead to mergers.

Other Motives behind the Merger

Growth: One of the fundamental motives that entice mergers is impulsive growth .
Organizations that intend to expand need to choose between organic growth or
acquisitions driven growth. Since the former is very slow, steady and relatively consumes
more time the latter is preferred by firms which are dynamic and ready to capitalize on
opportunities.

Synergy: Synergy is a phenomenon where 2 + 2 => 5; This translates into the ability of a
business combination to be more profitable than the sum of the profits of the individual
firms that were combined. It may be in the form of revenue enhancement or cost
reduction.

Managerial efficiency: Some acquisitions are motivated by the belief that the acquirer’s
management can better manage the target’s resources. In such cases, the value of the
target firm will rise under the management control of the acquirer.
Strategic: The strategic reasons could differ on a case-to-case basis and a deal to the
other. At times, if the two firms have complimentary business interests, mergers may
result in consolidating their position in the market.

Market entry: Firms that are cash rich use acquisition as a strategy to enter into new
market or new territory on which they can build their platform.

Tax shields: This plays a significant role in acquisition if the distressed firm has
accumulated losses and unclaimed depreciation benefits on their books. Such acquisitions
can eliminate the acquiring firms liability by benefiting from a merger with these firms.

Source: ICFAI Research Center

Benefits of Mergers

Internationally, one of the main causes of consolidation through mergers is that

companies as well as individual users of banking services are demanding for more
sophisticated banking services, particularly in the fields of electronic banking services
and e-commerce. Since the cost implications for banks of such customer led demands are
severe, and many cannot meet the necessary development costs, banks have been creating
alliances with other banks to share costs.

(a)Cost–savings: Cost-savings constitute an important outcome as well as reason of

merger and acquisitions. It emerges that economies of scale is important motivating
factor for consolidations.

(b) Revenue enhancement: Revenue enhancement due to increased size is also a

motivating factor within segment mergers.

(c) Deregulation: Easing of legal and regulatory barriers has opened the way for
increased mergers, both within and across National boundaries and across financial
industry segments.

d) Shareholders pressure: Shareholders have gained power relative to other

stakeholders in recent years. This development has put increased pressure on financial
institutions to improve profitability.

Disadvantages

(a) Customer service: Merger of two entities may result in dilution of competition in the
market, adversely affecting the customers’ interests. The larger undertaking, consequent
to merger, may exercise a market power to the detriment of its customers and suppliers.

(b) Elimination of competition: In a merger/amalgamation, an individual undertaking,

be it an actual or potential competitor may get eliminated. Or, a large unit may take into
its fold an efficient and growing medium or small-sized undertaking.
(c) Depositors Interest: In most of the cases, though the mergers are objected towards
safeguarding or protecting the interests of the depositors, one way or the other, in most of
the cases, depositors have suffered in the amalgamation process.

These adverse effects may or may not be outweighed by the positive features of mergers
such as economies of scale, stability through diversification, utilization of idle funds,
nursing a sick unit better/optimal utilization of capacity.

Introduction to the Indian Banking Industry:

The origin of the Indian Banking industry may be traced to the establishment of the Bank
of Bengal in Calcutta (now Kolkata) in 1786. Since then the industry has witnessed
substantial growth and radical changes. The banking horizons since independence have
already gone through three major shifts- a period of consolidation of banks (up to 1966),
a period of historic expansion in both geographical and functional terms ( from 1966-
1980) and a period of consolidation of branches (from 1980-1991).

The growth of banking industry in India may be studied in terms of two broad phases:
Pre-independence (1786-1947) and Post-Independence (1947 till date).The post-
independence can further be divided into three sub-phases:
 Pre-Nationalisation Period (1947-1969)
 Post- Nationalisation Period (1969-1991)
 Post-Liberalisation Period (1991-till date)

]. In India, joint-stock banks were founded under colonial rule mostly in order to create a
medium through which the government and British businessmen could procure cheap
loans. But from the 1840s, some Indian entrepreneurs also began founding joint-stock
banks in order to extend credit to Indian traders, who were mostly ignored or
shortchanged by the European-controlled banks.
After independence, and especially after the Nationalization of the Imperial Bank of
India and the subsequent Nationalization of all the major commercial banks,
developmental banking came into its own. In the post-Nationalization years, the deposits
mobilized and the credit extended by scheduled commercial banks in India have grown at
a phenomenal rate.
Between 1969 and 1990, Indian scheduled commercial banks, along with the cooperative
credit societies and the Regional Rural Banks penetrated deep into the countryside and
have extended credit to farmers and small-scale traders and industrialists as well as to big
traders and large industrial firms.
With the onset of ‘economic reforms’ from 1991, the structure of the banking system has
changed in a fundamental sense. The template for that structural change was provided by
the Report of the Committee on the Financial System (chaired by M Narasimham),
which, among its other recommendations, envisaged a structure under which three or four
large banks would provide global coverage, eight to 10 banks would provide national
coverage and the rest would be confined to local operations.
Evolution of Indian Banking

Evolution of Indian Banking

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

Pre-Nationalisation Post-Nationalisation
(1947-1980) (1980-onwards)

Post-Liberalisation
(1991-till date)

Figure 1.1

Innovations in Banking-Indian Cases :

This article specifies that globalization has brought about structural changes in the
world economy, particularly banking and financial services. Globalisation of Indian
economy has resulted into modernization and innovations in banks in India. It is
described that the biggest gainer in this drive is the customer in small places and remote
corners-the latest technology is now made available to each and everyone. The
importance of sophisticated or high technology for improving the customer service,
productivity, and operational efficiency of banks should be well organized. Since the
mid-1990s, there has been a steep increase in the number of branches and ATMs
opened by foreign banks in emerging economies. Most of the foreign entries have been
through two routes: (i) acquisition of domestic banks in the host country, (ii) Strategic
alliances. It is reinforced that globalization has brought about structural changes in the
world economy, particularly banking.

Mergers and acquisitions in Indian Banking dates back to Imperial Bank of India which
was formed by the amalgamation of three Presidency banks-the Bank of Bengal, bank of
Bombay and the Bank of Madras in 1921.
Few mergers have taken place thereafter mainly in the Public Sector banks-State Bank of
India took over Bank of cochin and Kashinath Seth Bank;New Bank of India emerged as
Punjab National Bank.
Times bank merged with HDFC Bank and Bank of Madura with ICICI Bank.
List of banks merged since 1961 to 2004

Sl Name of the merged Bank Merged with Date of Merger

No.
01. Prabhat Bank Ltd National Bank of Lahore 09-03-1961
Ltd.
02. Indo-Commercial bank Ltd. Punjab National Bank. 25-03-1961
03. Bank of Nagpur Ltd. Bank of Maharastra 27-03-1961
04. New Citizen Bank Ltd. Bank of Baroda 29-04-1961
05. Tranvancore Forward Bank Ltd. State Bank of Travancore 15-05-1961
06. Bank of Kerala Ltd. Canara Bank 20-05-1961
07. Bank of Poona Ltd. Sangli Bank Ltd. 03-06-1961
08. Bank of New India Ltd. State Bank of Travancore 17-06-1961
09. Venadu Bank Ltd. South Indian Bank Ltd. 17-06-1961
10. Wankaner Bank Ltd. Dena Bank 17-06-1961
11. Seasia Midland Bank Ltd. Canara Bank 17-06-1961
12. Kottayam Orient Bank Ltd. State Bank of Travancore 17-06-1961
13. Bank of Konkan Ltd. Bank of Maharastra 19-06-1961
14. Poona Investors Bank Ltd. Sangli Bank Ltd. 28-06-1961
15. Bharat Industrial Bank Bank of Maharastra 01-07-1961
16. Rayalseema Bank Ltd Indian Bank 01-09-1961
17. Cuttack Bank Ltd. United Bank of India 04-09-1961
18. Pie Money Bank Pvt.Ltd Syndicate Bank 04-09-1961
19. Moolky Bank Syndicate Bank 04-09-1961
20. Mercahnts Bank Ltd. Tanjore Permanent Bank 04-09-1961
21. Tezpur Industrial Bank Ltd. United Bank of India 04-09-1961
22. G.Raghunathmull Bank Ltd. Canara Bank 04-09-1961
23. Satara Swadeshi Commercial bank United Western Bank 06-09-1961
Ltd. Ltd.
24. Catholic Bank Ltd. Syndicate Bank 11-09-1961
25. Phaltan Bank Sangli Bank Ltd. 07-10-1961
26. Jodhpur Commercial Bank Ltd. Central Bank of India 16-10-1961
27 Bank of Citizen Ltd. Canara Banking 17-10-1961
corporation Ltd.
28. Karur Merchantile Bank Ltd. Laxmi Vilas Bank Ltd. 19-10-1961
29. Peoples Bank Ltd. Syndicate Bank 14-11-1961
30. Pratap Bank Ltd. Lakshmi Commercial 11-12-1961
Bank Ltd.
31. Unity Bank of India Ltd. State bank of India 20-08-1962
32. Bank of Algapuri Ltd. Indian Bank 14-08-1963
33. Metropolitan Bank Ltd. United Industrial Bank 06-02-1964
Ltd.
34. Cochin Nayar Bank Ltd. State Bank of Travancore 08-02-1964
35. Salem Shri Kannikaparameshwari Karur Vysa Bank 014-06-1964
Bank Ltd.
36. Unnao Commercial Bank Ltd. Bareilly Corporation 12-08-1964
Bank Ltd.
37. Latin Christian Bank Ltd. State Bank of Travancore 17-08-1964
38. Southern Bank Ltd. United Industrial Bank 24-08-1964
Ltd.
39. Shri Jayadeva Shankarling Bank Belgaum Bank Ltd. 26-10-1964
Ltd.
40. Bareilly Bank Ltd. Benaras State Bank Ltd. 16-11-1964
41. Thiya Bank Ltd. Lord Krishna Bank Ltd. 16-11-1964
42. Allahabad Trading & Bkg.Corp.Ltd. State bank of India 25-08-1965
43. Vettaikaran Padur Mahajan Bank Bank of Madura Ltd 01-09-1965
Ltd.
44. Malnad Bank Ltd State Bank of Mysore 06-10-1965
45. Josna Bank Ltd. Lord Krishna Bank Ltd. 13-10-1965
46. Amrit Bank Ltd. State Bank of Patiala 03-02-1968
47. Chawla Bank Ltd. New Bank of India 23-04-1969
48. Bank of Behar Ltd. State Bank of India 08-11-1969
49. National Bank of Lahore Ltd. State Bank of India 20-02-1970
50. Miraj state Bank Ltd. Union Bank of India 20-07-1985
51. Lakshmi Commercial Bank Ltd. Canara Bank 24-08-1985
52. Bank of Cochin Ltd. State Bank of India 26-08-1985
53. Hindustan Commercial Bank Ltd. Punjab National Bank 19-12-1986
54. Traders Bank Ltd. Bank of Baroda 13-05-1988
55. United Industrial Bank Ltd. Allahabad Bank 31-10-1989
56. Bank of Tamilnad Ltd. Indian Overseas Bank 20-02-1990
57. Bank of Thanjavur Ltd. Indian Bank 20-02-1990
58. Parur Central Bank Ltd. Bank of India 20-02-1990
59. Purbanchal Bank Ltd. Central bank of India 29-08-1990
60. New Bank of India Punjab National Bank 04-09-1993
61. Bank of Karad Ltd. Bank of India 1993-94
62. Kashinath Seth Bank State Bank of India 1995-1996
63. Punjab Co-op. Bank Ltd Oriental Bank of 1996-1997
commerce
64. Bari Doab Bank Ltd. Oriental Bank of 1996-1997
commerce
65. Bareilly Co-op. Bank Ltd. Bank of Baroda 03-06-1999
66. Sikkim Bank Ltd Union Bank of India 22-12-1999
67. Times Bank Ltd. HDFC Bank Ltd. 26-02-2000
68. Bank of Madura ICICI Bank 21-03-2001
69. Benaras State Bank Ltd. Bank of Baroda 20-07-2002
70 Nedungadi Bank Ltd. Punjab National Bank 01-02-2003
71. Global Trust Bank Oriental Bank of 24-07-2004
commerce

Source: RBI Newsletter/IBA Bulletin, Jan 2005 Vol XVII - No.1

Pre-Liberalization Period:

In India, the Companies Act, 1956 and Monopolies and Restrictive Trade Practices Act,
1969were the statutes governing mergers and acquisitions among companies. In the
Companies Act, a procedure has been laid down, in terms of which a merger can be
effectuated. Sanction of the Company Court (High Court) is an essential pre-requisite for
the effectiveness of and for effectuating a scheme of merger. The other Statute regulating
mergers was the hitherto Monopolies and Restrictive Trade Practices Act, 1969 (MRTP
Act).After the 1991 amendments, the statute does not regulate mergers. The regulatory
provisions in the MRTP Act were removed with a view to giving effect to the new
industrial policy of liberalization and deregulation, aimed at achieving economies of scale
for ensuring higher productivity, competitiveness and advantages in the international
markets.

Post-Liberalization period:

In 1991, the Government of India set up a committee under the chairmanship of

Mr.Narasimhan to make an assessment of the banking sector. The report of this
committee contained recommendations that formed the basis of the reforms initiated in
1991.The banking sector reforms had the following objectives:
1. Improving the macroeconomic policy framework within the which banks operate;
2. Introducing prudential norms;
3. Improving the financial health and competitive position of banks;
4. Building the financial infrastructure relating to supervision, audit technology and legal
framework; and
5. Improving the level of managerial competence and quality of human resources.

Mergers in Indian Banks

The Indian banking sector is steadily gearing up towards a healthy consolidation under
the aegis of structural reforms. As the banking sector has employed large capital and is
equally fragmented co-existing with multiple players, it requires a well-defined
restructuring process. Today, there are too many banks to handle the size of business in
the system. In order to attain the economies of scale and also to combat the unhealthy
competition within the sector besides emerging as a competitive force to reckon within
the International economy; the consolidation of Indian banking sector through mergers
and acquisitions on commercial considerations and business strategies- is the essential
pre-requisite.

Further, one of the incisive statements of the Narasimhan Committee recommendations

on economic reforms, states-‘There is clearly a need for consolidation of structure which
could be brought about essentially through a process of negotiation rather than imposed
merger on profitability considerations and also for reasons of business strategy.’ This
statement may be a guiding principle with the entire consolidation exercise in the banking
sector needs to be addressed.

With increasing globalization, attaining “size” advantages will become critical for Indian
banks. Combined with the need to attain higher capital standards under the Basel II
Accord, consolidation in the Indian banking sector will become imminent.

The main drivers for the consolidation of the banking sector among others include:
 The need to achieve economies of scale
 The desire to become One stop Shop for all financial products/services
 Exploit geographical/product/information technology synergies
 Minimize transaction cost and reduce the cost of regulatory compliance in the
context of Basel II Norms
 Weaker banks will find it difficult to raise capital to meet Basel II Norms
 Even the stronger banks will need to access international markets to augment
capital resources and this will be difficult in the absence of size.

Mergers should not be seen as a means of bailing out weaker banks. Mergers between
strong banks would make greater economic and commercial sense and would have a
“force multiplier effect.”

The Finance Minister’s recent quote seems to be appropriate for ensuring that more than
6 Indian banks are represented amongst the top 500 banks of the world – “To attain
global aspirations and greater banking synergy, banks have to consolidate.” With the
opening up of financial services under WTO regime, the process of globalisation would
gain momentum .In the banking sector the following changes are visualized-

 Consolidation of players through mergers and acquisitions

 Globalisation of operations
 Development of new technology
 Universalisation of banking
With technology acting as a catalyst, banking segment expect to see great changes in the
coming years.

Financial sector reforms set in motion in 1991 have greatly changed the face of Indian
banking. The banking industry has gradually moved from regulated environment to a
deregulated market economy. The market developments kindled by liberalization and
globalisation have resulted in changes in the intermediation role of banks. The pace of
change has been more significant in recent times with technology acting as a catalyst.
Financial sector would be opened up for greater international competition under WTO.
Banks will have to gear up to meet the stringent prudential capital adequacy norms under
Basel II. In addition to Basel II and WTO, the Free Trade Agreements may have an
impact on the shape of banking industry.
Financial sector reforms adopted in the 1990s have enhanced the strength of banks and
financial institutions in India.  A striking feature of these institutions has been their
improved resilience to the domestic and the external environment. Under Basel II the
capital requirements are more risk sensitive as these are directly related to the credit
rating of each counter-party instead of counter-party category as it is under Basel I.
Further, it requires banks to hold capital not only for credit and market risk but also for
operational risk (OR) and where warranted for interest rate risks, credit concentration
risks, liquidity risks etc. This makes Basel II more comprehensive than Basel I. Where
banks were required to hold a uniform level of 8 per cent as minimum capital under Basel
I, supervisors have the discretion to require banks to hold higher levels of minimum
capital under Basel II. Basel II has other advantages such as providing a range of options
for counter-party capital requirements and in the process reducing the gap between
required capital and regulatory capital. Basel II recognises a wider range of collaterals
and provides incentives for improved risk management practices. 
With the commencement of the banking sector reforms in the early 1990s, the RBI has
been consistently upgrading the Indian banking sector by adopting international best
practices.  The approach to reforms is one of having clarity about the destination as also
deciding on the sequence and pace of reforms to suit Indian conditions. This has helped
us in moving ahead with the reforms without disruption.  With the successful
implementation of banking sector reforms over the past decade, the Indian banking sector
system has shown substantial improvement on various parameters.  It has become robust
and displayed significant resilience to shocks.  There is ample evidence of the capacity of
the Indian banking system to migrate smoothly to Basel II norms. 
b. Consolidation – In the normal course of operations banks would be constantly
looking for opportunities of inorganic growth. Banks which operate with capital above
the minimum levels have an edge over the other banks to the extent that they would be
able to seize an opportunity for merger/acquisition as and when it is available without
any loss of time. However, it would be necessary for such banks to improve their
internal controls and risk management systems before embarking on a path of inorganic
growth.  Basel II implementation would enable banks to meet the above pre-requisites
and place them in a situation where they can take advantage of opportunities as and
when they arise.

While it is true that implementation of Basel II is not the be all and end all on the subject
of financial stability it must be recognised that banks are “special”.  Their sound and
efficient functioning is critical not only to the growth of the real sector but also for
strengthening the social infrastructure.  Internationally, therefore, banks have moved
centre-stage and their performance is the cynosure of all eyes. 
 The banking industry is now a very mature one and banks are being forced to change
rapidly as a result of open-market forces such as threat of competition, customer demand,
and technological innovations such as the growth of the Internet.
If banks are to retain their competitiveness, they must focus on customer retention and
relationship management, upgrade and offer integration and value added services,
especially in the consumer banking sector. In addition, if they are to remain cost-
effective, forming strong alliances and joint ventures with other non-banking entities
must become a major strategic weapon in a volatile and rapidly-evolving marketplace.
Banking industry in India is undergoing a rapid metamorphosis. Their role of a traditional
banker has been replaced with financial services provider for the clients. Most of the PSU
and private sector banks in our country have already started looking at their portfolio of
services offered and what they should do in the future for remaining competitive in the
industry. As public sector banks are likely to undergo major consolidation, suddenly for
many Indian banks things have changed. The merger of Timesbank with the HDFC Bank
and that of ICICI Bank with Bank of Madura points at the possibility of further
consolidation in the industry for adding values. While in both these cases market
immediately reacted sharply by increasing their capitalization and shareholders of both
these banks saw appreciable increase in their wealth. This just goes on to prove that
among other factors, bankers now will have to constantly seek to invest in technology
and also be open to strategic alliances, M&A, restructuring and other exercises for adding
EVA to shareholders wealth all the time.

Narasimhan Committee report (1991)

The first report of the Narasimhan committee (November 1991) on the financial system
had recommended a broad pattern of the structure of the banking system as under:

(a) 3 or 4 large (including State Bank of India) which could become international in
character.
(b) 8 to 10 banks with a network of branches throughout the country engaged in
‘universal’ banking;
(c) Local banks whose operations would be generally confined to a specific region;
(d) Rural banks (including RRBs) whose operations would be confined to the rural areas
and whose business would be predominantly engaged in financing of agriculture and
allied activities.
The Narasimhan committee was of the view that the move towards this revised system
should be market driven and based on profitability considerations and brought about
through the process of mergers and acquisitions.

Narasimhan Committee report (1998)

The second report of the Narasimhan Committee (April 1998) on Banking sector reforms
on structural issues made the following recommendations:
“Mergers between banks and banks and financial institutions need to be based on
synergies and locational and business specific complimentaries of the concerned
institutions and most obviously make sound commercial sense.”
The committee has also made the following recommendations on the role of RBI in bank
mergers:
(a) Laying the guidelines to process a merger proposal in terms of the abilities of
investment bankers.
(b) The key parameters that form a basis for determining swap ratios.
(c) The stages at which Boards will get involved in order to have a meaningful Board
level deliberations.
(d) Norms for promoter buying or selling shares directly/indirectly, during, before/after
discussion period etc. Without this many mergers will become a subject of public debate,
which may not all the time necessarily constructive.

Source: Narasimham Committee Report on Banking Sector Reforms.

Mergers/Amalgamations-Banking Regulation Act, 1949

Amalgamation of banking companies under Banking Regulation Act, 1949 falls under
two categories i.e., voluntary and compulsory amalgamation.

Section 44A- Voluntary amalgamation of Banking Companies.

Section 44A of the Banking Regulation Act, 1949 provides for the procedure to be
followed in case of voluntary mergers/amalgamations of banking companies. Under these
provisions a banking company may be amalgamated with another banking company with
the approval of the shareholders of each of the banks by a resolution passed by majority
of two-third in value of the shareholders of each of the said banks. The banks have to
obtain Reserve Bank’s sanction for the approval of the Scheme of Amalgamation.

Section 45- Compulsory amalgamation of Banking Companies

Section 45(4) of the Banking Regulation Act, 1949 Reserve bank may prepare a scheme
of amalgamation of a banking company with other banking institutions (the transferee
bank).A compulsory amalgamation is pressed into action where the financial position of
the bank has become weak and urgent measures are required to be taken to safeguard the
depositors’ interest. Section 45(4) of the Banking Regulation Act, 1949 provides for a
bank to be reconstructed or amalgamated compulsorily, i.e. without the consent of its
members or creditors, with any other banking institutions as defined in sub- section (15)
thereof. Action under the provisions of this section is taken by the Reserve Bank in
consultation with the Central Government.

With the initiation of the reforms in the financial sector during the 1990s, the operating
environment of the banks and term-lending institutions has radically transformed. One of
the fallouts of the liberalization was the emergence of nine new private sector banks in
the mid-1990s that spurred the incumbent foreign, private and public sector banks to
compete more fiercely than had been the case historically. With the initiation of banking
sector reforms, a more competitive environment has been ushered in. Now banks are not
only competing among themselves, but also with non-banks, such as financial services
companies and mutual funds. While existing banks have also been allowed greater
flexibility in expanding their operations, new private sector banks have been allowed
entry. Over the last decade nine new private sector banks have established operations in
the country.
In order to strengthen their competitiveness, the banks could consolidate through strategic
alliances. The Narasimham 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
the problem of weak banks but only after cleaning up their balance sheet.' The
Government has tried to find a solution on similar lines, and passed an ordinance an
September 4, 1993, and took the initiative to merge New Bank of India (NBI) with
Punjab National Bank (PNB). Ultimately, this turned out to be an unhappy event.
Following this, turned out to be an unhappy event. Following this, there was along
silence in the market till HDFC Bank successfully took over Times Bank. Market gained
confidence, and subsequently, the market witnessed two more mega mergers. The
merger of Bank of Madura with ICICI Bank, and of Global Trust Bank with UTI
Bank, emerging as a new bank, UTI-Global bank.

Important Observations:
 There is a need to take into account labor standards, and adopt suitable long
term employment policies both at the National and International levels more
appropriately at this juncture when restructuring banks via M&As cannot be
wished away.
 The pace of Mergers and Acquisitions in banking sector has been augmenting
during the last five decades .The major factors like globalization, technological
changes and regulatory flexibility have triggered the mergers and acquisitions of
banks today.
 The recent developments in Europe, America and Asia indicate that the Merger
activity in the banking sector is going to continue. In the Indian banking sector,
the concern is to have a uniform policy for M&A decisions.
 There appears to be poor accounting standards the countries have and are
going for the cross-border Mergers and Acquisitions. There are two methods of
accounting used in Mergers and Acquisitions. Pooling method is limited to the
business combination in which purchase consideration is paid in terms of equity
shares whereas purchase method is applied in the cases where consideration is
paid in terms of cash, equity or debt or any other combination thereof. The
changes that Financial Accounting Standard Board(FASB) have made still fall
short of creating global standards, but it is said that it is a step in the right
direction to bring about uniformity in the reporting standards to ensure
transparency and understandability of accounting reporting.
 There is a change in the banking operations which are increasingly becoming
customer-dictated. The ability of the banks to offer clients access to several
markets for different classes of financial instruments has become a valuable
competitive edge. In short, the domestic economy is viewed as an increasing pie
which offers extensive economies of scale that only large banks will be in a
position to tap.
 The Indian banking system would therefore see consolidation through Mergers
and Acquisitions and a co-existence of both National and International players.
It is foreseen that :
a) 3 or 4 large globally competitive banks;
b) 8 to 10 national banks with a network of branches throughout the country engaged
in ‘Universal banking;
c) The remaining local banks and Regional Rural banks being the niche players.
 It is also viewed that as traditional competition advantages vanish, the pace with
which banks accept the new paradigms of globalization would determine winners
and losers.
 The fact that though consolidation through mergers and acquisitions may be the
requirement of the future, the domestic banking sector should be driven by the
market-related parameters such as size and scale, geographical and distribution
synergies skills and capability.
 The emerging market dynamics like falling interest rate regime which makes the
spread thinner, increasing focus on retail baking, enhanced quest for rural credit,
felt the need for augmenting more profits especially from operations, reduction of
NPAs in absolute terms, the need for more capital to augment the technology
needs etc., are the major drivers for mergers and acquisitions in the banking
sector.
 It is also observed that while the merger process is obviously a change initiative,
the human element is more vital for its success as without a positive mindset of
the human being, no change initiative can be a successful venture. It is further
observed that in order to achieve the desired results of the merger exercise
especially in banks, one needs to recognize the complexities and continuous
learning involved in understanding HR perspective of mergers and acquisitions
and to draw and implement a viable plan for change in the collective
behaviours,attitudes and mindset of the work force which translates such
mergersplans into workable solutions.Only then the gains of consolidation would
be achieved for its sustainable competitive advantage.
 It is to point out the important facts that in order to realize the benefits and
failures of consolidation, there is a need to evolve standard principles which could
incorporate the international best practices in consolidation and avoid the pitfalls
in the process. Such principles could act as guideposts in the process of
consolidation in the Indian Banking industry.
 It is also viewed that the corporatisation of public banks would not alter the basic
characteristics of the banks, but at the same time, provide some distinct
advantages for consolidation.
 With increasing globalization, attaining “size” advantages will be critical for
higher capital standards under Basel II Accord, consolidation in Indian Banking
industry will become imminent. However, it is pointed out that there is a need to
address the issues including maximizing synergies in terms of regional balance,
network of branches, HR cultures, asset commonality and legacy issues in respect
of technology.
 Mergers and acquisitions are the order of the day, it is necessary to put in place a
legal infrastructure which will satisfactorily resolve different issues of the
different stakeholders like depositors, shareholders and employees. It is also
suggested that the institutional issues like tax-sops to the transferee bank and
dissolution of the shell company of the transferor bank etc., is to be looked into.
  Mergers and acquisitions could lead to reduction in costs for a variety of reasons.
Consolidation can lead to increased revenues through its effects on firm size, firm
scope and the market power. It is concluded that the emerging scenario would
look as follows:
a) SBI and its associates would form a single entity in the next of the couple of years
b) Nationalized banks would consolidate into 4 or 5 banks in the medium term
c) The private banks would consolidate into not more than five banks over a period of
next five to seven years.
d) The overall consolidation could result in the present 49 banks(other than foreign
banks) would get reduced to less than 12 banks in the medium to long term.
 Mergers and acquisitions in the banking sector has significant relevance for the
future course of retail banking industry. Consolidation would take the banking
sector to a threshold of core competency based banking. With most banks,
private, public and foreign, aligning themselves to distinct competencies in
various segments of banking, their asset portfolios hold the key to market
segmentation-driven by M&A in the banking sector.
 Banks would look for strengthening their presence in some segments or
diversifying by acquiring complementary retail banking assets or divesting
certain lines of business. It is viewed that this journey will witness consolidation
resulting in a few players focused on key market segments. Further it is viewed
that banks would align themselves in to their respective focus segments and
buying out ‘geographies’ and ‘large’ segmental retail assets will be the
underlying mantra in most of the M&As, the industry is likely to witness.
 Global banking industry is consolidating in order to eliminate the excess
capacity and the fact that today public policies are encouraging banks to merge.
Consolidation is to build stronger financial sector. It is expressed that leveling
the playing field between foreign and domestic banks is important for a
competitive setting.
 The landscape for both regional and national banking mergers would evolve
since the same corporate owner would be able to segment and cross-promote the
products of both banks without losing the customers. Further the concern of the
central bank over the banking consolidation and its effect on systematic risk and
the stability of the financial system are expressed. A serious concern about the
Indian banks, out of which only 6 banks rank within the top 500 banks in the
world.
 The Indian banking sector must be restructured. The author suggests that the
transition could be like Argentina and Thailand which encouraged domestic
acquisitions and selectively opening the banking sector to foreign competition
which led to 2-3 local players and presence of foreign banks.
 The role of management and the expectations of the investors and it is seen that
consolidation is often seen as a route to stepping up the growth and expanding
market share. Consolidation is seen as only an enabling step towards realization
of the synergies .
 The tangible benefits of a merger would take longer time and may require
changes in the structure of the merged entity. It is summarized that there are
reasons for cautious optimism. While ‘big bang’ form of consolidation is
 unlikely it is possible that a stream of activity may unfold if the environment is
supportive. It is expressed the similar banks may face challenges when
confronted with the task of merging into a single balance sheet and evolve a
consistent business model. Indian banks have demonstrated their ability to
change slowly but steadily. Consolidation may require them to hasten this
process.
Conclusion:
There are various aspects and advantages of consolidation in banking industry. It
can be concluded that the success of a bank depends on profitability and low cost of
the products and marketing policy. This is possible by large volumes and reduction
in operational cost. This large volumes and reduction in costs as well as a strong
base can be built through consolidation of banks by mergers. It can be concluded
that the process of consolidation in Indian banking is a must. Further it is stated that
banks should be of an ideal size and strength to offer competitive pricing of the
products and sustain in a competitive atmosphere. The consolidation of banks
would be a win-win situation for all parties as under:

Sl Parties Benefit
No.
1. Banks Sound financial position, large business, large assets,
benefits of core banking solution, networking and state of
the art technology, large profits, improved investor
confidence.
2. Customers Better and competitive pricing of all products including
services, better services, improved and upgraded
technology.
3. The Government of Better monitoring, interaction with less number of CEOs,
India& The easy implementation of policies, convenience in
regulatory i.e, surveillance due to better and updated technology, higher
Reserve bank of dividends.
India
4. Rating agencies Better or improved rating of Indian banks
5. Foreign Safety of funds,better investment opportunities,Negotiable
Institutions/NRIs environment,Indian banks of International standards.
6. Other entities Sound and large Indian banks,no risk in performance of
dealing with the the contracts and obligations,safer investments and higher
Indian banks dividends,better deal.
The Indian banks should diagnose their competitiveness. Indian banks, who aspire to
become truly global players, should be prepared to face full force global competition on
their home ground.

There is a definite need to develop a merger review process and to identify the authority
that will be responsible for conducting the merger review process. It is high lighted that
even if merger is to be accepted as a normal business decision in the banking sector, the
critical role played by the banking in the payment and settlement systems of an economy,
a merger review process is definitely needed. Protecting the safety and soundness of the
financial system is the most important consideration that would be evaluated while
examining the merger between the banks. Since RBI has the necessary experience and
information due its supervisory role, RBI will necessarily have to be the nodal agency for
conducting the merger review process.

The interests of the stakeholders of both companies should be adequately safeguarded.

The challenges by integrating people, culture, knowledge and common understanding

to assimilate different style of operations prevailed before and after consolidation
should be paid due attention The importance of Human Resource strategy during the
Merger and acquisition process cannot be ignored. The critical components of the
Human resource strategy during an M&A would include:
a) Grade and compensation benefits parity
b) Organization culture and values alignment
c) Communication
d) Roles and goals alignment.

The paper suggests that it is good to create a steering committee to oversee the
implementation of HR strategy during the M&A process. The leadership would go
through a turbulent time during an M&A process and also it still critical it remain on
top of things. Cultural integration would definitely be an issue and has to be addressed.
The paper concludes with the fact that M&A means Synergy. Any strategic intent,
however lofty, would be ultimately delivered on the ground by the people of the
combined organization.

Consolidation is an inevitable process in the banking sector as banks seek to reap

economies of size. Mergers and acquisitions are considered useful to achieve the requisite
size in the short run.
The 21st Century may see the dawn of “Darwinion Banking”. Only the banks that could
fulfill the demands of their markets and changing times would survive and prosper.

Globalisation of Indian economy has resulted into innovations in banks in India. The
importance of sophisticated or high technology for improving customer service,
productivity, and operational efficiency of banks is well recognized. As a part of their
action plans, Indian banks have introduced many new techniques and a considerable
degree of mechanization and computerization in most of their operations. Banks have set
up exclusive data network for communication known as BANKNET. For this they have
established SWIFT (Society for Worldwide Inter-bank Financial Telecommunications),
through which the banks can communicate with their branches or other banks in national
and international network.

Another change that is taking place is the large scale use of cards in place of cash for
settlement of financial transactions. Banks are slowly adapting to provide non-cash based
services. Transactions through electronic mode are gaining importance.
Now-a-days banks are undertaking innovations in savings bank account, internet banking,
retail banking, corporate banking, investment banking, innovations through networked
ATMs, portfolio management services, depository-participant services and
dematerialization.

The Indian banks are no longer physical buildings, but they have become a global
business and they need to think globally to be successful. The road is bumpy but we have
drive on it to reach our destination.

References:
1) Compendium of Papers-Theme of Indian Banking: Realizing Global
Aspirations, Bankers’ Conference (BanCon) 2004-10th &11th Nov
2004,New Delhi.Inuagurated by Shri A.P.J.Abdul Kalam,Hon’ble
President of India-hosted by Punjab National Bank.
2) Indian Banking: Realizing Global Aspirations”-Special Address by
P.Chidambaram, Hon’ble Finance Minister, Govt. of India.
(BanCon).
3) The Chartered Financial Analyst, Dec 2005. ICFAI University
Press.
4) ‘Praxis-Business Line’, Oct 2005.
5) Professional banker, July 2005, ICFAI University Press,
6) Indian banking, 2005. ICFAI University Press.
7) IBA Bulletin, Jan 2005, Vol XXVII, No. 1
8) The ICFAI Journal of Mergers and Acquisitions, Jan 2006, ICFAI
University Press.
9) IBA Bulletin, Jan 2004, Vol XXVI, No. 1.
10) IBA Bulletin, June 2004, Vol XXVII, No. 6.
11) The ICFAI Journal of Mergers and Acquisitions, June 2004, ICFAI
University Press.
12) Frontline, Vol 21,Oct 2004.
13) Treasury Management, Dec 2004. ICFAI University Press.
14) Palgrave McMillan, New York, 2003, pp.275.
15) Advances in Mergers and acquisitions, Vol 2, Pg 1-26, 2003.
Elsevier Science Ltd