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Bank Mergers in a consolidation

wave ?
Assessment and Emerging
issues

C.S.Balasubramaniam
The paper discusses
I. Economic back drop of recent
developments
2. Key drivers of M&A in banking sector
3. Recent spate of major M& A deals
among banks and strategic factors
facilitating the M&A wave
4.Concluding remarks
Economic backdrop
Indian economy has been growing since 2002-
03 and grew at 9.4% in 2006-07
During 2006-07 savings and investments
increased at 32.4 % and 33.8 %
Merger Banks initiate and RBI approves !
Rapid growth rate in GDP did not translate into
much in terms of per capital terms due to the
rapid growth in population , real per capita
income in the context of rising inflation rate and
cost of living and rise in gross fixed capital
formation .
Economic backdrop
Growth of GDP- 9% in 2005-06
7.5 % in 2004 -05
8.5 % in 2003-04
Manufacturing sector grew at 12.3 %
Services sector increased by 11 %
In contrast ,agricultural sector rose marginally at
2.7 %,particularly when 60% of population is
dependent on this sector.

Recent developments
FEMA replaces FERA regulating foreign
exchange transactions
Limits of foreign investment including FDI
were increased
Improvement in credit ratings by S&P,
Moodys and Fitch
Overall better environment for investment
Key Drivers of M&A in banking
sector in India
Diversification of activities in banking
sector
Competitive strategies in operations
become positive after M&A in banks
Revenue and cost synergies materialize
Bancassurance arrangements
Capital adequacy compliances due to
deadlines of BASEL II implementation.
Bank mergers in a consolidation
wave
SBI has become the biggest among the bigger
banks in India often with the support of
Government
ICICI Bank has also gained in size and turnover
as second largest bank because of its mergers
of Bank of Madura ,Sangli Bank and
diversification and economies of scope
HDFC Bank also gained in size with its merger
of Centurion Bank of Punjab and Times Bank
Bank mergers
Leading PSBs like Punjab National Bank Bank
of India,Bank of Baroda have also become
bigger due to their respective mergers
Merger as a strategy was required in banks due
to competitive economies, expenditure
advantage in technology investment , greater
pooling of skills and management ,geographical
coverage & branch network
Niche markets could also be created
Core Competencies
Bank mergers
Capital base had to be enlarged due to
adherence to BASEL II compliances for some
banks on the merger path.
However ,these banks faced difficulties in
raising capital due to current market conditions
on account of impact of world financial crisis on
Indian economy .It has become easier now with
better climate and rise in sensex and nifty now.
A number of National Committees including
Narasimham Committee(1992 and 1998) ,Khan
Committee(1997) , Verma Committee
(1998),RaghuramRajan Committee (2007) have
recommended bank mergers
Concluding remarks
Capital requirements for merged banks
have become larger for operations
technology and capital adequacy reasons
Banks have to become more market
driven to become successful in mergers .
Further this will help in tracking the merger
process and gains from merger
Quantification of synergies in costs and
revenue is vital for strategic reasons