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Project Report

An Analytical Study on
Consolidation of Banking
Sector in India


Institute of management Technology

Distance Learning Programme

Submitted By
Name : Himanshi Jain
Enrollment No. : 52102486
Address for : C-242/Yamuna
Correspondence Vihar, Delhi-
Mobile No. : 9891772894
Resume of : Yes
Project Guide
Consent Letter : Yes
from Guide
Specialization : Finance
Date of : 30/03/2008
Guide’s Resume
G-599, Second-A, Nehru Nagar, Ghaziabad Amit Bhargava

Date of Birth : 18th Feb. 1981

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

Qualified Chartered Accountant
from ICAI.

Professional Experience : Banking, Merchant Banking,

since April 2006 working with
SMC Group of Companies as
Manager Finance (Member of
*National Stock Exchange,
*Bombay Stock Exchange,
*National Commodity Exchange,
* Multi Commodity Exchange),
Registered Insurance Broker.
17, Netaji Subhash Marg,
Daryaganj, New Delhi-110002.

Responsibilties : * Funds Management

* Finalization of Account
* Commission Handling of
franchisee in the channel
* Internal Audit of Account
* MIS report for funds
planning for Directors &
* Currently undertaking
the responsibility of
Merging of M/s SAM
Global Securities Ltd.(Listed
at Guwahati Stock
Exchange) with M/s SMC
Global Securities Ltd.
(Listed at Ludhiana Stock

(Amit Bhargava)


Chapter 1 Introduction

Chapter 2 Profiles of Indian Banks

Chapter 3 Main Mergers, Acquisitions & Consolidation

Chapter 4 Main Driver For The Merger Acquisitions & Consideration

Chapter 5 Relevance of Merger, Acquisitions & Consolidation

Chapter 6 Experience & Limitations of Merger & Consolidation

Chapter 7 Findings & Suggestions



Institute of Management Technology,

Distance Learning Programme,


Sub: Consent Letter


This is to certify that the synopsis on the project entitled “An

Analytical Study on Consolidation of Banking Sector in India”
presented by Ms. Himanshi Jain, student of MBA bearing enrolment
no. -52102486(session 2005), in partial fulfillment of the requirement
for the award of degree of MBA, is a bonafide work carried out by him
under my supervision.

In my knowledge, this work has not been submitted, either in part or in

full, to any other institute for the award of degree or diploma.

Thanking You,

(Amit Bhargava)
Consolidation Mergers & Administrations is gaining its strength
from competition that emanates not only almost the banks. But also
from other segments of financial sector. Consolidation Mergers &
Acquisitions in the financial sector is an open challenge across the
global world.

A spiriting wave of Consolidation Mergers & Acquisitions across the

global has heralded a sea change in the nature of financial sector.
Since the financial sector is gearing to move towards Basel-II issues
pertaining to consolidation gain momentum and this is visible in our
country as well.

Market led mergers may gain prominence in the coming years.

This study is divided into seven chapters.

Chapter-I Describe the Introduction, Significance of Problem &

Objective of study.

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

Sector, Foreign Sector & Regional Rural Banks as well.

Chapter-III Describe the Main Mergers & Acquisitions–Historical

Perspective Phase Wise.

Chapter-IV Describe the Main Driver for the Consolidation, Mergers &
Acquisitions-factors each aspect.

Chapter-V Describe the Relevance of Consolidation, Mergers &

Acquisitions Local as well International level.

Chapter-VI Describe the Experience & Limitations of Mergers,

Acquisitions & Consolidation-Govt. role as well as R.B.I. role.
Chapter-VII Describe the Whole hearted summary of the findings &
Suggestions fully discussed.
Chapter – 1: Introduction
Statement of the problem:

Financial management is an integral part of overall corporate

management; Finance plays an extremely crucial role in the continuity
and growth of a business.

Main banking is changing its shape and color. Fit has to retain its
human face such that the current offers bear fruit for a large number of

The expansion phase after Nationalization which was maker by

geographical and numerical proliferation of bank branches, developer
some weakness such as low profitability, poor customer service,
mounting non-performing assets and over staffing etc. For making the
medium banks competitive profitable and vibrant in the long run,
financial sector reforms which were introduced in the early Nineties of
the last century based on the Narismham committee recommendations
of 1991 & 1998.

The phase witnessed the liberal entry of private and foreign banks,
operational freedom to the banks, deregulation of the interest rates,
reduction in the statutory reserve requirements of statutory liquidity
ration and cash reserve ratio, introduction of international norms of
accounting in terms of capital adequacy, income recognition asset
classification and provisioning etc. These changes brought
competitiveness in the Indian banking industry and profitability became
the core business objective of the banking sector.

Liberalization, deregulation and global integration of banking

activities have increased the risks of the banking industry in depth and
Banks being aware of the risk dimension of their business are
proactively devising their internal mechanisms for anticipation,
identification and management of these risks, which was more of less a
neglected area before the introduction of financial sector reforms.
This phase has been characterized by following features:

The nationalized banks have started rationalizing their branch

network by shifting, merging and closing down the non-viable
branches. The opening of new branches is based purely on business

Indian banks are passing through the phase of mass

communication the twin objectives of handling which are the increasing
volumes of business effectively on one hand and improving the
housekeeping and customer service on the other. The computerization
will provide level paying filed for nationalized banks in relation of
foreign and private sector banks.

Computerization has rendered the manpower surplus in the

banking industry, which led to introduction of voluntary retirement
(VRS) in the nationalized banks with a view to rationalize the

The increasing competition among banks with the entry of foreign

and private sector banks has increased the customers’ expectations on
one hand and the rationalization of rate of interest and service charges
has reduced the profit margins on the other because of the decreasing

The increasing competition has made the banks more customers


The increasing competition and shrinking profit margins led to the

voluntary merger of the banks for going competitive edge, such as
merger of bank of Madura with ICICI Bank, Times bank with HDFC bank
and ICICI Ltd. with ICICI Bank, IFCI with IDBI and Global Trust Bank with
Oriental Bank of Commerce.

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

long way to go. Legislative changes are taking place for making the
banks more transparent and viable. International accounting standards
are being introduced in a phased manner with a view to make the
Indian banks, internationally competitive with sound capital base. The
banks are experiencing the pressure of competition in the form of
changing customer requirements. Customers’ retention and thinking
spreads. To cope with these pressures the banks are becoming more
and more customer friendly by introducing the tailor made products
suiting to various segment of the population. For coping of with the
problem of profitability, banks are adopting tow pronged strategy by
diversifying their activities to increase non-interest in-come on one
hand controlling the operational expenses by rationalizing their
network and workforce, on the other.

The small and medium sized banks, including some of the

nationalized banks are finding it difficult to survive in the long run
because of the increasing competition and squeezing profit margins
there by leading towards phase of merger and acquisitions in the final
phase of the consolidation.

The emerging scenario after the consolidation phase will be

dominated by existence of five to six nationalized banks having global
presence and strong capital base with few private banks of all India
character coupled with small regional banks suiting to local
requirements. This phase is likely to last by the end of present decade.

In the era of globalization the organization will have to be

competitive in order to face the challenges. “Survival of the fattest”
has become a reality in most of the sectors including with entry of
foreign players.

Desire to become “Champion” is important to become strong

through consolidation mergers and acquisitions. With regard to India it
is worth while to mention that merges between banks worded be of
advantages only if it takes into account the synergies and
complementarities of merging units.

It is clear that the banking sector has need and continues to need
to execute almost magical transformation to be successful. Each and
every aspect of life is touch by banking sector now a day.

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

generally accepted that mergers promote synergies. The basic idea is
that the combined bank will create more value than the individual
banks operating independently. Economics refer to the phenomenon of
the “2 + 2 =” effect brought about by synergy. The resulting combined
entity gains from operating and financials synergies operational
synergies generally refer to gains in economics of scale and economies
of scope.

The Indian banking industry consisted of 97 commercial banks-28

public sector banks 20 private sector banks and 42 foreign banks, 196
regional rural banks, 52 scheduled Urban cooperative banks and
scheduled state cooperative banks. The growth of the banking industry
in India may be studied in terms of two broad phases:-

1. Pre-Independence 1786 to 1947

2.Post-Independence 1947 to till date

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


Evolution of the Indian Banking Industry


Evolution of Indian Banking

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

Pre-Nationalization Post Nationalization Post Liberalization

(1947-1969) (1969-1991) (1991

Classification of Concepts:-

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

single Company where one survives and the others loses its corporate
existence. The survivor acquires the assets as well as liabilities of the
merged company or companies.

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

companies all assets, liabilities and stock of one company stand
transferred to transferred company in consideration of payment in the
form of equity shares of Transfer Company or debentures or cash or a
mix of these modes.

Acquisition: It is the purchased by one company of controlling interest

in the share capital of another existing company. These means that
even after the takeover although there is change in the management
both the firms obtain their separate legal identity.

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

amalgamations as a blending of two or more existing undertaking into
one undertaking, the share holders of each blending company
becoming substantially the share holders in the company which is to
carry on the blended undertaking. Two or more banks combine to form
a new entry in India the legal terms for merger is amalgamation:

Take over: It is generally involves the acquisition of a certain block of

equity capital of a company which enables the acquirer to exercise
control over the affairs of the company, normally merger/amalgamation
and acquisition/tank over are used interchangeably.

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

They have built a pan Indian branch network. They have developed a
store house of expertise in lending to different sectors including
agriculture and small and medium enterprises. Public sector banks
have been the sharpest instrument in increasing the degree of financial
inter-mediation in the economy. These achievements deserve to be
applauded. The point however, is that public sector banks or for what
matter any bank cannot rest upon their or its laurels, especially at time,
when unprecedented opportunities knock at their doorsteps, when the
freedom for action is complete and when the price for in action may
threaten their very survival.

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

have responded admirably. Among these the financial sector,
especially banking reforms took as deep root. In the banking sector, the
mindsets that were cultivated after independence also changed. The
new challenges are therefore, not greater or more formidable than the
challenges that we have overcome.

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

wing where with we fly to heaven.”

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

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

Scheduled Banking Structure in India #

(As on March 31, 2005)

Scheduled Banks in India

Scheduled Commercial Banks Scheduled Co-operative Banks

Public Private Foreign Regional

Sector Sector Banks Rural
Banks (27) Banks (29) Banks (33) Banks (196)

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

Nationalized SBI & Its Old Private New Private

Bank (19) Associate Sector Banks Sector Banks
S (8) (21) (9) (8)

Chapter – 2
Profile of Indian Banks
Today in the world’s top 1000 banks, there are many domestic
banks from the developed countries than from the emerging
economies, out of the top 1000 banks globally; over 200 are located in
USA, just above 100 in Japan, over 80 in Germany over 40 in Spain and
around 40 in the UK. Even China has as many as 16 banks within the
top 1000, out of which as 14 are in the top 500.

India on the other hand had 20 banks with in the top 1000 out of
which only 6 within the top 500 banks with the great Talent available in
India which sees Indians in many important positions in global banking
as also the well established technology services sector of India, which
is the main frame work on which modern banking is based it is
imperative that we restructure our financial and banking sector to
make it more globally competitive with domestic as also global

Consolidation of Banks: Statistical overview:


Data regarding all nationalized Banks

Rs. Crore
2002-04 2004-05 2005-06
Actual Actual Estimate
Total deposit 6,88,081 7,93,947 9,00,000
Total Advances 3,60,140 4,12,224 5,00,000
Total Income 79,598 85,787 95,000
Net Profit 7784 11,003 14,000

Average Figure: per public sector bank & per nationalized


As per estimates of 2005-2006

Rs. Crore

Total deposit 47368

Total Advances 26315
Total Income 5000
Net profit 737

Now assume that the state bank subsidiaries are merged with
state bank of India and other nationalized banks are merged with each
other and the number is reduced from exiting 19 to 8. The figure will be
as shown under:

Consolidation will help drive down in intermediation costs

Operating Cost/Average Cost

(A) PSU. Banks

(i) Top 5 2.4
(ii) Next 10 2.52 Avg 2.45
(iii) Remaining 737

(B) Private Sector Banks:

(i) Top 5 1.59
(iii) Remaining 1.82 Avg 1.79

(A) Foreign Banks:

(i) Top 5 2.91
(iii) Remaining 3.03 Avg 3.01

[Source: RBI Mckinsey analysis]

No. of Banks Total Assets

[Source: IBA Bulletin Special Issue]

In India we have four category of banking players public Sector
Banks (PSU) old private Sector banks, new private banks and foreign
banks. There are 6 banks whose asset size is high than Rs.80000 crores
such banks constitute 50% of the overall total assets of the industry. 15
banks whose assets size between Rs.10000/- crores and below
Rs.25000/- crores constitute 14% and there are 12 banks whose assets
size below Rs.10000/- crores constitute only 4% form this it is apparent
a few banks managing a larger proportion of total banking assets is

The 2nd Narasimham committee report was the first to make the
proposal for the process of consolidation in the PSUS suggesting that
they should be brought down to 3-4 global entities and 5-6 national
entities. India is a hugely over banked and under serviced country.
There are close to 100 scheduled commercial banks 4 non schedule
commercial banks and 196 regional rural banks.

The SBI and its seven associates have about 14465 branches; the
19 nationalized banks have 36927 branches; The RRBS have 14773
branches and foreign banks around 276 branches. So the scheduled

SBI 14465

National 36927

RBS 14773

Foreign Both 276

Other Schedule Bank 3363

Besides, there are a few thousand cooperative bank branches on

an average one bank branch caters to 15000 people. However only one
bank – State Bank of India is among the top 100 banks in the world.
Consolidation is this imperative in the Indian banking industry.

Despite gains in efficiency, consolidation can also pose

considerable challenges by way of integrating people, culture,
knowledge and common understanding to assimilate different style of
operations prevailed before consolidation. Fusing formal systems and
processes is a Hercules task and it become more complicated due to
disruption in existing system. Consideration through merger can be
easier if it is operational through rapid advancements in the
communicate system, rule base management system and universal set
of guidelines and standards.

Need for Consolidation of Banks:-

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

Number of branches, volume of business asset size, capital and
reserves etc are interchangeably considered as the size of a bank.
However while considering the size of a bank it is necessary to link the
size with bank’s profit and efficiency. Profit revenue and cost functions,
including the managerial efficiency, are affected by the bank size. On
the other hand, there is a limit to ‘scale economics,’ which allows the
average cost to fall and average revenues to rise with increase in size.
In other words the scale benefits are limited up to certain level of size.
Similarly the ‘scope economics’ allow a bank to divisibly its business
and product mix to maximize its revenue. However the scope
economics also to a certain extent can have a favorable influence on
the revenue. Managerial ability to control costs, which is more
important than scale and scope economies, is also deemed as critical
success factor that comes into play beyond size consideration for
The importance of size in the performance down-in of blanks can
be outlined as follows:

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

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

introducing product diversification.

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

- Risk diversification is possible with large size and larger

geographical reach.

- Fund mobilization and deployment will be easy with large size

leading to larger market share.

- Large banks can operate preferably with thinner margin

compensated by sheer volumes.

The literature on scale economies in banking is mostly confined

to the US economy,

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

and consolidation took place. In the US case most of the studies found
evidence of scale economics for small banks.

Most recent studies on scale economy have used flexible

functional forms like ‘translog’ to indicate the ‘U-Shape’ of average cost
curve to include the possible potential cost variation. The emerging
view of the recent scale economies literature is that the average cost
cure in banking has relatively ‘flat U Shape’ with medium–sized banks
being more scale efficient than very large or small banks.

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

M – Mixing

E – Entities
R – Resource for

G – Growth

E – Environment

R – Renovation
Consolidation is inevitable and Need of the Hour:-

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

Keshari and Paul–1994 who took deposit as output. Ray and Sanyal.
1995 found large economies of scale in cost structure of banks, which
decrease with increasing size. Their estimates centered on PSBs and
cost of capital was not considered by the author. Chattergee-1997
using bank deposits as an output measured the scale economies of
SCBs and found the same conclusion that small blanks do feature
inherent economies of scale. Srivastava-1999 found that Indian banks,
particularly PSBs are operating at scale below the optimum size. Using
Ray scale economies and expansion path scale economies, Srivastava
concluded that large size provides gains to cost efficiency for in India.

In India top banks by size are also top by size of profit though
lagging behind in performance indicator. All over the world, the effect
of size of the bank has been widely discussed and in fact India is
relatively slow entrant into the subject. The topic attained heat in
recent times with the failure of many banks due to low risk absorbing
Capacity and lack of protecting the shareholders’ interest. Added to
this, the market power of the banking sector is increasing owing to
globalization. Banking is one among the largest and most profitable
industries in both domestic and global markets. This is hardly surprising
since the banking business has become global before globalization
becomes a buzz word. Now is has become imperative for banking
industry to get consolidated to with-stand storms and shocks what-So-
ever be so that they will not shiver and wither from being shaken by
the global market forces.

Refocusing the bank to grow the “good bank” and make enough
profits is the new mantra of banking sector. In a quest to achieve there,
banks are expanding their branch network, increasing their technology
investment and enlarging their business operations.
“Banking Industry: Vision 2010” document prepared by 1 BA in
Nov. 2003 clearly felt that consolidation in the Indian sector was
imminent. If the consolidation process has to take place smoothly it will
be necessary to look at the legal, regulatory, accounting, HR and
technology related issues proactively.

New Models for Restricting RRBs:

The 196 RRBs to gather have 14433 branches in 516 districts

spread over 22 states of the country. Thus they control about 37% of
rural branches of all banks. They have about 19% share in rural
deposits and 21% shave in rural credit of all banks.

RRRS Nationali SBI and Foreign All

zed Its Banks SCBS
Banks associat
1. Cash Deposit 6.31 6.69 4.89 6.58 6.35
2. Credit + 77.07 99.14 105.51 134.13 104.66
Dep. Ratio
3. Ratio of deposit 79.32 86.99 79.16 59.56 79.88
to total
4. Ratio of Term 53.41 63.75 63.03 66.22 65.14
deposit to Total
5. Ratio of secured 94.13 87.15 87.56 67.43 75.63
advances to
total advances
6. Ratio of Intt. 9.02 8.86 8.66 7.85 8.71
Income to total
7. Ratio of wages 85.47 70.74 71.10 31.95 63.11
bills to
8. Ratio of wage 27.81 21.37 19.7 12.49 18.32
bills to Total
costs Exp.
9. Ratio of wage 24.28 16.41 15.18 8.62 14.07
bills to total
10. Return on 1.04 1.04 0.96 1.59 1.05
11. Return on 4.40 19.50 20.89 15.21 18.57
12. Cost of 6.43 6.21 7.02 5.31 6.46
13. Cost of Funds 6.43 6.20 6.88 5.26 6.20
14. Return on 11.5 9.82 9.04 10.70 9.93
15. Return on 12.98 10.18 9.74 8.28 9.80
16. Return on 5.13 3.62 2.16 5.44 3.73
adjusted to cost
of funds
17. Return on 6.45 3.99 2.86 3.02 3.60
adjusted to cost
of funds

So RRBs to be effective should be converted into one seamless

organization of all India structure with a single owner to fully top upon
the core competencies of the RRBs. The administrative model on the
lines of SBI 9one control office with state level LHOs) can work best for
such a single bank for rural Credit delivery.

Need for a Merger Process

Advocates of banking consolidation believe that M & As of banks

will produce more efficient and healthier banking system less prone to
failure. The benefits and synergies from bank consolidation are
obvious. The enlargement of banks through mergers would increase
the competitive strength and raise the efficiency of the system due to
economies of scale. Again globalization of banking consolidation is that
it might lead to reduction in bank lending to small business Excessive
risk exists when merger/acquisition is very rapid without adequate
managerial and financed capital to manage the expansion.

In India merger and amalgamation of banks are not new between

1969 and 2005 a total of 26 banks were merged, largely on a voluntary
basis for strategic purposes. But in recent years particularly after 1991
even profit-making banks have been merged to achieve the number or
position. No one has studied the real benefits of such mergers. We
have not come across any study to shoe that during the post-merger
period transaction cost have fallen for customers or that the enlarged
banks have provided better services at the same cost prevailing before
merger. The general opinion is that only the corporate business class
and upper-mid-class can enter multinational banks or banks like ICICI
and HDFC.

There are a lot of small players in the Indian banking sector. The
industry structure is fragmented in India. Also even as India is among
the top countries in the world in respect to GDP its strength is not
reflect in the banking space. The average market capitalization on the
top there players in India is at $9 billion which is third from bottom.
Though China is the lowest now at $ 5 billion, things will change fast
after the new issuance from China. Now consolidation is the trend
which will take place sooner or later in India as well.

Larger the Better

Some indicators of performances of three Banks:-

Operating Expenses
(In crores)

S.N Bank 02-03 03-04 04-05 05-06 06-07

1 HDFC 5771 810 1055 1691 2421
2 ICICI 2012 2571 3299 5001 6691
3 PNB 2051 2371 3278 3023 3326
Return on Assets

(In crores)

S.N Bank 02-03 03-04 04-05 05-06 06-07

1 HDFC 1.52 1.45 1.47 1.38 1.37
2 ICICI 1.13 1.31 1.48 1.30 1.09
3 PNB 0.98 1.08 1.17 1.07 1.03

Business for Employee

(In crores)

S.N Bank 02-03 03-04 04-05 05-06 06-07

1 HDFC 865 866 806 758 607
2 ICICI 1120 1010 880 905 1027
3 PNB 195.65 228.22 176.87 330.92 407.41

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

90% of total assets for HDFC Bank went up from .93% in 1995-96 to
1.95% in 2002-03, in case of ICICI Bank the operating expenses
increased from 1.05% to 1.88% during the same period. In 2003-04 the
ratio increased to 2.05% but in case of PNB, there has been a slight fall.
Profitability too has been on the decline for both ICICI bank and HDFC
Bank. Thus merger policies of these banks have not resulted in
mitigation of operational cost. And it has not helped improve profits.
Though the business per employee had shown significant increase
which could very well be on account of longer working hours. This
becomes obvious when they are compared to PNB with substantially
lower level of business per employee. The PNB’s working hour maybe
much less than those in ICICI and HDFC banks.
But market forces are the driving force behind bank consolidation.
There is an increase in competition and quality and quality in services,
though at an increasing operating cost. Further the increased
diversification resulting from bank consolidation should make for a
healthier banking system less prone to crisis. However the growing
banking consolidation and the increasing competitive environment
resulting from this process are going to face some challenge.

The RBI will have to be vigilant to make sure that banking

consolidation does not lead to excess risk taking by banks seeking
exponential growth through acquisition or unhealthy concentration in
certain activities. Banks some-time makes mistakes by having excess
exposure in illiquid assets or by having adverse selection or investment
in volatile assets. This has happened in 1980 in the west when
depositor lost money due to banks risky exposure. Today we do not
know the project-wise exposure of leading private banks. Depositors
can’t spot whether or not banks are taking excessive risk in the course
of consolidation and restricting.

If a large bank fails, the entire sector will face enormous strain
care must be taken to prevent such failures. So if the finance ministry
has decided to merge public sector banks, it should ensure that the
merging banks go through identical corporate governance through
various training programs at all levels to introduce comparable
competence and culture of work. The management, post merger, will
have to treat at human resource equitably.

The presence of large banks in greater numbers in future would

make the supervision of these institutions to ensure that they are
healthy and are not taking excessive risk.

An uphill task of course though banks supervision and increase in

competition due to wide spread consolidation is certain to result in
higher levels of development and economic growth.
“Chorus for banking reforms gets louder.” Morgan Stanley says
India must join consolidation wave sweeping developing countries-
Economic Times Oct. 08-2005.

Business for Employee

Population-Group 1995 1998 2001

Nationalized Banks -- -- --
Rural 14.48 13.02 13.39
Semi-urban 16.27 15.68 15.51
Rural+Semi urban 30.75 28.70 28.90
Urban 24.47 22.82 22.68
Metropolitan 44.76 47.92 48.90
Urban+Metropolitan 69.23 70.74 71.08
PSBs -- -- --
Rural 13.83 13.02 12.69
Semi-urban 18.50 18.40 17.99
Rural+semi-urban 23.33 31.42 30.68
Urban 24.56 22.92 22.74
Metropolitan 43.09 45.63 46.56
Urban+metropolitan 67.65 68.55 69.03
Chapter – 3

Business for Employee

Historical Perspective:
The banking system in India went through various stages before it
emerged into modern banking systems with increase in trading and
administration of East India Company. The early banking system of
banias, chetty, sahukaras, podars and shroffs was replaced by banks
established by English agency houses during the end of eighteenth
century. But almost of all them failed due to failure of parent agency
houses during the trading crisis of 1829-33 as they mixed bank with

The next set back by the banks was faced during 1862-65 during
American Civil War, which led to a speculating boom in the Indian
cotton trade, as a result of which many banks and Companies were
formed. Although almost all of them failed as soon as Civil war was
over and the boom collapsed. The three presidency banks set up by
respective Govt., also failed due to handicap of inexperience and their
inability to conduct foreign exchange business.

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

enclosed as Table-1.

Business for Employee

Founded Failed year Name of Bank Where

year Merged F/M Founded
1720 1770 F Bank of Bombay Bombay
1770 1832 F Bank of Hindustan Calcutta
1773 1775 F Bank of Bengal & Bihar Calcutta
1784 1791 F Bengal Bank Calcutta
1786 1791 F General Bank of India Calcutta
1808 1920 M Bank of Calcutta/Bank of Calcutta
Bengal 1808
1819 1928 F The Commercial Bank Calcutta
1824 1829 F The Calcutta Bank Calcutta
1829 1848 F Union Bank Calcutta
1833 1866 F The Agra & United Agra
Service Bank Ltd.
1835 1837 F The Bank of Mirzapore Mirzapur
1840 1859 F North Western Bank of Mussoorie
1840 1920 M Bank of Bombay: Re- Bombay
formed in 1868
1841 1842 M Bank of Asia London
1841 1849 M The bank of Ceylon Colombo
1842 1884 F The oriental Bank Bombay
1842 1863 F The Agra saving fund Agra

1843 1920 M Bank of Madras Madras

1844 1850 F The Banaras Bank Banaras
1844 1893 F Shimla Bank Ltd. Shimla
1845 1866 F The commercial Bank of Bombay
1845 1851 F The conpore Bank Kanpur
1846 1862 M Dacca Bank Dacca
1852 1855 F Chartered Bank of Asia London
Chartered Mercantile
Bank of India London &
1854 1857 F The London and Eastern London
Banking Corp.
1854 -- The Comptoir D’ Paris
Escompte of Paris
1860 -- Central Bank of Western Bombay
1862 -- Bank of Rohilkhand Rampur
1863 -- Punjab Bank Ltd. Rawalpindi
1863 -- Sind Punjab & Delhi bank Calcutta
Corp. Ltd. Leading to
Grindlays Bank
1865 -- Allahabad Bank Allahabad
1881 1858 F The Oudh Commercial Faizabad

Source: IBA Bulletin

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

growth of Indian banking picked up pace and between 1900-1914 a
large number of new banks camp up. Further the growth of Indian
banks suffered its first and major set bank in 1913, during the worst
ever banking crisis in India, starting before the war and accentuated by
it followed by post war depression (1922-23) wherein the rate of bank
failure was very high and thereafter followed by incident of partition
during 1947.

Probably till that time no proper attention was paid to rescue these
banks besides proper controlling and monitoring, to check the failures.

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

with new power it acquired in 1949 under banking companies Act to
intervene in the event of crisis in a bank, the picture totally changed.
The failure of Math bank created a panic among the depositors and had
it not been for the amalgamation of four banks in Bengal into United
Bank of India, there might well have been another major banking crisis
with the liquidation of two scheduled bank the Laxmi Bank and the
Palai Central Bank in 1960, several small and medium sized banks
experienced serious runs on them. It was the first and appropriate tool
to provide relief to ailing banks besides maintaining public and
depositors’ confidence in banking system in the country hence, a new
section 45 was inserted in banking companies Act in Sept. 1960.

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

central Government for amalgamation of a banking unit with a well
managed bank with in a period of hot more than six months
moratorium granted by the govt. on an application made earlier in that
behalf by the RBI. One advantage of compulsory amalgamation over
liquidation is that the depositors get immediate credit to the extent of
readily realizable assets at the common of the amalgamation additional
payments being make as and when the remaining assets are realized.

Thus in 1961 alone thirty banks were merged compulsorily with

other banks. As a consequence of improved atmosphere, banks failure
decreased, while the number of mergers amalgamation and transfers
in-creased from one in 1954 to twenty two in 1963 and seventy nine in

The idea behind this merger to strengthen the banking system,

small, weak and insufficient upon scheduled banks which could hardly,
if ever have become viable and eligible for a license, were being
merged with other scheduled bank. It is evident that the basic objective
of banks mergers of amalgamation in this period was to check the
frequent failure of banks and to save them from facing crisis and
maintaining public confidence.

A brief list of banks mergers, amalgamations transfers of assets

and liabilities are given in Table-2


Year Voluntary Compulsory Other Transfer Total

Amalgamations merger mergers of Assets
under section under and
44-A section 45 Liabilities
1950 4 -- -- -- 4
1951 2 -- -- 1 3
1952 -- -- 4 -- 4
1953 -- -- 1 2 3
1954 -- -- -- 1 1
1955 -- -- -- 3 3
1956 -- -- -- -- --
1957 2 -- -- 2 4
1958 4 -- 2 1 1
1959 4 -- -- 4 8
1960 2 -- -- 5 7
1961 1 30 2 3 36
1962 3 1 2 5 11
1963 2 1 4 15 22
1964 7 9 1 62 79
Total 31 41 19 101 192

Source IBA Bulletion

Consolidation process:

The consolidation process of Indian banks has started in early 1960

itself. The rapid branch expansion resulted in stretching beyond the
optimum level of supervision and control. The banks were faced with
losses. Then there were a series of policy initiatives taken by the RBI.
As a result of these measures, there was marked showdown in the
branch expansion and attention was paid to improved housekeeping,
customer service, credit management, staff productivity and
profitability of banks. Steps were also taken to reduce the structural
constraints that obstructed the growth of banking industry.

Banks merged since 1961:

All the banks listed below (except new bank of India) were
amalgamated under section 45 of the banking regulation Act 1949
while the new bank of India amalgamated under section-9 of the
banking companies (Acquisition of undertaking) Act 1980.
Besides these banks, from 1960 to June 1993 there were 21
voluntary amalgamations, 18 merges with the SBI or its associates and
132 transfers of assets and liabilities.

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


Sr. Name of Bank Merged With whom Date of merger

No merged
1 Prabhat Bank Ltd. National Bank of 09.03.1961
Lahore Ltd.
2 Indo-Commercial Bank Punjab National 25.03.1961
Ltd. Bank
3 Bank of Nagpur Ltd. Bank of 27.03.61
4 New citizen bank Ltd. Bank of Baroda 29.04.61
5 Travancore forward bank State Bank of 15.05.61
Ltd. Travancore
6 Bank of Kerala Ltd. Canara Bank 20.05.61
7 Bank of Poona Ltd. Sangli bank Ltd. 03.06.61
8 Bank of new India Ltd. State bank of 17.06.61
9 Venadu bank Ltd. South Indian 17.06.61
bank Ltd.
10 Wankaner bank ltd. Dena bank 17.06.61
11 Seasia midland bank Ltd. Canara Bank 17.06.61
12 Kotlayam orient bank State Bank of 17.06.61
ltd. Travancore
13 Bank of Konkan Ltd. Bank of 19.06.61
14 Poona investors bank Sangli bank 28.06.61
15 Bharat Industrial bank Bank of 01.07.61
ltd. Maharashtra
16 Rayalaseema bank ltd. Indian Bank 01.09.61
17 Cuttack bank ltd. United Bank of 04.09.61
18 Pie Money Bank Pvt. Ltd. Syndicate Bank 04.09.61
19 Moolky bank ltd. Syndicate Bank 04.09.61
20 Merchants bank ltd. Tagore 04.09.61
permanent bank
21 Tezpur industrial bank United bank of 04.09.61
ltd. India
22 G. Raghunathmull bank Canara Bank 04.09.61
23 Satara Swadeshi United western 06.09.61
commercial bank ltd. bank ltd.
24 Catholic bank ltd. Syndicate Bank 11.09.61
25 Phaltan bank Sangli bank ltd. 07.10.61
26 Jodhpur commercial Central bank of 16.10.61
bank ltd. India
27 Bank of citizen ltd. Canara banking 17.10.61
corp. ltd.
28 Karur mercantile bank Lakshmi 19.10.61
ltd. commercial bank
29 Peoples bank ltd. Syndicate bank 14.1.61
30 Pratap bank ltd. Lakshmi 11.12.61
commercial bank
31 Unity bank ltd. State bank of 20.08.62
32 Bank of Algapuri Ltd. Indian Bank 14.08.03
33 Metropolitan bank ltd. United Industrial 06.02.64
bank ltd.
34 Chochin Nayar bank ltd. State bank of 08.02.64
35 Salem Shri Karur Vysya bank 01.06.64
Knnukaparameshwari ltd.
bank ltd.
36 Unnao commercial bank Bareilly corp. 12.08.64
ltd. bank ltd.
37 Latin Christian bank ltd. State bank of 17.08.64
38 Southern bank ltd. United industrial 24.08.64
bank ltd.
39 Shri Jadeya Shankarling Belgaum bank 26.10.64
bank ltd. ltd.
40 Bareilly bank ltd. Banaras state 16.11.61
bank ltd.
41 Thiya bank ltd. Lord Krishna 16.11.64
bank ltd.
42 Allahabad trading & BKG State bank of 16.11.64
corp. ltd. India
43 Vettaikaran padur Bank of madura 01.09.65
mahajan bank ltd. ltd.
44 Malnad bank ltd. State bank of 06.10.65
45 Josna bank ltd. Lord Krishna 13.10.65
bank ltd.
46 Amrit bank ltd. State bank of 03.02.68
47 Chawla bank ltd. New bank of 13.04.69
48 Bank of Behar ltd. State bank of 08.11.69
49 National bank of Lahore Do 20.02.70
50 Miraj state bank ltd. Union bank of 08.11.69
51 Lakshmi commercial Canara bank 24.08.65
bank ltd.
52 Bank of cochin ltd. State bank of 26.08.85
53 Hindustan commercial Punjab National 19.12.86
bank ltd. Bank
54 Traders bank ltd. Bank of Baroda 13.05.88
55 United industrial bank Allahabad bank 31.10.89
56 Bank of Tamilnadu ltd. Indian overseas 20.02.90
57 Bank of Thanjavur ltd. Indian Bank 20.02.90
58 Parur central bank ltd. Bank of India 20.02.90
59 Purbanchl bank ltd. Central bank of 29.08.90
60 New bank of India Punjab national 04.09.93
Some of banks merged after the reform process started are listed
61 Bank of Karad ltd. Bank of India 1993-94
62 Kashinath Seth bank State bank of 1995-96
63 Punjab corp. bank ltd. Oriental bank of 1996-97
64 Bari Doab bank ltd. Do 1996-97
65 Bareilly corp. bank ltd. Bank of Baroda 03.06.99
66 Sikkim bank ltd. Union bank of 22.12.99
67 Times bank ltd. HDFC Bank ltd. 26.02.00
68 Banaras state bank ltd. Bank of Baroda 20.07.02
69 Nedungadi bank ltd. Punjab national 01.02.03
70 Bank of Madura ICICI Bank 2001
71 Global trust bank ltd. Oriental bank of 24.07.04
72 Centurion bank Bank of Punjab 01.10.05

[Trends and Progress in Banking] Source-RBI

In the wake of globalization, the international experience has

shown a steep surge in mergers and convergence in the banking
industry and their efforts have shown remarkable result in their profit.
It is observed that return on assets of a large number of banks that
under took mergers and acquisition increased immediately after the
merger and continued to remain higher in successive years.

Further, lowering of entry barriers and inviting foreign investment

in the industry, the banking sector is already experiencing symptoms of
excess capacity. This trend is likely to be accentuated as more and
more national and international players are planning entry into and
already overcrowded turf.

This may force banks to consolidate into a smaller number of

larger banks. The bank for international settlements Reprt-1992 note, “
……….. forces are obliging may blanks to consolidate. Whether the
competition stems form within the industry or outside, it, ……….”. A
merger movement may become pronounced feature of the banking
industry, which may be viewed as a solution to excess capacity, a lack
of capital and to poor profitability. The 21st century may see the dawn
of “DARWINION BANKING” only the banks that could fulfill the demands
of their market and changing times would survive the prosper.

Size is a great competitive advantage for banks and this level of

fragmentation needs to be corrected so as to create 4-5 ‘right size’
banks, bank of the size of SBI with world class standards, which will
enable them to respond to the stimulus to global opportunities. Size
enables banks to lend large sums to select corporate, thereby ensuring
a better quality asset book. After all state bank of India is after the
many M & A the only bank in India ranked among the top 100 best
banks in the worlds.

The Indian banking system would therefore see consolidation

through mergers and Acquisitions and a coexistence of both national
and international players. As we envisaged by the Narasimham
committee report (1991) the broad pattern of the structure of the
banking system in India as I foresee will be:-

- 3 to 4 large globally competitive banks

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

country engaged in ‘Universal’ banking.

- The remaining local banks and regional rural banks being the niche
players. As traditional competitive advantages vanish, the paced
with which banks accept the new paradigms of globalization would
determine winners and losers.

Structurally the banking sector displays a high degree of

fragmentation. The market share of the top 5 banks in India is
41.5%. The market share of the top 10 banks is 57%. As against this
china the market share of the top 5 banks is 75% and that of the top
10 banks is 85% with the entry of new private sector banks, the
banking sector has become even more fragmented in the reform
year since 1992.

It is widely believed-based on empirical evidence sector.

Consolidation, completion and risk management are no doubt critical to
the future of banking but it is our belief that governance and financial
inclusion would also emerge as the key issues for a country like India at
this stage of socio-economic development.
Chapter – 4

Main Driver for the consolidations

Mergers & Acquisition

Looking the global trend of consolidation and convergence, it is

need of the hour to restructure the banking sector is India through
mergers and amalgamations in order to make them more capitalized,
automated and technology oriented so as to provide environment more
competitive and customer friendly.

Few most important impediments for paving the way towards

merger and amalgamation on commercial consideration and mutual
arrangements, such as Government share holdings of public sector
banks, legal provisions relating to banking and industrial matters must
immediately be resolved if at all the pace of M & A (Merger &
Acquisition) has to be accelerated in Indian banking Industry.

In order to boost the mergers and acquisition, consolidation on

commercial considerations, following points should be taken case of:

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

viz; Govt, Banks, Union and staff etc.

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

towards friendly relations with a view to get best possible results
out of available resources.

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

on the basis of capital, business, performance, system and
procedures, technological advancement, geographical presence
etc. should come up voluntary for mergers and amalgamations.

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

‘Cooperation and not competition’ need of the hour:

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

the process of globalization would gain momentum. In the banking
system all over the world the following changes are visualized:

i. Consolidation of players through mergers and acquisitions.

ii. Globalization of operations

iii. Development of new technology

iv. Universalization of banking

With technology acting as a catalyst, banking segment except to

see great changes in the coming years.

Objective behind mergers and acquisitions in banking Industry:

The people objectives behind mergers and acquisition may be

highlighted as given below:

- The overcome the problem of slow pace of growth and profitability

due to widening of banking industry. The public sector banks have
to compete both with the private banks and the foreign banks both
in terms of products and service parameters.

- To revive a loss making bank as it may not able to restore the non-
performing assets (NPA) on its own.

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

geographical coverage in best possible manner.

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

merger is vertical or conglomerate.

- To limit competition and prevent. Overcrowding and mushrooming

up of many banks.
- To gain economies of scale and increase income in proportion to
less amount of investment.

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

physical and managerial skills.

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

amass vast economic power.

Dominant Factors:

A number of issues emerge in the consideration of expected

continuation of bank M & A activity high on the list is what factories are
likely to dominate in future bank merger and acquisitions. In their 1996
article, Spiegel and Govt. compiled a list of factors motivating bank
merger and acquisition activity:-

a. Revenue growth from a larger customer base

b. Efficiencies in operations

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

d. Diversification of income from both products and geographic area

f. Optimal deployment of excess capital

g. The search for higher value of common shares.

(A) Revenue Enhancement:

Consolidation can lead to increased revenues through its effects on

firm size, firm scope i.e. through either product or geographic
diversification as market power. Research suggests that mergers may
provide some opportunities for revenue enhancement either from
efficiency gains or form increased marked power however, many
indicated that revenue enhancement due to increased size was a
moderately important factor motivating consolidation.
The merger of ICICI Ltd. and ICICI Bank clearly demonstrate in the
Indian context that consolidation can lead to increased revenue.

(B) Efficiencies in operations:

Mergers and acquisitions can lead to reductions in costs for a

variety of reasons. The existing research literate, which focuses on cost
saving attributable to economies of scale, economies of scope or more
efficient allocation of resources, fail to find much evidence suggesting
that cost saving constitute an important out-come of M As. However,
many pointed to economics if scale as a very important motivating
factor for consolidations.

(C) Ability to spread fixed Cost over a larger customer:

Base: New technological developments have encouraged consolidation

because of their high fixed costs and the need to spread these costs
across a large customer base. At the same time, dramatic
improvements in the speed and quality of communications and
information processing have made it possible for financial service
provider to offer a broader array of products and services to larger
numbers of clients over wider geographic areas then had been feasible
in the past.

(D) Diversification of income from both products and

geographic area:

The one area where consolidation seems most likely to reduce firm
risk is the potential for diversification gains, although even here the
possibilities are complex, such gains are most likely to arise due to
assets, Diversification across geographies; some gains may also derive
from geographic diversification on the liabilities side of the balance
sheet. In addition, diversification gains may result from consolidation
cross financial products and services. On the other hand after
consolidation some firm’s shift towards riskier asset for folios and
consolidation may increase operating risks and managerial

For example, organizational diseconomies institution become

larger and move may occur as financial complex if senior management
teams stray for their area of core competency. More broadly, there is
no guarantee that cost saving or efficiency gain will be realized.

(E) Stabilization of asset quality: Small sized banks with weaker

assets would find it difficult to survive in the long run as they need
to meet the additional capital requirements.

The exit route for such banks will be to get absorbed by banks with
strong asset quality.

Average net N.P.A. %

Table-1 [Rs. crores]

Asset size

<1000 -- NPA Level 4.98%

25000-8000 -- -- 2.68%

>8000 -- 3.33%

[Source IBA Bulletin]

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

of 1-2 percent and average for the Indian context around 2.5 percent is
width in the acceptable range. The average NPA level for the banks
whose size lesser that Rs.1000 crores is around 4.98% which
substantially high weaker asset quality necessitates infusion of
additional capital and hence Stabilization of asset quality is important.

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

work, requires a huge cost outlay:
RBI has indicated the desire that banks must more towards
adopting standardized approach for credit risk management and basic
indicator approach for operational risk management as per Basle-II
frame work.

Effective credit risk assessment is fundamental in banking and it is

an especially important skill in India where credit satins and traded
security prices are less available as additional information for credit
risk managers. There are very limited data default histories. Even if
there is data, calculating the key variables of Basle-II default
probabilities, loss given default and so on would not provide a good
guide to the current situation, because the economic environment in
which banks operate has changed so much since the mid–1990.

The New Basle-II

Capital Accord

Minimum Supervisory Market

Capital Review Discipline
Requirement Process

Pillar-I Pillar-II Pillar-III

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

basis of a long period of time, preferably through a full economic cycle.
In such circumstance, the skills of credit risk manager are very
Default probabilities and loss given default are terms used in the
context of Base-II‘s pillar one, the minimum capital requirements.
Basle-II however is more than just its pillar-I it is based on three pillars.
An important innovation of Basle-II is the incorporation of supervisory
review into the international framework.

This second pillar it is critical that the minimum capital

requirements set out in the first pillar be accomplished by a robust
implementation of a supervisory review process, including efforts by
banks to assess their capital adequacy. This is expected to result in
bankers and regulators engaging more focused discussions of risk
management pillar 2 recognizes that national supervises may have
different ways of entering.

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

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

Hence under the changing environment of implementing Basel-II

framework, the small banks tend to lose out their competitiveness. The
way out of this situation is to go for consolidation and this would ensure
creating shareholder value as against destroying shareholder value if
no action if taken.

(G) Search for high value of shares

Increased competition has helped to squeeze profit Margins,

resulting in shareholders pressure to improve performance.
Importantly, share holders have gained power relative to other
stakeholders in recent years. This development is expected to
continue, as it is the result of a structural move towards the
institutionalization of savings.

Table – 2
Average PAT (%) Across Asset Size

<Rs. 10000 crs. -- 18.66%

Rs.1000 – 25000 crs. -- 22.70 %

Rs. 2500-80000 crs. -- 25.35%

>Rs.80000 crs. -- 23.04%

IBA Bulletin Special

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

among the various stake-holders. There are several parameters under
which one could measure whether the business is really creating
shareholders value. One such important parameter is the profitability of
the overall business. It is not enough that net interest margin is high,
lower NPA etc. but in addition the share-holders look at learning per
share accusation year on year. It is interesting to note that almost all
size of banks are generating profit and hence the share holders interest
is currently taken care of completely, however the equity market has
reacted differently for different type of banking categories.


The banks having similar technology can be merged:

Table –3

Bank Core Banking Solution Vendor

Bank of India Finacle Infosys

PNB No Finacle Infosys

ICICI Bank No Finacle Infosys

IDBI Bank No Finacle Infosys

Axis Bank No Finacle Infosys

Bank of Rajasthan No Finacle Infosys

Bank of Punjab No Finacle Infosys

Alternatively the technology can be developed to convert the data

of the bank having different technology. There will not be much
problem on this account.

⇒ The large number of branches and the manpower can be controlled

through the upgraded technology. With the core banking solution
the more number of units will not matter. Further the manpower can
be managed by using technology.

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

there by addressing the problem of maintaining balance throughout
the country.

⇒ The productivity of the merged entity will improve and most of the
other problem will be solved automatically.

⇒ Imparting training to the employees. The training will help improving

knowledge and developing skills amongst the employees. Their
attitude can be changed through training. They can be prepared for
change and work in a new environment. They will accept the change
for their betterment, better remuneration, better facilities, well
furnished and decorated branches and better working conditions.

Chapter – 5

Relevance of Consolidation, Mergers and acquisitions

Consolidation in Banks: Legal Problems and Solutions

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

popularly known as the bank nationalist ion Act, and the banking
regulation Act, 1949 govern nationalized banks. While SBI is governed
by the State Bank of India Act, 1955 and the seven associate banks of
SBI are governed by the SBI (subsidiary banks) Act, 1959, private banks
are covered under the Banking regulations Act 1949.

Section 44-A of the Banking

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

another private Bank. However the provision of the BR Act does not
clearly spell out mergers and acquisitions among the public Banks
(PSUs) without the intervention of the RBI.

Section of the BR Act gives RBI powers to apply to the Govt. to

place banks under a moratorium and prepare a scheme for

A legal framework for consolidation in the banking sector is how

being put in place to consolidated legislation governing both public and
private banks instead of separate status existing now. A committee
was formed (by Indian banks association) IBA for drafting a legal
framework for consolidation in the domestic banking sector. The
committee has already finalized the report and sent to the Govt. of
India for further action.

The new umbrella legislation could suggest a single composite

banking law that could govern all state owned banks, the state bank of
India and its seven associate banks, and all the private banks.

Emergence of two Scenarios

There could be two basic banking structures that could emerge.

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

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

1. First Structure:

It is perfect fit for the new private sector bank taking over an old
smaller banks or a group of smaller banks.

We are summing here an existing new private sector bank taking

over a smaller bank or a group of smaller banks.

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

emerges at the largest player in the private sector bank. There is
always a possibility for HDFC Bank to merge with HDFC Ltd, and
hence it could be reckoned as another large player.

Private Sector ROA % NIM Total Assets

Bank 31.3.07 (
ICICI 1.09 2.6 344658
HDFC 1.33 4,32 360548

Source: ICICI


Private Sector Market ROA % NIM % Total Assets

Bank 31.03.04 Share % Rs.Cr.
1. ICICI Bank 6.87 1.09 2.6 344658
2. HDFC Bank 2.15 1.33 3.68 360548
3. UTI Bank 1.30 1.27 4.32 21882
4. Federal .81 1.00 1.00 13658

Source: ICICI


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

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

It could be seen that though the ROA is almost same for ICICI Bank
and HDFC Bank, the NIM is much higher in the case of HDFC Bank and
this could be due to how cost of resources. It is also interesting to note
that the PAT (Profit after Tax) for ICICI Bank is 33% against HDFC Bank
at 28%. How could be a scenario, when NIM is lower and where as the
PAT is higher for ICICI Bank? This could be due to larger proportion of
other income or due to large asset size. The asset size is critical for the
profitability of the business and hence the asset size is below a
threshold limit, it could destroy share holders value.

There are 18 banks whose market share is less than 1% and for
these banks to sustain the pressure in the medium to long term in the
changing scenario is going to be difficult. For e.g. Technology
advancement for providing service meeting Basel-II requirements for
risk management would require additional infusion of funds. The fixed
could be spread over when the asset size is large and otherwise, this
will not be economical.
The scenario that could emerge will be that each of new private
sector bank such as ICICI Bank, HDFC Bank merged entity of IDBI Bank
absorbing 4 or 5 old private sector Banks.

II Second Structure:

Consolidation within the nationalized banks/PSU Banks:

A) Consolidation with the SBI group:

The consolidation within the SBI group is always on the cards. The
group is will be integrating risk management practices SBI group
as one entity in the future will become a largest bank in the

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

one third of the market share. SBI is already a player who is well
positioned to be on the global map. It is important for the group not to
lose the market share.

(B) Consolidation within the nationalized Bank:

A cluster approach could emerge in the Case of nationalized

banks. There are 5 banks with size of over Rs 80000/- Crores each of
the banks could look at absorbing one bank in the size category of Rs
25000-80000 crores. In additional they could absorb one bank with size
less than Rs 25000 Crores. The ideal scenario will be that not more
than five banks among the nationalized banks to remain in the long
run. The process of M & A is comparatively for the nationalized banks
as the controlling interest is with the Govt. of India.



Charting the End objective:

While charting the end objective the consolidation strategies must

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

or a niche player.

2). Whether plans for foreign banks as joint venture partners or what is
the desired pattern of share holding.

3). Apply international accounting norms for computing capital


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

efficiency in line with international benchmarks.

5). The desired business lines and product offers.

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

consideration for selecting the right candidate.

7). The weak banks have an exit strategy.

Is Relationship Banking at Risk?

Many believe that a consolidated environment may threaten

relationship. Borrowers might be tempted to switch to other banks, or
to the financial market. Borrowers, however face and equal challenges
how to benefit from competitive pricing without jeopardizing the
benefits of relationship. This is the relationship puzzle. The relationship
puzzle has no obvious solution.
What might be true is that a bank-dominated system invites
oligopolistic behavior such that completion is contained while a market-
dominated system suppresses competition less.

Experience & Limitations of Mergers and


The current Scenario:

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

of public sector banks. With the merger of crisis ridden Global Trust
Bank (GTB) with Delhi based oriental Bank of Commerce, Bank of
Punjab Ltd. With centurion Bank a new chapter has begun in the history
of banking sector. According to the reports published in the Economics
Times, about half a dozen public sector banks are fishing for acquisition
tar-gets in the region where they are recessive sector as well and then
the Indian banks will have to prove their “Global Competence” and only
then Indian banking industry will be able to stand right forth the global
banking “Competition hurricane.”

M & A –Indian Experience:

Merger of Laxmi Commercial bank with Canara Bank of Karad Ltd.

Bank of India, Hindustan Commercial Bank, New bank of India,
Nedugandi bank with PNB, Global Trust Bank Ltd. With OBC, Bank of
Punjab with centurion Bank and IDBI Bank are not intended to create a
big bank, but the weak banks are merged with strong banks by
considering it as the better solution at that particular point of time.

The past experience being as such now Indian banking industry is

moving towards it true sense of consolidation for creation of globally
competitive strong big banks.
After the report of Marasimham committee, the new bank of
India-a nationalized bank, governed by banking (Regulation) Act 1949,
Banking (Acquisition and transfer of under takings) Act 1980 banking
nationalized Act 1970/80 was merged with PNB nationalized bank,
governed by the same acts, both having its has office at New Delhi.

RBI under its supervisory and controlling role observed that New
Bank of India was incurring heavy losses, NPA’s were becoming high,
quality of assets were deteriorating and financial position was so
unsatisfactory that its capital and to some extent the deposits were
eroded under the circumstances in order to safeguard the depositors
interest and image of banking. RBI suggested to central govt. that it
could serve public interest if the said New Bank of India is merged with
another stronger nationalized bank. But due to various constraints viz;
non-clarity of legal provisions regarding adjustment and written off or
loss against capital/reserve, political uncertainty, relocation of
branches, redeployment of manpower, affect on seniority/promotion to
staff, cultural and systemic integration etc. number of cases were filed
in various courts, which took about 5/6 years to get finally resolved by
supreme court of India.

In spite of all these things the amalgamation of Bareilly

Corporation bank Ltd. With Bank of Baroda was mainly guided by need
of requirement of capital and net worth, which BCD Ltd, was advised to
maintain through RBI directives. Further recent mergers and
amalgamations of Banaras state Bank with Bank of Baroda and Global
Trust bank with the oriental Bank of Commerce were also mooted with
similar objectives.

Hence we can say that merger and amalgamation in India

banking so far has been to provide the safeguard and hedging to weak
bank against their failure and that too at the initiative of RBI, rather
than to pave the way to initiate the banks to come forward on their
own record for merger and amalgamation purely with a commercial
view and economic consideration.
M & A at international level

International experience:-

An important force of change taking place in the world wide

banking industry is consolidation. A major outcome of the financial
sector reforms in a large part of the developed world has been
consolidation of banking industries.


Mergers & Acquisitions activity in banking industry in selected

country of the world 1991-1998

Numbers Value ($

Countries 91- 93- 95- 97- 91- 93- 95-96 97-

92 94 96 98 92 94 98
1. Austria 35 19 21 7 1.07 0.4 1.04 2.08
2. Belgium 22 18 12 7 1 0.6 04 5.01
3. France 133 71 49 24 2.4 .5 6.1 1.3
4. Germany 71 83 36 25 3.5 1.9 1.1 19.3
5. Itlay 122 105 94 24 5.3 6.1 6.2 8.7
6. 20 13 8 8 0.1 0.1 2.2 0.4
7. Spain 76 44 26 13 4.3 4.5 2 0.7
8. United 71 40 22 11 7.5 3.3 22.6 2.3
9. United 1354 1477 1083 628 56.8 55.3 114.9 107.6
10. 47 59 27 7 0.4 3.9 0.5 23

Source BIS working paper No-54

Stage of Bank consolidation in different European

S. No Country Stage
1. Germany Starting
2. France Starting consolidation, political constrained
3. Italy Consolidation rapidly getting underway
4. Spain/Portugal Another round required to complete bank
5. UK Still expect serval defining transactions to
complete bank consolidation
6. Austria Completing bank consolidation
7. Nordic Region High degree of domestic retail bank
consolidation-now cross border and
8. Benelux Netherlands-substantially complete now
cross border in Belgium
9. Switzerland Substantially completed

Source-The Banker London,

An overview of the financial services industries in the world
indicate that steeps surge in the trends of consolidation is talking
place. The data in the table-1 shows that while in most of the countries
no. of mergers have reduced the value involved in them has increased
many folds.

Merger in Asia:-
Merger and acquisitions activities in Asian countries are not as
frequent as witnessed in America and Europe. Mergers and acquisitions
has already been started in countries like Philippines, Korea, Singapore,
Japan, Saudi Arabia and soon it will pick up the pace like other
countries of the world.
Merger:-An overview of performance would include an analysis of
important aspects of mergers among top 200 banks. A review of post-
merger performance and significance of size of banks that merger and
their performance discussed below.
− 48% of the target banks were having ranging from 5 to 50% of
capital of the acquiring bank 52% of target banks were having
capital ranging from 51 to 98% of the capital of the acquiring

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

25% capital of the acquiring bank, while in case of 20%
difference between the capital of acquired and largest bank was
only 15%.

− Assets of approx. 46% cases of the target banks was of the range
up to 50% of acquiring banks, while approx. 54% cases of the
target banks were having assets more than 50% of assets of
acquiring bank.

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

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

Limitations of M & As:

The probable limitations that every merger might

have to face are:-

i) Dysynergy Effects:-

It is very important that before merging the

two banks should take into consideration the
nature and extent of synergy which they have.
Generally it is sees that if the two combining
entities differ in their work culture then the
synergy might go negative and this brings
about dysynergy.

ii) Striving for bigness:-

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

most important yardstick for the measurement
of success. But beyond the particular size, the
economies of scale turn into diseconomies of
scale. Thus while evaluating a merger or
acquisition proposal, the focus should be on to
create or maximize the share-holders wealth
rather than increasing the size.

iii) Failure or integrate well:-

It is said that “sometimes even a best strategy

can be ruined by poor implementation.” A post
merger or post acquisition integration of the
two banks is must. Although this is an
extremely complex task-just like grinding east
and west together.

iv) Threats and effects of mergers:-

v) Whatever the motives driving M & As, many fear that the
quest for size is leading to the unhealthy creation of super
banks. Sectoral consolidation and reduction in competition
suggestion no immediate benefits for customers or staff who
find them-selves in the front line of rationalization and having
to bear the burn of its casts. Consistent with the findings of
many others a study by the bank of international settlements
(BIS) reports the experience of the majority of mergers as
“disappointing” with organizational problems almost inevitably
under estimated and most acquisitions overpriced, nothing the
creation of banks “Too Big to Fail”

The super banks short size and unwieldiness can

encourage complacency and offer no more protection against
failure. However the failure of such huge banks would be of
such consequence that host govt. may be forced to use
taxpayers money to bail out any which encountered difficulties
because of the serious implications for the financial system;
consequently, this “virtual insurance policy” allows large
financial institution to pursue imprudent credit and investment
policies. It is the having ‘wounded giants’ which carries
systemic risk along with them.

Merging units tend to under-perform the industry in the

first merger years, mainly due to problems with credit quality
and below average generation, this merger driven
consolidation is raising important public policy concerns,
notably with respects to employment, indeed the
announcement of a merger is usually accompanied by an
announcement of cost-cutting redundancies context their
consumer gains and maintain that they only result in
employment losses and diminishing access to services.

Mergers can also result in poor credit flow to small business

segments and a lion share may go to corporate sector thus
effecting the economic cycle.
A merger or acquisition or takeover upsets the links
between implicit and explicit in a company based on trust
between managers and workers; between employers and
employees. Integration of links requires harmonization of
various aspects of terms and conditions of employment to
ensure common practice in the combined organization that
may change existing human resource management practices
of either or both organizations.

In some banks resistance from the community to the entry

of an investor bringing in fresh capital could well be less. A few
years ago Bank of Madura where the chattier community held
a lot of shares, was merged with ICICI bank, here the
community did not oppose the dial since the then chairman
KM Thyagarajan also chattier convinced the community
members to agree.

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

many banks would be unwilling partners. For instance united
western bank will look at options like rights and may be
preferential allotment to pure financial investors, rather than
merge itself with another bank, perhaps the same holds true
for the Kerala based catholic Syrian bank. But bank like city
union bank or Rajasthan could be more open to a merger with
another bank.

According to a banker associated with the Lord Krishna-

Federal Bank merger deal there could be different
considerations at play. The Lord Krishna employees are not
unhappy since the deal will not unsettle their lives and
careers. If the bank was merged with a nationalized bank
hundred would have been transferred outside Kerala, while a
severance scheme would have followed if LKB was acquired by
a new generation private bank. It was an old private bank
acquiring another with a similar culture.

However, there is no thumb rule. A community which

associates itself with a bank, will not agree to merger with
another bank controlled any another community which share
similar feelings. Such a bank would perhaps approve of a
merger with a public sector banks. But in such cases the
present law does not allow a normal merger through
exchanges of shares. A PSU bank can acquire a private bank
only if the later is a basket case. The precondition is that the
private banks capital has been wiped out. Such mergers are
messy, draw bad press and could be politically embarrassing
since these are preceded by a moratorium on depositors
withdrawing funds.

Under the circumstances, the regulator, the regulator has

to wait till the bank slips to a point of no return. It is possibly
time that the central bank and the govt. push through a
change in law to a allow mergers of govt. and private banks
through the accepted share-swap route.

More so, because for many old, private, public sector banks
could be the only takes: first it would quicken consolidation in
the banking sector; second these banks would have more
options and certainly fetch a better price as the merger would
happen before the capitals eroded; and third this would not be
opposed even by the most hardboiled trade unionist.

The creation of very large banks also heightened concern

about systemic risk. The increased potential of systemic risk
created by large size banks also intensify concurs about there
being considered “To big to fail” (TBFT) strict prudential norms
and supervisory guidance assumes all the more significance in
such a converged and consolidated environment.

RBI Lays down M & A Norms:-

Reserve banks lay down mergers and acquisitions norms for the first

It can be said that bank merger must now pass through Mint-Street.
Norms as under:

− The regulator cannot be side stepped to push through a

merger between a non-banking finance company and bank by
moving the court of law.

− A ‘Voluntary’ merger between two private banks must be

approved by two third of the total board members and not
those present alone.

− The directors who participate in such meeting must be

signatories to existing corporate governance covenants.

− Before merger proposal is put to vote by share holders.

− The banks boards must disclose valuation details; financials

share price movements among other things to RBI.

RBI has said the guidance would also be applicable to mergers

between public sector banks which have been opposed by the
left parties significantly, this the first indication of the central
bank’s support to PSU Bank mergers. However, there is no
legal provision for paying off a dissenting share holder of a
PSU Bank.

Findings & Suggestion

While consolidation is in many ways a natural response to our

rapidly changing banking environment, it will also facilitate financial

− Weak banks that are threat to the system will be weeded


− Public sector banks have been relatively poorly valued as

against the private sector. Consolidation will ensure fair

− Basel-II due to be implemented by 2007 will require in

increased capital commitments from all banks as well as
increased transparency and accountability to both
regulators and the market, Geographic expansion allows
banks to diversify risks by exploring more avenues for
profitable business in the global market. Port folio risk on
the asset side and funding risk on the liability side would be

− Indian banks would also have a presence at both ends of

the transition of the Indian business expanding overseas.

− Stake holders would benefits due to reduced inter-

mediation cost and consolidation would also benefits
employees in the banking system since it would lead to
retraining and re-skill of the work force enabling personal
Thus Indian banking industry expects consolidation to
set in motion several future benefits arising out of
synergies between business. However there are risks
involved in realizing this synergy value primarily related to
technology, integration, work culture and human resources.
These issues head to be sorted out very early for the same
success of any M&A.

Technology is the fundamental force driving the

merger wave but the benefits of the technology revolution
accrue optimally only to large scale banks. Technology
enables the banks to share customer wallet, lowering the
cost of servicing a customer and increased profitability of
even smaller branches.

However, critical areas that need careful

consideration for integration of different technology
platforms and software which not only have process and
control implications but may involve substantial costs in
terms of money and time and retraining of personnel.

The process of mergers and acquisitions required the

assimilation of two different cultures and managing the
integration process of such diverse cultures is the greatest
problem that the banks are facing today in the post merger
of New Bank of India with PNB highlights the complexities
involved in such integration process.

Consolidation-Critical size to succeed in business:

The issue of consolidation merger and acquisitions in the

Indian banking sector has been debated for many years and intensified
recently given the large number of political and regulatory
announcements related to ownership, governance and merger
acquisition activity among banks.

Some myths associated with consolidation and

private/foreign ownership pertinent to the Indian banking industries are
as under:

Myth-I: Consolidation will “reduce” competitive and

competitive forces:-

− Competitive forces are influenced less by existing competition

and more by new entrants taking away market share through
product development and innovation.

− A great example is the rapid development of the cellular phone

industry and its impact on the fixed line service providers in
terms of both cost and services.

Myth-2: Consolidation will create people


− This is true but only partially.

− Reality is that banks like most other industries are rapidly

evolving in terms of their technology, product and organization
structure. Redundancies in traditional roles (teller operations etc)
are being more than offset by the rapid growth in new roles
(sales, marketing product, development, customer services) and
in new industries including the out sourcing industry.

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

and service parameters
− Larger organizations have greater ability to invest in technology,
thereby improving efficiency and quality of service to consumers.

− Larger organizations by virtue of scale have a lower cost, benefits

of which can be passed on to consumers.

Myth-4: Consolidation will reduce flow of credit top

priority sectors.

− Flow of credit to specific sectors is and will continue to be driven

by competition and risk-reward trade off’s especially with the
adoption of Basel-II norms on risk capital.

− Large, well-capitalized banks with strong risk management

controls will be better equipped to channel credit to all sectors
including priority sectors.

− The key is market potential profitability, risk-reward environment

and not a large number of players in fragmented industry.

− Take the example of the pioneering work being done by Yes Bank
a new generation private sector bank in the area of agriculture
and rural banking.

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

they ready to face global competitive. Hence
consolidation should be more gradual.

− To be able to complete globally public sector bank need to

urgently adopt the private enterprise model and this can only be
possible through private owner ship and management.
− The best example of this is the success of new generation private
sector banks like HDFC bank and ICICI Bank who have effectively
competed against both nationalized and foreign banks.

Myth-6: Consolidation will result in the creation of

“Large Financial conglomerates” which will be
difficult to supervise.

− Consolidation will considerably reduce the span of supervision for

regulators. Larger and better capitalized entities will also reduce
systematic risks.

− Whilst complexity associated with the diverse lines of business

and scale of inter-linked exposures will increase, effectively
policy making and closer supervision will be more easily possible
with fewer players rather than in a fragmented market.

− A good although extreme example would be the dramatic decline

of the cooperative banking in last few years.

Having attempted to address some of the myths associated with

consolidation let me turn to the issue of size and its critically to
succeed in business. The need for size and hence consolidation is
being driven by 4 global trends in the industry.

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

− Technology is expensive to procure and implement.

− Size and scale helps justify investments in up to date technology

through larger productivity gains.

2) Rapid communization of products resulting in shrinking margins:

− Banking products are normally not amenable to ‘patenting and
hence a very limited window of exclusively exits.

− Rapid replication by many competitors has resulted in shrinking

margins and commoditization.

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

3) Need to offer a comprehensive suite of products to both

corporate and retail customers:

− X-selling a number of products to customers is critical for profit

ability and return on equity.

− This implies considerable investment in product development-

people, infrastructure and investments.

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

a single or limited product set.

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

in light of commoditization and shrinking margins.

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


4) Recapitalization of banks in the light of Basel-II norms:-

− Weaker bank will find it difficult to raise sufficient capital to meet

Basel-II norms.

− Consolidation of weaker banks with stronger banks is the only

real alternative. The question is whether these should be market
determined or driven by the govt.?
− Even the stronger local banks will need to access international
market to augment capital resources and this would be difficult in
the absence of size.

Given the existing structure of market participants this can

be achieved only through a consolidation of the existing players.
Here size is critical for both survival and growth size and scale
are critical in this capital intensive industry for survival since
without size it is difficult to be competitive. Size and scale are
also important for growth since longer links with larger balance
sheets and larger customer base are better place to top new
opportunities through appropriate investment appetite.
Consolidation has to be a market determined process and the key
steps required to enable consolidation are:

• Implement and operationalise the press note issued in march

2004 where by foreign bank could have a presence in India

− 74% ownership in private sector bank.

− Setup a wholly owned subsidiary

− Operate as a branch of the foreign parent.

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

with economic interests.

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

− Ensure clarity on ownership and governance policy vis a vis

private sector banks.
− Allowing fulfledged M & A in banking sector, in particular govt.
Banks where there are major deterrents over a specific time
frame (Minimum 51% govt. holding 1% voting right and 20% FII
limit) leveling the playing field between domestic and foreign
banks is particularly important for a competitive setting. The
popular view that large banking firms are more efficient and less
risky than smaller firms or the notion that the global banking
industry is consolidating in order to eliminate excess capacity
may be some of the forces bat one cannot deny the fact that
today public policies are encouraging bank to merge.

The landscape for both regional and national banking

mergers would evolve since the same corporate owner will be
able to segment and cross promote the products of both banks
without customers.

The question is not consolidation to cover weaknesses, but

to build stronger financial sector. Though each bank and brand
can be effective and progress too, but the combined assets
systems technology platforms of the corporate parent will
mitigate the risks and extend the credit, which a singular
particular bank could have taken.

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

domestic banks from the developed countries than from the
emerging economies. According to the banker 2004 out of the
top 1000 banks globally, over 200 are located in USA, just above
100 in Japan, over 80 in Germany over 40 in Spain and around 40
in the UK. Even China has as many as 16 banks with in the top
1000, out of which as many as 14 are in the top 500. India on the
other hand, had 20 banks with in the top 1000 out of which only
6 within the top 500 banks.
With the great talent available in India which sees Indians
in many important positions in global banking as also the well
established technology services sector of India, which is the main
framework on which modern banking is based it is imperative
that we restructure our financial and banking sector to make it
more globally competitive with domestic as also global

The finance minister’s recent quote seems appropriate for

ensuring that more than 6 Indian Banks are represented amongst
the top 500 banks of the world “to attain global aspirations and
greater banking synergy, banks have to consolidate.”
Supportive Role by the Government:

The Govt. has been planning for the consolidation of public sector
banks, regional rural banks and private sector banks. The present govt.
wants merger and acquisitions of the PSBs, RRBs and private sector
banks but it does not want to impose the same and enforce it as
imperative but wants it to happen willingly. Now idea has been picking
up very fast and the govt. has started working on catalyzing the first
merger between two or three strong PSBs which may come very soon
and then the process will continue.

The decision of merger has been left to the Board of the banks
and the govt. would play a supportive role. After the merger and
amalgamation of all the banks it will be possible to have 2-3 banks of
international standards and 6-8 banks of National standards and 10-12
banks of regional levels

It is the present context that the world bank funding arm, IFC has
planned to fund the upcoming consolidation in the Indian banking
Industry in case of need. This could involve financing the tier (ii) capital
of banks by providing long term dept. this is also a step towards
improving the capital adequacy of the banks.

The consolidation of banks will be a win-win situation

for all the parties as under:-

i) Banks:-

Sound financial position large Business, Large assets,

Benefits of core banking solution, networking and the state
of the art technology, large profit, improved investor

ii) Customers:-

Better and competitive pricing of all products including

services and better improved and upgraded technology.

iii) The Govt. of India and RBI:-

It helps in Better monitoring, interaction with less number

of CEO’s, easy implementation of policies and convenience
in surveillance due to better and undated technology
higher dividends.

iv) Rating Agencies:-

Better or improved rating of Indian Banks.

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

Ultimate safety of funds better investment opportunities

negotiable environment, Indian banks of international

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

Sound and large Indian banks, no risk in performance

of the contracts and obligations, safer investments and
higher dividends better deal.

Thus the process of consolidation on Indian banking

is a must. The regulatory authority the CEOs of most of the
banks and other authorities have been pointing out that in
the text couple of years the banking industry will see a
number of banks planning merger and acquisition. The
banks should be of an ideal size and strength to offer
competitive pricing of the products and to sustain in a
competitive banking atmosphere.

It is oblivious that only large bans can offer the

lowest cost for the lending of funds and also providing
diversified services. Not only this they can also afford the
huge expenditure to be uncured for transformation and
ongoing technology up gradation. They will be ready to
face any future unforeseen challenges which may arise and
appear in future. The issue of credit risk, market risk and
operational risk will also be addressed as the consolidated
entity will be able to meet all the parameters of
international standards.

Measures have already been announced to grant

complete managerial autonomy at the public sector banks
in keeping with the clearly delineated ownership role. The
area where it is possible to make further improvement have
been identified by IBA (Indian bank association) as
remuneration package for retaining the top management
delegation of powers to the respective boards for
appointing statutory central auditors and doing away with
the jurisdictions of CBI/CVC over the offers of PSBs.

We are examining these issue but they have to

examine in the context of the implications for the public
sector as a whole. We should be in favor of a separate
dispensation for PSBs because world over banking is
regards as one of the lifelines of the economy and cannot
be equated with manufacturing or any other services.
Important suggestions towards consolidation

To sum up mergers and acquisitions will encourage banks to

gain global reach and better synergy and allow large banks to acquire
the stressed assets of weaker banks.

Merger in India between weak/unviable banks should growth

faster so that the weak / unviable banks could be rehabilitated
providing continuity of employment to the working force, utilization of
assets blocked up in the weak/unviable banks and adding
constructively to the prosperity of the nation through increased below
of funds.

The mergers cult in India has yet to each fire with merchant
bankers and financial consultants acquiring skills in grinding the banks
to absorb weak /unviable banks and but then again on successful
operations. The small and medium sized banks are working under
threats from economic environment which is full of problem for them,
VIZ. Inadequacies of resources, out dated technology/non systematized
management pattern, faltering marketing efforts and weak financial

To remove sickness from the banking industry,

consolidation/merger/acquisition is one of the best available
alternatives which require attentions from all concerns. It is rightly said,
“ United we stand-divided we fall” in a way corporate mergers
takeovers, amalgamation and damagers are bound to change
drastically and rapidly the economy in size and quality performance
through recognized corporate undertakings, combined resources and
united efforts of experience executives and skilled work force.

As the entire banking industry is witnessing a paradigm shift in

system process, strategies it would warrant creation of new
competencies and capabilities on an on-going basis for which an
environment of continuous learning would have to be created so as to
enhance knowledge and skills. There is every reason to welcome the
process of creating globally strong and competitive banks and let the
big Indian banks create big thunders internationally in the days out

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

hon’ble president of Indian Sh. A.P.J Abdul Kalam much require to be
done by the banking industry in this regard.

⇒ With the international banking scenario being dominated by

larger banks, it is important that Indian too should have a fair
number of larger banks which could play a meaningful role in the
emerging economies. Indian has only one where as China has
five and Brazil has six banks among the top twenty banks in
emerging economies.

⇒ The performance of banks in India indicates that certain

performances catachrestic are not restricted to a particular bank.
Therefore consolidation of banking industry is critical from
several aspects. Mainly the reasons for mergers and acquisitions
can include motives for value maximization as well as non-value
maximization. The factor including mergers and acquisitions
usually include technological progress, excess capacity, emerging
opportunities, consolidation of international banking market and
deregulation of geographic, functional and Product restriction.
Policy inducements such as the govts’ incentives that could
accrue to the top managers are also other important factors
which may determine the pace of consolidation.
⇒ It is found that in all major economies banking industry undergoes
some sort of restructuring process. The economy which delays this
process leads to stagnation. That is why it is important from the
point of view of long term prospects of the economy the
consolidation process should be given prime attention.

⇒ The major gains perceived from bank consolidation are the ability to
withstand the pressures of emerging global competition to
strengthen the performance of the banks, to effectively absorb the
new technologies and demand for sophisticated products and
services to arrange funding for major development products in the
realm of infrastructure, telecommunication, outlays and to
streamline human resources and skills in tune with the emerging
competitive environment.

⇒ The international experiences reveal a wide range of processes and

practices involving consolidation, their impact on the banking
market and the trend in post merger performance of banking
institutions. These experiences could provide useful inputs to the
banking policy in India.

⇒ An important observation which may be induced from various past

mergers that the merger between big and small banks led to greater
gains as compared to merger between equals. It is also observed
from past experimental if the merger follows business expansion
aided by appropriated technology and diversified product range it
could lead to greater gains for the banking industry as a whole
similarly, consolidation increase the market power and does not
cause any damage to the availability of services to small customers.

⇒ Evaluation of banks carried out by individual banks reveal that

higher capital adequacy and lower non-performing assets explain to
a greater extent the growth, profitability and productivity of banks
since increase in capital and steep reduction in non-performing
assets cannot be entirely left to the individual banks in the present
scenario. Consolidation in the banking industry is of great relevance
to the economy.

⇒ A diagnostic performance evaluation study would reveal out

important aspects of divergence in the performance of the domestic
banking institutions. A high degree of variation is found in the
performance of various groups of banks. Since PSU account for a
large share of banking assets and their lower performance ratio
reflect the entire banking industry it is considered important that
suitable consolidation process may be initiated at the earliest, so
that, the efficiency gain made by a large number of banks of other
groups will be properly reflected which could lead to a positive
impact on the image of banking.

⇒ Consolidation can also be considered critical from the point of view

of quantum of resources required for strengthening the ability of
banks in asset creation. It indicates that restructuring in Indian
banking may not be evolved across the bank groups.

⇒ Indian banks have the unique character in displaying similar

characteristics of performance despite consisting of different size
and ownership. This trend further substantiates the scope for
consolidation across the bank groups.

The issue of bank consolidation assumes significance from the

point of view of making Indian banking strong and sound; apart from it
growth and development to become sustainable international
evidences strongly indicate greater gains to the banking industry after
the consolidation process.

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

consolidation process through merger and acquisitions is long due to
address some of the structural problems that are being faced by the
banking industry in India. Sooner the process takes off, greater the
benefits to the economy as a whole.

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

sector banks is around the corner and such a situation, when it
becomes a reality will augur well especially for rural financing and the
benefits of consolidation and emergence of financially strong and
globally competitive new entities in Indian Banking will retain the local
feel and render much more effective rural lending ensuring that the
banking benefit reach out to the rural masses as well in our Indian

Indian banking is changing its shape its shape and color. It has to
retain its human face such that the current effort gear fruit for a large
number of people.


1) UNI – Europe study analyze of response 2000

2) Justin Paul – “Strategic Management of Merger Decision and Swap

Ratio Valuation.: Case study of Bank to Madura Merger with ICICI
Bank. IBA Bulletin special issue of 2003.

3) IIB Journals – Various issues and volumes.

4) RBI Bulletins – Various issues and volumes.

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

India Context.

6) Mohan Rakesh (2002), A Decade after 1991: New Challenges

Facing the Indian Economy.

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

8) Samal, B (2001); Micro level study on capital formation by small

and marginal farmers in W.B.

9) The Banker London (2004), Rural take on banking tech.

10) Virmani, A. (2004), India’s Economic Growth.

11) Srivastava, P. Size Efficiency and Financial Reforms in Indian

banking (1999).

12) Keshari, P.K. and M.T. Paul, “Relative efficiency of foreign domestic
banks (1994).

13) Chatterjee G., “Scale economies in banking-Indian experience in

deregulated era.

14) Berger, A.N. Hunter, W.C. and S.G. Timme, “ The efficiency of
financial institutions (1993).

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

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

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

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


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



1) The Hindu Business Line

2) Economic Times Daily

3) Business Sandard

4) Business India, Bombay

5) Time of India


1) IBA Report “Banking Industry Vision 2010

2) Govt. of India (1991) Report of the committee on Financial Sector

reforms (Sh. M. Narasimham).

3) Govt. of India (1998) Report of the Committee on Banking Sector

Reforms (Sh. M. Narasimham).

4) Compendium of papers: Theme Indian Banking: Realizing Global

Aspiration Bankers Conference (Ban Con 2004).

5) Database on Indian banking 1998–99 to 2002-03.

6) Transforming Indian Banking: In search a Better Tomorrow, (2002).

7) Trends in selected banking variables, 1993-94 to 2002-03

Web Sites





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

The Pennsylvania.

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

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

4. Chatterjee G. “Scale economies in banking-Indian experience in

deregulated era”. RBI occasional papers 18/1/97.

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