TABLE OF CONTENTS

S.NO TITLE PAGE NO.

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1. Introduction 3
2. Overview of Indian Banking Industry 4
3. Rationale behind Mergers of Banks 6
4. Benefits of Mergers to Indian Banks 8
5. PSBs Consolidation Building Block of $5 9
Trillion Economy
6. Emerging Issues in Merging and Acquisition 11
7. A case study on mega merger of SBI with its 12
associate banks and Bhartiya Mahila Bank
8. Conclusion 23
9. References 24
 Introduction
Banking sector is one of the fastest growing areas in the developing
economies like India. Indian economy has witnessed fast pace of growth
post liberalization era and banking is one of them. Merging in banking
sector has provided evidences that it is a useful tool for survival of weak
banks by merging into larger banks. It is found that small and weaker
banks face difficulty in bearing the impact of global economy and
therefore they need support and it is one of the most important reasons for
merger of banks. Some private banks used mergers as a strategic tool for
expanding their horizons. There is huge potential in rural markets of
India, which is not yet explored by the major banks. It strengthens their
networks across geographical boundary, improves customer base and
market share.

Objectives:

The centered objectives behind the merger and amalgamation may be

highlighted as under:

 To reduce the competition in the market.

 To expand the market without expanding the competition.

 To gain more by putting the resources together.

 To compete in the global market.

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 Overview of Indian Banking Industry
The history of Indian Banking shows that seeds of banking in India were
sown back in the 18th century when efforts were made to establish the
General Bank of India and Bank of Hindustan in 1786 and 1790
respectively. Later some more banks like Bank of Bengal, Bank of
Bombay and the Bank of Madras were established under the charter of
British East India Company. These three banks were merged in 1921 and
it formed the Imperial Bank of India, which later became the State Bank
of India. The period between 1906 and 1911 witnessed the establishment
of banks such as Bank of India, Bank of Baroda, Canara Bank,
Corporation Bank, Indian Bank and Central Bank of India; these banks
have survived to the present. The banking sector in India can be divided
into two eras i.e. pre-liberalization era and post-liberalization era since
1991. In the pre-liberalization era, the Government of India nationalized
the 14 largest commercial banks in 1969. A second dose of
nationalization of six more commercial banks followed in 1980. The
stated reason for the nationalization was to give the government more
control of credit delivery. Later, in the year 1993, the government merged
New Bank of India with Punjab National Bank. It was only the merger
between nationalized banks and resulted in the reduction of the number of
nationalized banks from 20 to 19.

The banking sector has seen a tremendous amount of change in the post
liberalization era i.e. in the early 1991; the then Narasimha Rao
government embarked the policy of liberalization. Licenses were given
to small number of private banks like Global Trust Bank, which later
amalgamated with Oriental Bank of Commerce, Axis Bank (earlier UTI
Bank), ICICI Bank and HDFC Bank. This move had augmented the

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growth in Indian Banking. Along with the rapid growth in the economy
of India, followed by the growth with strong contribution from all the
three sectors of banks, viz. government banks, private banks and foreign
banks. The impact of globalization on Indian Banking has caused many
changes in terms of regulations and structural. With the changing
environment, many different strategies have been adopted by this sector
to remain efficient and to surge at the forefront in the global arena. One
such strategy is in the course of consolidation is merger and acquisition.

Conceptual Framework

In the wake of economic reforms, Indian industries have started

restructuring their operations around their core business activities through
merger, acquisition, and takeovers because of their increasing exposure to
competition both domestically and internationally.

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 Rationale behind Mergers of Banks
Here are some motives and rationales for mergers of banks:

1. Market Leadership

The merger can enhance value for shareholders of both companies

through the amalgamated entity’s access to greater number of market
resources. With addition to market share a company can afford to control
the price in better manner with a consequent increase in profitability.

2. Growth and Diversification

Companies that desire rapid growth in size or market share or

diversification in the range of their products may find that a merger can
be used to fulfill the objective instead of going through the volume
consuming process of internal growth or diversification. The firm may
achieve the same objective in a short period by merging with an existing
firm. In addition, such a strategy is often less costly than the alternative of
developing the necessary production capability and capacity.

3. Synergy

Implies a situation where the combined firm is more valuable than the
sum of the individual combining firms. It refers to benefits other than
those related to economies of scale. Operating economies are one form of
synergy benefits.

4. Risk

Managing Bankruptcy and organizational risks, recent studies have

established that if merger and acquisitions in banks if allowed in a
controlled manner would significantly reduce the bankruptcy risk of the

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merged entity. Obviously, mergers would also provide these benefits to
banks in India reducing their bankruptcy concerns.

5. Economies of Scale

With the help of mergers and acquisitions in the banking sector, the banks
can achieve significant growth in their operations and minimize their
expenses to a considerable extent. Another important advantage behind
this kind of merger is that in this process, competition is reduced because
merger eliminates competitors from the banking industry.

6. Economies of Scope

An ability to grow products and segments and an opportunity to cross sell

would enhance revenue. This could also result in more geographic
growth.

7. Strategic Integration

Considering the complementary nature of the businesses of the concerned

companies, in terms of their commercial strengths, geographic profiles
and site integration, the amalgamated entity may be able to conduct
operations in the most cost-efficient manner. The merger an also enable
maximum utilization of various infrastructural and manufacturing assets,
including utilities and other site facilities.

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 Benefits of Mergers to Indian Banks
Here are some important benefits of mergers of banks:

1. Competitive

The consolidation of PSBs helps in strengthening its presence globally,

nationally and regionally.

2. Monitoring

With the number of PSBs coming down after the process of merger-
capital allocation, performance milestones, and monitoring would
become easier for the government.

3. Efficiency

It has the potential to reduce operational costs due to the presence of

shared overlapping networks. And this enhanced operational efficiency
will reduce the landing costs of the banks.

4. Self-Sufficiency

Larger banks have better ability raised resources from the market rather
than relying on state exchequer.

5. Benefits to RBI

RBI is benefited due to improved and better monitoring over the banks. It
reduces the increased number of meetings due to a smaller number of
CEO’s and also easy implementation of its policies due to better and
upgraded technology.

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 PSBs consolidation building block of $5 trillion
economy
The government’s decision to consolidate 10 public sector banks (PSB)
into four mega state-owned lenders will act as a building block for
achieving $5 trillion economy target. To support next level of growth, the
country needed big banks. The mega merger announced on August 30,
2019 aims to achieve that objective. We will now have 6 mega banks
with enhanced capital base, size, scale and efficiency to support high
growth that the country requires to break into club of middle-income
nations. The road-map for the future will be “technology driven, clean,
responsible” and there will be no gaming of system by any of the stake
holder in the financial sector space be it auditors, rating agencies,
creditors or bankers. “All well capitalized well provisioned banks to
support $5 trillion economy.”

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 New banks After the Merger
S. No. Amalgamated Banks Anchor Banks

1. Punjab national Bank (PNB), Oriental PNB

Bank of Commerce (OBC) & United
Bank of India
2. Canara Bank & Syndicate Bank Canara Bank
3. Union Bank of India, Andhra Bank & Union Bank of
Corporation Bank India
4. Indian Bank & Allahabad Bank Indian Bank

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 Emerging issues in merging and acquisition
1. Employees perception

Employees personally feel threatened by mergers and acquisitions.

Findings reveals that age, marital status and gender of the employee
affect the employee’s perception. Age is the most influential factor.

2. Decision Making

The banks that are getting merged are expected to see a slowdown in
decision making the top level as senior officials of such banks would put
all the decisions on the back-burner and it will lead to a drop-in credit
delivery in the system.

3. Weak Banks

A complex merger with a weaker and undercapitalized PSB would stall

the bank’s recovery efforts as the weakness of one bank may get
transferred and the merged entity may become weak.

4. Other Issues

There are evidences in literature that media plays an important role in

shaping the social context for mergers and acquisition. That it is the
uncertainty that creates stress for employees rather than the actual
changes associated with the merger. Communication and a transparent
change process are important. Leaders need to be competent and trained
in the process of transforming organizations to ensure that individuals
within the organization accept the changes prompted by a merger.

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 A case study on mega merger of SBI with its
associate banks and Bhartiya Mahila Bank
Bank in general terminology is referred to as a financial institute or a
corporation which is authorized by the state or central government to deal
with money by accepting deposits, giving out loan and investing in
securities. The main role of Banks is economic growth, expansion of the
economy and provide funds for investment. In the recent times banking
sector has been undergoing a lot of changes in terms of regulation and
effects of globalization. These changes have affected this sector both
structurally and strategically.

With the changing environment many different strategies have been

adopted by this sector to remain efficient and to surge ahead in the global
arena. One such strategy is through the process of consolidation of banks
which emerged as one of the most profitable strategy. There are several
ways to consolidate the banking industry; the most commonly adopted by
banks is merger. There have been several reforms in the Indian banking
sector, as well as quite a few successful mergers and acquisitions, which
have helped it, grow manifold.

The first and the most successful example of merger is of New Bank of
India merging with the Punjab National Bank (PNB). This was the first
merger between nationalized banks. And then there were a lot of mergers
in banking industry which exemplified that mergers are beneficial for an
industry.

The merger of State Bank of India with its 5 associate banks namely State
Bank of Bikaner and Jaipur (SBBJ), State Bank of Hyderabad (SBH),
State Bank of Mysore (SBM), State Bank of Patiala (SBP), State Bank of

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Travancore (SBT) and Bhartiya Mahila Bank. It was on 1st April 2017
that "the SBI opened as 'one bank' and will continue to operate in the
same manner as before, post-merger" -Bhattacharya told the media.

Founded in 1806, Bank of Calcutta was the first Bank established in

India, and over a period of time, evolved into State Bank of India (SBI).
SBI represents a sterling legacy of over 200 years. It is the oldest
commercial Bank in the Indian subcontinent, strengthening the nation’s
trillion-dollar economy and serving the aspirations of its vast population.

The Bank is India’s largest commercial Bank in terms of assets, deposits,

branches, number of customers and employees, enjoying the continuing
faith of millions of customers across the social spectrum. SBI,
headquartered at Mumbai, provides a wide range of products and services
to individuals, commercial enterprises, large corporates, public bodies
and institutional customers through its various branches and outlets, joint
ventures, subsidiaries and associate companies. SBI merged with its
associate banks in order to have increased balance sheet and economies
of scale. With this merger:

1. SBI has entered into the league of top 50 global banks.

2. It has now 24,017 branches and 59,263 ATMs serving over 42
crore customers
3. SBI is now a banking behemoth with an asset book of Rs 37 lakh
crore.
4. The merged entity will have one-fourth of the deposit and loan
market, as the SBI's market share will increase from 17% to 22.5-
23%.
5. SBI's asset base is now five times larger than the second largest
Indian bank, ICICI Bank.

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Apart from these facts, there are many perceived gains as well: the
government, as shareholder, feels that now it will have six less capital-
hungry banks to worry about. It was expected that a larger institution will
be better equipped to deal with sticky loans, thereby enabling fresh credit
outflows to productive sectors. Thus, Productivity and efficiency are also
among the expected benefits.

But these benefits were questionable due to SBI's legacy and ownership
structure. A former SBI chairman had once remarked that reforming SBI
was trying to make an elephant dance. Even discounting for exaggeration,
according to the statement, a larger and unmanageable bank is getting
even larger. The merger seems to overlook a critical, post-crisis concern -
the too-big-to-fail (TBTF) question. The TBTF theory posits that some
institution is so large and intricately interconnected with different parts of
the economy that failure can create a systematic shock. This forced many
governments to bail out large financial institutions with taxpayer money.
It might also be instructive to note that many countries have been
formulating preventive TBTF regulations.

India’s mega merger with its associate banks has been anything but
smooth for some of the latter’s employees. Whereas Officers and clerks
working for the erstwhile associate banks feel that they have been given a
raw deal with several instances of arbitrary transfers and many officers
losing out on their seniority post the transfer. A senior official of the
association said the employees are facing increased working hours as the
servers at SBI are unable to handle the traffic, and they (the staff) are still
adjusting to the new working conditions. There have been several
instances of arbitrary transfers with allegations that SBI has not been
following the rules governing transfers. Aggrieved SBI had filed a
counter petition arguing that it was strictly complying with all the

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stipulations and safeguarding the interests of the employees of the
associate banks and denied all allegations.

"The merger will affect the seniority of top officials of Associate Banks
and will also result in redeployment or loss of jobs of some workmen and
closure of branches and finally, the banks might lose some of their
regular customers," said C.H. Venkatachalam, AIBEA general secretary.

The bigger question was the impact that the merger would have on the
health of SBI. Cumulative bad loans of the five associate banks were as
big as 35% of the bad loans of SBI. Their slippage ratio stands at 20%
and credit costs have deteriorated to 5.56%. Also, their Non-Performing
Asset (NPA) were around 4 times the NPAs of SBI alone. When these
banks having deteriorating conditions join SBI, they will have adverse
effect on SBI's health.

No doubt, the revenue will increase, but at what cost? What we need is
not big, but strong, efficient and vibrant banks. In order to understand the
current scenario and throw light on the impact of merger on SBI, A
comparison is drawn between pre-merger entities (before merger SBI and
associate banks) and post-merger entity (after merger - the consolidated
bank).

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 The quarter that was – the starting point

SBI+ABs+BM 31st March 31st March 1st April 2017

B 2017 (Solo) 2017 (ABs) (Merged)
Total Deposits 2044751 540569 2585320
CASA Ratio 45.58 40.10 44.40
(%)
Gross Advances 1627273 325234 1952507
Market Share- 18.13 5.04 23.17
Deposits (%)
Market Share- 17.11 4.15 21.26
Advances (%)
No. of Branches 17170 6847 24017
Total Staff 209572 70231 279803
No. of 3375 829 4204
Customers (in
lakhs)

CASA Ratio: CASA ratio stands for current and savings account ratio.
CASA ratio of a bank is the ratio of deposits in current and saving
accounts to total deposits.

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 Rs. in Crores

SBI+ABs+BM 31st March 31st March 1st April 2017

B (Asset 2017 (Solo) 2017 (ABs) (Merged)
Quality Ratios)
Gross NPA 6.90 20.15 9.11
Ratio (%)
Net NPA Ratio 3.71 12.99 5.19
(%)
Provision 65.95 52.18 61.53
Coverage Ratio
(%)
Slippage Ratio 2.59 17.87 5.78
(%)
Credit Cost (%) 2.14 5.77 2.90

Gross NPA: A nonperforming asset (NPA) refers to a classification for

loans on the books of financial institutions that are in default or are in
arrears on scheduled payments of principal or interest. In most cases, debt
is classified as nonperforming when loan payments have not been made
for a period of 90 days. Provisions made for NPAs are not considered in
case of Gross NPAs.

Net NPA: Gross NPA – Provisions

Slippage Ratio: (Fresh accretion of NPAs during the year/Total standard

assets at the beginning of the year) *100

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 SBI+ABs +BMB 31st March 2017 (Solo) 1st April 2017 (Merged)
CET 1 (%) 9.82 9.41
Tier 1 (%) 10.35 10.05
CAR (%) 13.11 12.85
GoI Shareholding 61.23 60.75
(%)

Capital Adequacy Ratio (CAR): The capital adequacy ratio (CAR) is a

measure of a bank's capital. It is expressed as a percentage of a bank's risk
weighted credit exposures.

SBI+ABs+BMB 31st March 31st March 1st April 2017

(Financial 2017 (Solo) 2017 (ABs) (Merged)
Ratios)
Cost to income 47.75 57.66 49.54
Ratio (%)
Cost of Deposits 5.79 6.31 5.84
(%)
Yield on 9.42 8.98 9.32
Advances (%)
NIM (Domestic) 3.11 2.35 2.93
(%)

Details of Profit & Loss Account are as follows:

2016-17 2017-18 Growth Growth

Q1FY18 Q1FY18
Over Over

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 Q4FY17 Q4FY17
Q1 Q4 Q1 % %
Interest Inc. 54494 5896 54905 -6.89 0.76
8
Interest 36248 3790 37299 -1.59 2.90
Expenses 3
Net Interest Inc. 18246 2106 17606 -16.42 -3.51
5
Non-Interest 8761 1222 8006 -34.50 -8.62
Inc. 2
Operating Inc. 27007 3328 25612 -23.06 -5.17
7
Staff Expenses 7783 8914 7724 -13.34 -0.75
Overhead 5462 7064 6013 -14.88 10.08
Expenses
Operating 13245 1597 13738 -14.02 3.72
Expenses 8
Operating 13762 1730 11874 -31.40 -13.72
Profit 9
Provisions 13388 2075 9869 -52.44 -26.29
1
Net Profit 374 -3442 2006 435.88

As SBI needed reconstruction, this step of merger seems to be a smart

step. Long term benefits of the merger will significantly outweigh the
near-term challenges. The resulting cost advantage; enhanced reach; and
economies of scale from this merger, will help SBI sustain its mission of
being an enduring value creator. But at the same time the enthusiasm to

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create massive banks through mergers needs to be tempered with
skepticism.

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 Conclusion
Merger and amalgamation help the banks and the economy to function
more efficiently because it helps in the increase of the resources and thus
the profits. It is done to reduce the competition and for survival in the
market but it is good only when the economy does not get affected due to
competition issues. They have their own issues as well as disadvantages
accordingly. Merger and amalgamation increase the efficiency of the
banks but it leads to loss of their own identities. It also helps in
strengthening the base of the new unit and also helps in saving of taxes. It
also helps in expanding of the reach and also geographical operation.

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 References
1. https://m.ecomomictimes.com/wealth/personal-finance-news/psu-
bank-mergers-customers-of-which-banks-are-likely-to-be-impacted-
and-how/articleshow
2. Krishn A Goyal and Vijay Joshi, 2011, Mergers in Banking Industry
of India: Some Emerging Issues, Asian Journal of Business and
Management Sciences Vol. 1 No. 2 [157-165]
3. Ms. Jaspreet Kaur, 2017, A Case Study on Mega Merger of SBI with
its associate banks and Bhartiya Mahila Bank, Trinity Vol. No. 3(4)
4. Tables Source: SBI Press Release Q1FY18 Results

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