CHAPTER V

SUMMARY OF FINDINGS,
SUGGESTIONS AND
CONCLUSION

INDEX
Page No.
 5.1 Introduction 224
 5.2 Findings 225-235
 5.3 Suggestions 235-240
 5.4 Conclusion 241-242
 5.5 Future Scope of the Study 243
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SUMMARY OF FINDINGS, SUGGESTIONS AND

CONCLUSION

5.1 INTRODUCTION

Banks as financial intermediaries plays a significant role in economic growth,

provides funds for investments, increasing the nation‟s savings rate, channeling the
available savings into high investment priorities and better utilization of available
resources. A well planned, organized, efficient and viable banking system is a necessary
concomitant of economic and social infrastructure in an economy. Today, bank
management in India is facing a two faced challenge - to improve their profitability on
one hand and to serve the public in various innovative ways and means with greater
efficiency. During the last few decades, structure of banking sector has turned from a
controlled system into liberalized one.

The efficiency of banks, which reflects the ability of banks in transforming its
resources to output by making its best allocation, is essential for the growth of an
economy. Therefore, the economies of world have experienced a revolutionary change in
the environment of banking sector. The competition among banks at domestic and global
level has increased and it has compelled the banking industry to improve their efficiency
and profitability.

In this present chapter, conclusions are drawn out of the analysis of the financial
performance of State Bank of India and its Associate Banks pre and post merger period.
For the purpose of the study, necessary data for State Bank of India and its Associate
Banks are collected from the period 2002-2003 to 2011-2012. The financial statements
mainly used are the Profit and Loss Accounts and Balance sheets published in the annual
reports of the respective banks. This chapter epitomizes the major findings of the study
and few suggestions for the betterment of the existing financial performance of the banks
under study.
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5.2 SUMMARY OF FINDINGS

The market power of banking sector is increasing owing to globalization. In both
domestic and global markets, banking is one of the largest and most profitable industries.
It has become imperative for banking industry to get consolidated, to withstand the
storms and shocks from the global market forces, Merger and Acquisitions are
considered to be the fast track for increasing the size, expanding branch network and
enlarging business operations. The evolution of M & A‟s has been long drawn. Many
economic factors have contributed to its development. As long as economic units of
production exist, M & A‟s would continue for an ever - expanding economy. Several
committees have suggested M & A‟s in the banking industry as one of the measures to
strengthen its viability. The recommendations of the committees formed the foundations
for consolidation in the financial sector. Thus, M & A‟s in the banking industry is a force
of change taking place worldwide.

The State Bank of India is a multinational banking and financial services

company based in India, it is the biggest commercial bank in the whole of Asia. SBI and
its associates continued to show robust growth and development in net profit, net interest
income, tier I capital adequacy ratio, home loan sections, high value deals, power
projects, and many. SBI and its associate banks started merging from 2008, in this year
the SBS merged with SBI and SBIn merged with SBI in 2010. This present study
analyzed the profitability of SBI and its associate banks using CRAMEL model,
profitability of the banks in pre and post merger periods, and the process of merging with
the remaining banks. The following are the findings of the study;

I) CRAMEL RATIOS ON PROFITABILITY

5.2.1 Descriptive Statistics
Descriptive analysis is applied to analyze the profitability and performance of the
banks through comparison of pre and post merger performance of the concerned banks
and to identify the significant variables which is directly accompanied with the
performance of the banks. The pre and post merger performance of SBI and SBS with
CRAMEL, the 12 ratios such as RAA (C1), DER (C5), ROAA (R2), CRDR (R3), RFAA
(RA), IDR (R5), RPPE (M1), RBPE (M2), BPB (M4), RONW (M5), RASA (L1) and
CDR (L5) and the pre and post merger performance of SBI and SBIn with CRAMEL,
the 7 ratios such as RGSA (C2), RGSI (C3), CAR (C4), DER (C5), RRI (A2), RBPE
 226

(M2) and BPB (M4) indicate the positive effect and increased the performance of the
bank in post merger period.

The performance of SBI and SBBJ with CRAMEL - 5 ratios such as DER (C5),
RPSAA (A4), BPB (M4), RTDD (L2), and CDR (L5), the performance of SBI and SBH
with CRAMEL - 7 ratios such as DER (C5), RNPAA (A3), RPSAA (A4), RONW (M5),
ROPTA (E3), ROA (E4) and RTDD (L2), the performance of SBI and SBM with
CRAMEL - 7 ratios such as ROAA (R2), RFAA (R4), RPSAA (A4), RONW (M5),
ROA (E4), RTDD (L2) and RLAA (L3) and the performance of SBI and SBP with
CRAMEL - 7 ratios such as ROAA (R2), RFAA (R4), RNPAA (A3), RPSAA (A4),
ROPTA (E3), RTDD (L2) and RLAA (L3) and the performance of SBI and SBT with
CRAMEL - 10 ratios such as CAR (C4), ROAA (R2), RFAA (R4), RNPAA (A3),
RPSAA (A4), RONW (M5), ROPTA (E3), RIITI (E5), RTDD (L2) and RLAA (L3)
indicate the positive effect and increased the performance of the bank.

Variables such as CAR (C4) - Capital Adequacy Ratio, DER (C5) - Debt Equity
Ratio, ROAA (R2) - Ratio of Other Assets to Assets, RFAA (R4) - Ratio of Fixed Assets
to Assets, RNPAA (A3) - Ratio of NPA to Advances, RPSAA (A4) - Ratio of Priority
Sector Advances to Advances, RBPE (M2) - Ratio of Business Per Employee, BPB (M4)
- Business Per Branch, RONW (M5) - Return on Networth, ROPTA (E3) - Ratio of
Operating Profits to Total Assets, ROA (E4) - Return on Assets, RTDD (L2) - Ratio of
Term Deposits to Deposits, RLAA (L3) - Ratio of Liquid Assets to Assets, and CDR
(L5) - Cash Deposit Ratio are found to be highly significant and most contributing
variables. Hence, banks that tend to merge have to carefully analyze those fourteen
variables after merger, as they are closely associated with the profitability and
performance of the banks.

II) PRE AND POST MERGER PERFORMANCE

5.2.2 Linear Regression Analysis
Linear Regression Analysis is made to identify the significant variable through „t‟
and „F‟ values when other factors are kept constant. The pre and post merger
performance of SBI and SBS using CRAMEL, the R2 of 14 ratios such as, RAA (C1),
RGSI (C3), DER (C5), RIA (R1), CRDR (R3), IDR (R5), RRI (A2), RNIIA (A5), RBPE
(M2), ICR (M3), BPB (M4), BWFR (E2), ROA (E4) and RASA (L1) are positive and
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having goodness of fit. In the case of DER (C5), it is high i.e. 0.998. The R2 of 16 ratios
such as, RGSA (C2), CAR (C4), ROAA (R2), RFAA (R4), RRAD (A1), RNPAA (A3),
RPSAA (A4), RPPE (M1), RONW (M5), SWFR (E1), ROPTA (E3), RIITI (E5), RTDD
(L2), RLAA (L3), RPCTA (L4) and CDR (L5) are found to be not bright. The prospect
of post merger performance of SBI and SBS with CRAMEL is good.

The pre and post merger performance of SBI and SBIn with CRAMEL, the R2 of
all the thirty ratios such as, RAA (C1), RGSA (C2), RGSI (C3), CAR (C4), DER (C5),
RIA (R1), ROAA (R2), CRDR (R3), RFAA (R4), IDR (R5), RRAD (A1), RRI (A2),
RNPAA (A3), RPSAA (A4), RNIIA (A5), RPPE (M1), RBPE (M2), ICR (M3), BPB
(M4), RONW (M5), SWFR (E1), BWFR (E2), ROPTA (E3), ROA (E4), RIITI (E5),
RASA (L1), RTDD (L2), RLAA (L3), RPCTA (L4), and CDR (L5) are 1.000 and are
positive and having goodness of fit, which indicates that the prospect of pre and post
merger performance of SBI and SBIn with CRAMEL is very bright.

The performance of SBI and SBBJ with CRAMEL, the R2 of the 23 ratios such
as, RAA (C1), RGSA (C2), RGSI (C3), CAR (C4), DER (C5), RIA (R1), CRDR (R3),
RFAA (R4), IDR (R5), RRAD (A1), RRI (A2), RNPAA (A3), RNIIA (A5), RPPE (M1),
RBPE (M2), ICR (M3), BPB (M4), BWFR (E2), ROPTA (E3), RIITI (E5), RASA (L1),
RTDD (L2), and CDR (L5) are positive and having goodness of fit. In the case of RBPE
(M2), it is high i.e. 0.997. The R2 of 7 ratios such as, ROAA (R2), RPSAA (A4), RONW
(M5), SWFR (E1), ROA (E4), RLAA (L3) and RPCTA (L4) are found to be not bright.
The prospect of performance of SBI and SBBJ with CRAMEL is good and increasing
the performance of the banks.

The performance of SBI and SBH with CRAMEL, the R2 of the 20 ratios such as,
RAA (C1), RGSA (C2), RGSI (C3), DER (C5), RIA (R1), CRDR (R3), RFAA (R4),
IDR (R5), RRAD (A1), RRI (A2), RNPAA (A3), RNIIA (A5), RPPE (M1), RBPE (M2),
ICR (M3), BPB (M4), BWFR (E2), ROPTA (E3), RASA (L1), and CDR (L5) are
positive and having goodness of fit, other than the following 10 ratios such as, CAR
(C4), ROAA (R2), RPSAA (A4), RONW (M5), SWFR (E1), ROA (E4), RIITI (E5),
RTDD (L2), RLAA (L3) and RPCTA (L4). The ratio of BPB (M4) is high i.e. 0.993.
The prospect of performance of SBI and SBH with CRAMEL is good and increasing the
performance of the banks.
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The performance of SBI and SBM with CRAMEL, the R2 of the 20 ratios such
as, RAA (C1), RGSA (C2), RGSI (C3), DER (C5), RIA (R1), CRDR (R3), RFAA (R4),
IDR (R5), RRAD (A1), RRI (A2), RNPAA (A3), RNIIA (A5), RPPE (M1), RBPE (M2),
ICR (M3), BPB (M4), RONW (M5), BWFR (E2), RASA (L1) and RPCTA (L4) are
positive and having goodness of fit, other than the following 10 ratios such as, CAR
(C4), ROAA (R2), RPSAA (A4), SWFR (E1), ROPTA (E3), ROA (E4), RIITI (E5),
RTDD (L2), RLAA (L3) and CDR (L5). The ratio of RBPE (M2) is high i.e. 0.995. The
prospect of performance of SBI and SBM with CRAMEL is good and increasing the
performance of the banks.

The performance of SBI and SBP with CRAMEL, the R2 of the 16 ratios such as,
RAA (C1), RGSA (C2), RGSI (C3), RIA (R1), CRDR (R3), RFAA (R4), IDR (R5),
RRAD (A1), RRI (A2), RNIIA (A5), RPPE (M1), RBPE (M2), ICR (M3), BPB (M4),
ROPTA (E3) and RASA (L1) are positive and having goodness of fit, other than the
following 14 ratios such as, CAR (C4), DER (C5), ROAA (R2), RNPAA (A3), RPSAA
(A4), RONW (M5), SWFR (E1), BWFR (E2), ROA (E4), RIITI (E5), RTDD (L2),
RLAA (L3), RPCTA (L4) and CDR (L5). The ratio of RIA (R1) is high i.e. 0.962. The
prospect of performance of SBI and SBP with CRAMEL is good and increasing the
performance of the banks.

The performance of SBI and SBT with CRAMEL, the R2 of the 16 ratios such as,
RAA (C1), RGSA (C2), RGSI (C3), DER (C5), RIA (R1), CRDR (R3), IDR (R5),
RRAD (A1), RRI (A2), RNPAA (A3), RNIIA (A5), RBPE (M2), BPB (M4), ROPTA
(E3), RIITI (E5) and RASA (L1) are positive and having goodness of fit, other than the
following 14 ratios such as, CAR (C4), ROAA (R2), RFAA (R4), RPSAA (A4), RPPE
(M1), ICR (M3), RONW (M5), SWFR (E1), BWFR (E2), ROA (E4), RTDD (L2),
RLAA (L3), RPCTA (L4) and CDR (L5). The ratios of IDR (R5) and BPB (M4) is high
i.e. 0.973. The prospect of performance of SBI and SBT with CRAMEL is good and
increasing the performance of the banks.

The Linear Regression Analysis is made to identify that the 27 ratios are positive
and having goodness of fit. These ratios are increasing the performance of the SBI and
its associate banks for all analysis except RPSAA (A4) - Ratio of Priority Sector
Advances to Advances, SWFR (E1) - Spread to Working Funds Ratio, and RLAA (L3) -
Ratio of Liquid Assets to Assets.
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5.2.3 Factor Analysis

Factor analysis was calculated based on CRAMEL ratios, which help to find out
the most contributing factors towards the profit. The post merger performance of SBI
and SBS with CRAMEL, the variables such as RAA (C1) - Ratio of Advances to Assets,
DER (C5) - Debt Equity Ratio, CRDR (R3) - Credit Deposit Ratio, RBPE (M2) - Ratio
of Business Per Employee, BPB (M4) - Business Per Branch and CDR (L5) - Cash
Deposit Ratio, are found to be highly significant variables, therefore the banks should
carefully analyze these six variables in post merger period, as they are closely associated
with the performance of the banks.

The pre merger performance of SBS with CRAMEL, the combination of 13

CRAMEL ratios in factor I such as, RGSA (C2) - Ratio of Government Securities to
Assets, RIA (R1) - Ratio of Investment to Assets, ROAA (R2) - Ratio of Other Assets to
Assets, IDR (R5) - Investment Deposit Ratio, RRAD (A1) - Ratio of Return on
Advances, RNIIA (A5) - Ratio of Non-Interest Income to Assets, ICR (M3) -
Intermediation Cost Ratio, RONW (M5) - Return on Networth, SWFR (E1) - Spread to
Working Funds Ratio, ROPTA (E3) - Ratio of Operating Profits to Total Assets, RASA
(L1) - Ratio of Approved Securities to Assets, RTDD (L2) - Ratio of Term Deposits to
Deposits, and RPCTA (L4) - Ratio of Provisions and Contingencies to Total Assets and
the pre merger performance of SBIn with CRAMEL, the combination of 12 CRAMEL
ratios in factor I such as, RGSA (C2) - Ratio of Government Securities to Assets, RIA
(R1) - Ratio of Investment to Assets, IDR (R5) - Investment Deposit Ratio, RRAD (A1)
- Ratio of Return on Advances, RPSAA (A4) - Ratio of Priority Sector Advances to
Advances, RNIIA (A5) - Ratio of Non-Interest Income to Assets, ICR (M3) -
Intermediation Cost Ratio, RONW (M5) - Return on Networth, SWFR (E1) - Spread to
Working Funds Ratio, ROPTA (E3) - Ratio of Operating Profits to Total Assets, ROA
(E4) - Return on Assets and RASA (L1) - Ratio of Approved Securities to Assets and the
pre merger performance of SBI with CRAMEL, the combination of 12 CRAMEL ratios
in factor I such as, RAA (C1) - Ratio of Advances to Assets, CAR (C4) - Capital
Adequacy Ratio, DER (C5) - Debt Equity Ratio, ROAA (R2) - Ratio of Other Assets to
Assets, CRDR (R3) - Credit Deposit Ratio, RRI (A2) - Ratio of Return on Investments,
RPPE (M1) - Ratio of Profit Per Employee, RBPE (M2) - Ratio of Business Per
Employee, BPB (M4) - Business Per Branch, ROA (E4) - Return on Assets, RIITI (E5) -
Ratio of Interest Income to Total Income, and CDR (L5) - Cash Deposit Ratio are found
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to be more explained variation in pre merger time period, therefore the SBI should
carefully analyze the above ratios in post merger time, as they are closely associated with
the performance of the banks.

The pre merger performance of SBBJ with CRAMEL, the variables such as DER
(C5) - Debt Equity Ratio, RPPE (M1) - Ratio of Profit Per Employee, RBPE (M2) -
Ratio of Business Per Employee, BPB (M4) - Business Per Branch, RONW (M5) -
Return on Networth and CDR (L5) - Cash Deposit Ratio are found to be highly
significant variables therefore the SBI and SBBJ that tend to merge have to carefully
analyze these six variables in post merger period, as they are closely associated with the
performance of the banks.

The pre merger performance of SBH with CRAMEL, it can be understood that
variables such as DER (C5) - Debt Equity Ratio, CRDR (R3) - Credit Deposit Ratio,
RBPE (M2) - Ratio of Business Per Employee, BPB (M4) - Business Per Branch, and
CDR (L5) - Cash Deposit Ratio are found to be highly significant variables, therefore the
SBI and SBH that tend to merge have to carefully analyze these five variables in post
merger period, as they are closely associated with the performance of the banks.

The pre merger performance of SBM with CRAMEL, it can be understood that
variables such as IDR (R5) - Investment Deposit Ratio, RONW (M5) - Return on
Networth and RASA (L1) - Ratio of Approved Securities to Assets are found to be
highly significant variables, therefore the SBI and SBM that tend to merge have to
carefully analyze these three variables in post merger period, as they are closely
associated with the performance of the banks.

The pre merger performance of SBP with CRAMEL, it can be understood that
variables such as RFAA (R4) - Ratio of Fixed Assets to Assets, IDR (R5) - Investment
Deposit Ratio, RONW (M5) - Return on Networth and RASA (L1) - Ratio of Approved
Securities to Assets are found to be highly significant variables, therefore the SBI and
SBP that tend to merge have to carefully analyze these four variables in post merger
period, as they are closely associated with the performance of the banks.

The pre merger performance of SBT with CRAMEL, it can be understood that
variables such as IDR (R5) - Investment Deposit Ratio, RONW (M5) - Return on
Networth and RASA (L1) - Ratio of Approved Securities to Assets are found to be
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highly significant variables, therefore the SBI and SBT that tend to merge have to
carefully analyze these three variables in post merger period, as they are closely
associated with the performance of the banks.

From the Factor analysis, it is understood that CRAMEL type variables such as
RAA (C1) - Ratio of Advances to Assets, RGSA (C2) - Ratio of Government Securities
to Assets, DER (C5) - Debt Equity Ratio, ROAA (R2) - Ratio of Other Assets to Assets,
CRDR (R3) - Credit Deposit Ratio, RNPAA (A3) - Ratio of NPA to Advances, RPSAA
(A4) - Ratio of Priority Sector Advances to Advances, RBPE (M2) - Ratio of Business
Per Employee, BPB (M4) - Business Per Branch, RONW (M5) - Return on Networth,
ROPTA (E3) - Ratio of Operating Profits to Total Assets, ROA (E4) - Return on Assets,
RTDD (L2) - Ratio of Term Deposits to Deposits, RLAA (L3) - Ratio of Liquid Assets
to Assets and CDR (L5) - Cash Deposit Ratio are found to be highly significant and most
contributing variables towards the profitability of the bank, identified through t-test.
Therefore SBI and its Associate Banks that tend to merge have to carefully analyze these
fifteen variables in post merger time, since they are closely associated with the
performance of the banks.

5.2.4 Concentration Indices

The Concentration index of absolute values has revealed the pre and post merger
performance of SBI and SBS with CRAMEL (1), CRAMEL (3), CRAMEL (4) and
CRAMEL (5) elucidates, the post merger performance of SBI with SBS is more
concentrated i.e., 4.83 per cent, 3.94 per cent, 22.08 per cent and 77331.94 per cent
increment of concentration index than the pre merger performance of SBI and except
CRAMEL (2), the post merger performance of SBI with SBS is less concentrated i.e.,
2.23 per cent decrement of concentration index from the pre merger performance of SBI.

In pre and post merger performance of SBI and SBIn with CRAMEL (1),
CRAMEL (3), CRAMEL (4) and CRAMEL (5) elucidates, the post merger performance
of SBI with SBIn is more concentrated i.e., 5.7 per cent, 1.71 per cent, 21.31 per cent and
79048.81 per cent increment of concentration index than the pre merger performance of
SBI and except CRAMEL (2), the post merger performance of SBI with SBIn is less
concentrated i.e., 1.72 per cent decrement of concentration index from the pre merger
performance of SBI.
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In pre merger performance of SBI and SBBJ with CRAMEL (1), CRAMEL (2),
CRAMEL (4) and CRAMEL (5) revealed increment of concentration index i.e., 13.24
per cent (2011-2012), 7.53 per cent (2010-2011), 16.31 per cent (2011-2012) and
86574.81 per cent (2010-2011) and except CRAMEL (3), from 2002-2003 to 2009-2010
was found to be more concentrated than the year 2010-2011 and in this year it was found
to be less concentrated i.e., 23.12 per cent decrements of concentration index.

In pre merger performance of SBI and SBH with CRAMEL (1), CRAMEL (2),
CRAMEL (3), CRAMEL (4) and CRAMEL (5) revealed increment of concentration
index i.e., 8.61 per cent (2011-2012), 5.58 per cent (2010-2011), 21.76 per cent (2011-
2012), 33.53 per cent (2011-2012) and 382824.45 per cent (2011-2012).

In pre merger performance of SBI and SBM with CRAMEL (1), CRAMEL (2),
CRAMEL (3), CRAMEL (4) and CRAMEL (5) revealed increment of concentration
index i.e., 9.68 per cent (2011-2012), 4.55 per cent (2008-2009), 18.49 per cent (2009-
2010), 25.77 per cent (2011-2012) and 90750.83 per cent (2011-2012).

In pre merger performance of SBI and SBP with CRAMEL (1), CRAMEL (2),
and CRAMEL (4) revealed increment of concentration index i.e., 6.41 per cent (2011-
2012), 8.68 per cent (2008-2009) and 31.42 per cent (2011-2012) and except CRAMEL
(3) and CRAMEL (5) revealed decrements of concentration index i.e., 24.07 per cent
(2010-2011) and 146619.75 per cent (2007-2008).

In pre merger performance of SBI and SBT with CRAMEL (1), CRAMEL (2),
CRAMEL (4) and CRAMEL (5) revealed increment of concentration index i.e., 7.88 per
cent (2008-2009), 4.43 per cent (2010-2011), 41.77 per cent (2011-2012) and 126225.9
per cent (2011-2012) and except CRAMEL (3) revealed decrements of concentration
index i.e., 18.6 per cent (2010-2011).

The Concentration Index of pre and post merger performance of SBI with SBS
and SBIn, CRAMEL (1), CRAMEL (3), CRAMEL (4) and CRAMEL (5) is more
concentrated except CRAMEL (2) in post merger performance. In pre merger
performance of SBI with SBBJ, SBH, SBM, SBP and SBT with regard to CRAMEL (1),
CRAMEL (2), CRAMEL (4) and CRAMEL (5) is more concentrated except CRAMEL
(3). The SBI and its associates have to concentrate on these ratios to improve
profitability.
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5.2.5 Data Envelopment Analysis (DEA)

Data Envelopment Analysis (DEA) has been applied in this study to assess the
relative efficiency of the banks. It can be observed that the DEA analysis for all banks on
CRAMEL variables with Type I, comparing each of the banks‟ relative efficiency scores,
State Bank of Indore is said to be 100% efficient whereas State Bank of India by
contrast, is the least efficient bank and in CRAMEL variables with Type II, State Bank
of Patiala is said to be 108% efficient whereas State Bank of India and State Bank of
Saurashtra by contrast, is the least efficient banks and in CRAMEL variables with Type
III, State Bank of Mysore is said to be 108% efficient whereas State Bank of Hyderabad
by contrast, is the least efficient bank and in CRAMEL variables with Type IV, State
Bank of Travancore is said to be 126% efficient whereas State Bank of Hyderabad by
contrast, is the least efficient bank and in CRAMEL variables with Type V, State Bank
of Mysore is said to be 195% efficient whereas State Bank of Patiala by contrast, is the
least efficient bank.
Therefore, the relative efficiency score is high in SBM found through DEA
analysis for all banks on CRAMEL variables with Type III and V.

5.2.6 Testing of Hypothesis

Hypothesis - I Profitability and relative efficiency does not exist in SBI and its
Associate Banks with CRAMEL ratios through Descriptive analysis and DEA analysis.
It is observed that the pre and post merger performance of SBI and SBS with
CRAMEL, the 12 ratios such as RAA (C1), DER (C5), ROAA (R2), CRDR (R3), RFAA
(RA), IDR (R5), RPPE (M1), RBPE (M2), BPB (M4), RONW (M5), RASA (L1) and
CDR (L5) and the pre and post merger performance of SBI and SBIn with CRAMEL,
the 7 ratios such as RGSA (C2), RGSI (C3), CAR (C4), DER (C5), RRI (A2), RBPE
(M2) and BPB (M4) indicate the positive effect and increased the profitability and
performance of the bank in post merger period. Variables such as CAR (C4) - Capital
Adequacy Ratio, DER (C5) - Debt Equity Ratio, ROAA (R2) - Ratio of Other Assets to
Assets, RFAA (R4) - Ratio of Fixed Assets to Assets, RNPAA (A3) - Ratio of NPA to
Advances, RPSAA (A4) - Ratio of Priority Sector Advances to Advances, RBPE (M2) -
Ratio of Business Per Employee, BPB (M4) - Business Per Branch, RONW (M5) -
Return on Networth, ROPTA (E3) - Ratio of Operating Profits to Total Assets, ROA
(E4) - Return on Assets, RTDD (L2) - Ratio of Term Deposits to Deposits, RLAA (L3) -
Ratio of Liquid Assets to Assets, and CDR (L5) - Cash Deposit Ratio are found to be
 234

highly significant and most contributing variables, therefore the banks that tend to merge
have to carefully analyze those fourteen variables after merger, as they are closely
associated with the profitability and performance of the banks and DEA analysis reveals
SBI and its Associate Banks are relatively efficient banks except SBS and SBH,
particularly relative efficiency score is high in SBM and hence the hypothesis is rejected.
Hence, it can be understood that there is profitability and relative efficiency in SBI and
its Associate Banks with CRAMEL ratios through Descriptive analysis and DEA
analysis.

Hypothesis - II Profitability of the banks does not exist in pre and post merger
periods with CRAMEL ratios through Concentration Indices and Regression analysis.
The Concentration index has revealed that the pre and post merger profitability
performance of SBI with SBS and SBIn, CRAMEL (1), CRAMEL (3), CRAMEL (4)
and CRAMEL (5) is more concentrated on post merger performance except CRAMEL
(2). In Linear Regression analysis, the pre and post merger performance of SBI and SBS
with CRAMEL, the R2 of ratios of 14 ratios are positive and having goodness of fit. The
pre and post merger performance of SBI and SBIn with CRAMEL, the R 2 of all the
ratios are 1.000 and are positive and having goodness of fit, which indicates that the
prospect of pre and post merger performance of SBI and SBIn with CRAMEL is very
bright. The prospect of post merger performance of SBI with SBS and SBIn is good and
increasing the profitability and performance of the banks and hence the hypothesis is
rejected. Hence, it can be understood that there is profitability of the banks in pre and
post merger periods with CRAMEL ratios through Concentration Indices and Regression
analysis.

Hypothesis - III There is no significant relationship and adequate profit while

merging Associate Banks with State Bank of India through Factor analysis and
Independent Sample t-test.
The variables such as RAA (C1) - Ratio of Advances to Assets, RGSA (C2) -
Ratio of Government Securities to Assets, DER (C5) - Debt Equity Ratio, ROAA (R2) -
Ratio of Other Assets to Assets, CRDR (R3) - Credit Deposit Ratio, RNPAA (A3) -
Ratio of NPA to Advances, RPSAA (A4) - Ratio of Priority Sector Advances to
Advances, RBPE (M2) - Ratio of Business Per Employee, BPB (M4) - Business Per
Branch, RONW (M5) - Return on Networth, ROPTA (E3) - Ratio of Operating Profits to
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Total Assets, ROA (E4) - Return on Assets, RTDD (L2) - Ratio of Term Deposits to
Deposits, RLAA (L3) - Ratio of Liquid Assets to Assets and CDR (L5) - Cash Deposit
Ratio are found to be highly significant variables which shows significant relationship
with the performance of the banks, and they are contributing more on adequate
profitability of the banks, therefore the banks that tend to merge have to carefully
analyze and to concentrate on these fifteen variables after merger to improve profitability
and hence the hypothesis is rejected. Hence, it can be understood that there is significant
relationship and adequate profit while merging Associate Banks with SBI through Factor
analysis and Independent Sample t-test.

5.3 SUGGESTIONS
Although a lot number of reforms have been made for Indian banks, still there is
a need to modify the policies of public sector banks. At present, they are facing many
challenges which are hindering their performance, but these banks have to convert and
current challenges into opportunities with some modifications in accordance with the
globalization and changes in the technology of the financial markets, world over have
become closely integrated. Deregulation and liberalization have opened up new vistas for
banks but at the same time the pressure of competition has led to narrowing spreads,
shrinking margins, consolidation and restructuring. In the wind of change, sweep across
the world, the banks will need to be equipped to handle large number of innovative
activities. There are some suggestions which may be helpful to the banks to improve
their performance.

5.3.1 Consolidation Process

The trend of consolidation of Indian banking industry has been mainly to identify
and restructure weak banks. Hence, it may be suggested that in the Indian financial
system have many large banks, are required to absorb various risks operating with
domestic and global environment. Merger in banking sector were predominantly of
horizontal merger. This pattern suggests that banks have attempted to consolidate in
similar line.

5.3.2 Competitive Advantage

The M & A‟s in banking sector offers the competitive advantage should be used
as a means for banks‟ continual growth. Hence the uncovering potential problem that
could prevent the merged entity from losing competitive advantages and value addition
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should be considered. The consolidation of the banks which is simultaneously in

progress is operational consolidation among banks. The SBI being the largest public
sector bank and is being operationally integrated with its subsidiaries, in providing
various banking services. Hence, the merged banks i.e SBS and SBIn having competitive
advantage, if the remaining subsidiaries merged with SBI, which can also generate the
competitive advantage.

5.3.3 Utilization of Funds and Application of Modern Information Technology

The banks suggested to concentrate on utilization of funds to improve
profitability, performance, operational and relative efficiency. In order to improve their
position further, the SBI need to improve efficiency through electronic banking
technology and improved management skills. Adequate protective policy environment
needs to be created for the Indian banks to opt for healthy and transparent mergers on the
economies of scale. However, SBI compulsorily need to put in place sophisticated rich
management technologies and communication systems. Information Technology has
emerged as a strategic tool for profit generation and increasing operational efficiency in
banks. A cost-effective introduction of technology in banks especially at the branch level
can pave the way for higher profitability through cost reduction, better utility of
manpower, streamlined branch functioning, increased productivity and achieving
economies of scale. The banks making use of modern technology will pass on the
benefits of lower cost to its customers. Information Technology can led to improved
mass information services, better corporate planning, and better-informed credit
decision-making and credit information bureau (CIB). The entire business of banking is
becoming synonymous with information technology and SBI should develop new skills
in foreign currency, loans, exchange risk management through use of derivate
instruments like currency futures, options, swaps etc., to compete effectively with the
domestic private sector and foreign banks.

5.3.4 Appropriate Measures

Banks has to proceed with M & A activities, they have to proceed more carefully
so that they can avoid the common problems associated with M & A process. Further the
banks may develop appropriate measures to gauge the success of the synergistic merger
and adopt suitable measures to improve their post merger performance in future also.
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5.3.5 RBI Regulations

It must be remembered that merger is only alternative for restructuring financial
sector and there could be more advantageous option to leverage optimum utilization of
the available resources. The RBI, as a regulator and supervisor of the banking system,
would continue to play a supportive role in the task of banking consolidation with a view
to further strengthening the Indian financial sector and support growth while securing the
stability of the system. RBI should activate prompt corrective mechanism that helps in
identifying poor banks and advance the timings of the merger to avoid total collapse of
the bank. This will help the SBI and its associates to formulate appropriate strategies
which may mitigate the dilution in market value consequent upon merger.

5.3.6 Reducing Establishment Expenditure

The establishment expenditure, which constitutes the second largest expenditure
of the total, which need to be monitored regularly after dividing it as controllable and
non-controllable aspects. Though the staff salary structure of banks is subject to bilateral
agreements with the trade unions, but the utilization of the manpower resources to the
optimum advantage is within the control of managements. If staff assessment is carried
out on the basis of activity analysis and productivity criteria, it could be possible to attain
higher business volume with minimum staff and thus establishment cost can be
substantially reduced and banks‟ profitability improved in post merger period.

5.3.7 More Income Generation

To bring about a tangible improvement in income generation, banks should look
towards diversifying into a wide range of financial services. Since, the ancillary income
constitutes quite a low proportion of total income, it is more necessary that banks in
India should focus greater attention on enlarging their ancillary business both in terms of
variety and coverage. SBI‟s family tree having various ancillary services such as,
merchant banking services, non-banking subsidiaries, joint ventures and foreign banking
subsidiaries. They can also focus on consultancy services, marketing of services, leasing
services etc., where banks have to take special attention on it. To ensure maximum
profitability, banks need to adequately charge for these services with proper cost-benefit
analysis periodically. It is also essential to provide banking services at minimum costs.
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5.3.8 Enhancement of Deposits

Deposits, which constitutes a major chunk of bank liabilities needs to be explored
to the maximum potential. Banks must put maximum efforts to attract fixed deposits
which contribute significantly towards the enhancement of banks profitability.
Admittedly, mobilizing fixed deposits is becoming difficult due to competition from
mutual funds, the scope for enhancement of short-term deposits exists by improved
customer services, attractive rate of interest in commensurate with other non-banking
financial institutions and better nomination facilities.

5.3.9 Risk Aversion

The profitability of a bank in the new millennium largely depends on its ability to
efficiently manage the various risks, to which they are exposed in the changed scenario.
Credit risk, liquidity risk, capital risk, market risk, exchange risk, rate risk etc., are the
various risks faced by the banks. The management of these risks in gardening the level of
profitability is utmost important. When spreads are becoming thinner and thinner, banks
should resort to treasury operations to supplement their earnings and improve
profitability. A profitable non-fund business or services hold the key for the future
viability of any bank. Profit must come from increased volume of business through better
service. Innovative product development and proper marketing of the products help in
generating more profits, driven by the growth in volume of business. Banks should
develop core competencies in niche markets, introduce innovative products and adopt
product-branding techniques to augment their business along with income.

5.3.10 Increase in Productivity through TQM

Banks will have to formulate suitable human resource development strategies in
the environment. Quality of manpower employed in the banks will be a deciding factor
for profits and growth in the future. Banks will have to make profits by their respective
edge on the services excellence, as technology will be the same for all the banks. “Total
Quality Management” (TQM) concept should be effectively used for enhancing the level
of productivity in the banks. There is also a need to educate the customers on the various
aspects of banking. Efforts should be made to identify the need for banking services, for
the changing preference and emerging customer‟s expectations, banks should conduct
customer‟s surveys / meets. The efforts made by the bank management can‟t yield
positive results without the total involvement of the staff.
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5.3.11 Priority Sector Advances

Majority of the banks have a demand that the scope of the directed credit under
priority sector should be reduced gradually from 40 to 60 per cent as recommended by
Narasimham Committee. But in a country like India, we cannot move away from the
harsh reality of poverty and hence, the necessity of continuing credit to the priority sector
lending cannot be disputed. There is a need to reappraise the system of sanctioning the
priority sector credit with the greater emphasis on the right selection of the beneficiaries
to banks.

5.3.12 Market and Product Differentiation

Competition is always a one-manship game. In a competitive situation survival of
the bank largely depends on how far its management is both forward looking and
innovative. Each bank will, therefore, have to assess its strengths and weaknesses
(SWOT) analysis and draw up a strategic plan based in futuristic vision for the purpose
of (i) business diversification (ii) product diversification (iii) market segmentation (iv)
technological up gradation.

5.3.13 Monitoring and Controlling Mechanism on Important Ratios

With reference to CRAMEL ratios SBI and its associate's banks have to
concentrate on the ratios such as RAA (C1) - Ratio of Advances to Assets, RGSA (C2) -
Ratio of Government Securities to Assets, DER (C5) - Debt Equity Ratio, ROAA (R2) -
Ratio of Other Assets to Assets, CRDR (R3) - Credit Deposit Ratio, RNPAA (A3) -
Ratio of NPA to Advances, RPSAA (A4) - Ratio of Priority Sector Advances to
Advances, RBPE (M2) - Ratio of Business Per Employee, BPB (M4) - Business Per
Branch, RONW (M5) - Return on Networth, ROPTA (E3) - Ratio of Operating Profits to
Total Assets, ROA (E4) - Return on Assets, RTDD (L2) - Ratio of Term Deposits to
Deposits, RLAA (L3) - Ratio of Liquid Assets to Assets and CDR (L5) - Cash Deposit
Ratio are found to be highly significant variables, they are contributing more towards the
profitability of the bank, therefore the banks that tend to merge have to carefully analyze
those fifteen variables in post merger time, as they are closely associated with the
performance of the banks and to concentrate on these ratios to improve profitability.
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It is also suggested that the small and medium sized banking entities working
under threats from economic environment which is full of problems like inadequacy of
resources, outdated technology, non-systematized management pattern, faltering
marketing efforts and weak financial structure etc., It is therefore advised to re-organize
such banks through M & A‟s so that they could achieve success and re-establish them in
viable banking of optimal size with global presence and M & A‟s should be bound to
change drastically and rapidly the economy in size, quality, and performance increases
through re-organized undertakings, combined resources and united efforts of experienced
executives and skilled workforce.
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5.4 CONCLUSION
In the era of globalization, organizations are become competitive. “Survival of
the fittest” has become the reality in most of the sectors including banking, with the entry
of foreign players. While mergers can be considered barriers to perfect competition,
“small” companies tend to look at the short term (immediate) gain through merger. Lack
of resources required to compete with the big players may also, force the “small” to
merge with the “big”. After viewing the merger syndrome, it is possible that
permutations and combinations of mergers in the Indian Banking Industry have taken
place. In this scenario the researcher has come out with necessary analysis where a
positive sign of merger and acquisition may be made by the associate banks of SBI with
SBI. The Narasimham Committee report on Banking Sector Reforms do confirm merger
of large Indian Banks into “One” so that the size, strength and operations of each banks
may be supporting in global competition.

The present study was purely based on assessing the financial performance and to
identify the profitability variables, various analysis have been used to test and bring out
the variables which directly contribute to profit. In DESCRIPTIVE ANALYSIS
variables such as CAR (C4) - Capital Adequacy Ratio, DER (C5) - Debt Equity Ratio,
ROAA (R2) - Ratio of Other Assets to Assets, RFAA (R4) - Ratio of Fixed Assets to
Assets, RNPAA (A3) - Ratio of NPA to Advances, RPSAA (A4) - Ratio of Priority
Sector Advances to Advances, RBPE (M2) - Ratio of Business Per Employee, BPB (M4)
- Business Per Branch, RONW (M5) - Return on Networth, ROPTA (E3) - Ratio of
Operating Profits to Total Assets, ROA (E4) - Return on Assets, RTDD (L2) - Ratio of
Term Deposits to Deposits, RLAA (L3) - Ratio of Liquid Assets to Assets, and CDR
(L5) - Cash Deposit Ratio are found to be highly significant and most contributing
variables. Hence, banks that tend to merge have to carefully analyze the above said
fourteen variables after merger, as they are closely associated with the profitability and
performance of the banks.

The LINEAR REGRESSION ANALYSIS shows that the performance of the

SBI and its associate banks except RPSAA (A4) - Ratio of Priority Sector Advances to
Advances, SWFR (E1) - Spread to Working Funds Ratio, and RLAA (L3) - Ratio of
Liquid Assets to Assets performs moderately well.
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FACTOR ANALYSIS is made to identify the variables such as RAA (C1) -

Ratio of Advances to Assets, RGSA (C2) - Ratio of Government Securities to Assets,
DER (C5) - Debt Equity Ratio, ROAA (R2) - Ratio of Other Assets to Assets, CRDR
(R3) - Credit Deposit Ratio, RNPAA (A3) - Ratio of NPA to Advances, RPSAA (A4) -
Ratio of Priority Sector Advances to Advances, RBPE (M2) - Ratio of Business Per
Employee, BPB (M4) - Business Per Branch, RONW (M5) - Return on Networth,
ROPTA (E3) - Ratio of Operating Profits to Total Assets, ROA (E4) - Return on Assets,
RTDD (L2) - Ratio of Term Deposits to Deposits, RLAA (L3) - Ratio of Liquid Assets
to Assets and CDR (L5) - Cash Deposit Ratio are found to be highly significant and most
contributing variables identified through t-test. Therefore SBI and its Associate Banks
that tend to merge have to carefully analyze these fifteen variables in post merger time,
since they are closely associated with the performance of the banks.

The CONCENTRATION INDEX of pre and post merger performance of SBI

with SBS and SBIn, CRAMEL (1), CRAMEL (3), CRAMEL (4) and CRAMEL (5) is
more concentrated except CRAMEL (2) in post merger performance. In pre merger
performance of SBI with SBBJ, SBH, SBM, SBP and SBT with regard to CRAMEL (1),
CRAMEL (2), CRAMEL (4) and CRAMEL (5) is more concentrated except CRAMEL
(3). Hence, SBI and its associates have to concentrate on these ratios to improve
profitability.

DATA ENVELOPMENT ANALYSIS shows that State Bank of Mysore is said

to be 195% efficient than other associate banks. Hence, the relative efficiency scores of
all associate banks on CRAMEL variables found to be highly related.
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5.5 FUTURE SCOPE OF THE STUDY

The present study has made an in-depth analysis of Bank Mergers in Indian
Banking Sector - SBI and its Associates. There are some areas of research which could
not be taken up in the present study. It could be worthwhile for the future researchers to
investigate the following areas;

The study has assessed the performance of banks in pre and post merger periods
in financial terms. Human aspect of mergers has not been torched. Gauging the success
of mergers through this aspect could be another area of research.

Information Technology and its effects on profitability may be explored.

Comprehensive study can be focused on merger and acquisition in banks with

SWOT analysis for banks with poor performance on profitability.

In-depth study on profitability analysis of merged banks at branch level and

comparison of profitability behaviour of banks in the post-merger period can be
discussed.