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MERGERS AND ACQUISITIONS OF BANKS IN INDIA

UNIVERSITY OF MUMBAI

PROJECT REPORT ON
MERGERS AND ACQUISITIONS OF BANKS IN INDIA

T.Y.B.B&I (SEMESTER V)

ACADEMIC YEAR: 2017-18

SUBMITTED BY

MS. POOJA. S. MAURYA

NO - 32

PROJECT GUIDE

PROF MR. RAJIV MISHRA

N.E.S. RATNAM COLLEGE OF

ARTS, SCIENCE & COMMERCE

PROJECT REPORT ON

“MERGERS AND ACQUISITIONS OF BANKS IN INDIA

SUBMITTED

IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF DEGREE


OF

B.COM – BANKING & INSURANCE

By

MS. POOJA.S MAURYA


ROLL NO – 32

T.Y.BBI (SEMESTER V)

PROJECT ON

MERGER AND ACQUISITION OF BANKS IN


INDIA

DECLARATION

I Miss. POOJA. S. MAURYA OF RATNAM COLLEGE, BHANDUP OF TYBBI


(SEMESTER V) HEREBY DECLARE THAT I HAVE COMPILED THIS
PROJECT ON MERGER AND ACQUISITION OF BANKS IN INDIA IN THE
ACADEMIC YEAR 2016-2017.

THE INFORMATION SUBMITTED IS TRUE AND CORRECT TO THE BEST


OF MY KNOWLEDGE

SIGNATURE OF STUDENT

POOJA. S. MAURYA

ACKNOWLEDGEMENT
I owe a great many thanks to a great many people who helped and
supported me doing the writing of this book

My deep sense of gratitude to Principal DR. MRS. MARY.


VIMOCHANA of NES RATNAM COLLEGE OF ARTS SCIENCE
& COMMERCE for support & guidance. Thanks & appreciation to the
helpful people at NES Ratnam college of Arts, Science & Commerce for
their support.

I also owe my sincere thanks to the co-ordinator of our department


PROF: RIYA RUPANI for her co-ordination and support in completing
the project.

My deepest thanks to lecturer, MR. RAJIV. MISHRA guide of the


project for guiding & correcting various documents of mine with
attention & make necessary corrections as & when needed.

Would also thank my faculty members without whom this project is


incomplete. I also extend my heartful thanks to my family & my well-
wishers.
SR.NO CONTENTS PAGE. NO.
1 BANKING REFORMS IN INDIA

NARSHIMAN COMITTE REPORT


RAGHURAM RAJAN COMMITTEE
2 INTRODUCTION

MERGER & ACQUISITION


MERGER
ACQUISITION

3 TYPES OF MERGER

4 BENEFITS OF BANK MERGER & ACQUISITION

5 RESONS FOR MERGER

6 BASIC GUIDELINES FOR BANK MERGER &


ACQUISITION

7 IMPACT OF MERGER & ACQUISITION

8 DANGER OF MERGER & ACQUISITION

9 CHANGE IN INDIAN BANKING SCENARIO

10 MERGER & ACQUISITION IN INDIAN BANKING


SECTOR

11 RECENT MERGER & ACQUISITION NEWS IN


INDIA

12 TECHNOLOGY ISSUES IN MERGERS OF BANKS

13 CONCLUSION

14 BIBLIOGRAPHY

BANKING REFORMS IN INDIA:


NARSIMHAN COMMITTEE REPORT
The Narsimhan Committee on Banking Sector Reform was set up in December,
1997. ThisCommittee’s terms of reference include; review of progress in reforms
in the banking sector, to makeBanking system robust and internationally
competitive reforms should be modified according to
Situations, framing detailed recommendation regarding banking policy for each
dimension likeInstitution, technology and legislative.
The Committee submitted its report on 23 April, 1998 with the following
suggestions:
1).Use of mergers to build the size and strength of operations for each bank

2).Recommended merger of larger Indian banks to make them strong enough to


stand in international trade.

3).Speed up computerization in PSB.

4).Strengthen legal framework for credit recovery

5).There should be two to three banks with international orientation, eight to ten
national banks and a large pool of local banks so that system can cover remote
areas too.
1

6). Narrow banking will help weak banks to recover large banks should merge only
with banks of equivalent size and not with weaker banks.

7).Confine small, local banks to States or a cluster of Districts


8).Review the recruitment procedures, and the training and remuneration policies
of PSU bank.

9).Enhanced banking risk can be matched with increased capital adequacy.

10) Budgetary support non-viable for recapitalization

11) No alternative to the asset reconstruction fund.

12) Review the RBI Act, the Banking Regulation Act, the Nationalization Act and
the State Bank of India Act.

13) Professionalisation of the bank Boards.

RAGHURAM RAJAN COMMITTEE:

In April 2009, Raghuram Rajan penned a guest column for The Economist, in
which he proposed a regulatory system that might minimize boom–bust financial
cycles.
The Terms of Reference of the Committee will be as follows:

(i) We need to identify the changes required in our supervisory infrastructure and
regulatory
infrastructure that will allow financial sector to play a better role by keeping the
risk factor
intact.

(ii) To analyse the financial sector and its various segments and analyse the
changes to meet the requirements of real sector.

(iii) To analyse changes in other segments of the economy and it includes the
conduct of Monetary and Fiscal policy and operation of legal and educational
framework that will help financial sector to work effectively and efficiently.

(iv) To analyse the challenges in financial needs that will crop up in coming years
and to meet those challenges effectively we need real sector reforms.

SUGGESTIONS BY RAGHURAM RAJAN COMMITTEE:

1).Deregulation is required in certain areas.


2).Given how open India is, it is impossible to control capital flows and it will
create uncertainty and volatility in economy.

3).To grow into large banks there is a need to offer an entry point in banking
systems which entities can use.

4).Priority sector lending services certificates

5).Advancement in technology can help some small banks to evolve and


reduce its operational cost.

6).Greater participation of foreign players in domestic markets.

7).Give proper incentive and encouragement to professional markets.

8).Reduced government ownership below 50% still maintaining its control

9).Selling of small underperforming PSUs.

10).Stop or reduce creating uncertainty for investors by banning markets.


11).Bringing trade regulations under SEBI

12).Creating an innovation friendly environment for investors.

13).More liberal perspective in mergers and takeovers.

INTRODUCTION ON MERGER AND ACQUISITION IN


BANKS:

A large number of international and domestic bank all over the world are engaged
in merger and acquisition activities. One of the principal objectives behind the
merger and acquisition in the banking sector is to recap the benefits of economics
of scale. In the recent times, there have been numerous reports in the media on the
Indian Banking Industry Reports have been on a variety of topics. The topics have
been ranging from issues such as user friendliness of Indian banks, preparedness of
banks to meet the fast approaching Basel II deadline, increasing foray of Indian
banks in overseas markets targeting inorganic growth.

Merger and Acquisition is the only way for gaining competitive


advantage domestically and internationally and as such the whole range of
industries are looking to strategic acquisition within India and abroad. In order to
combat the unhealthy competition within the sector besides emerging as a
competitive force to reckon with in the International economy. Consolidation of
Indian banking sector through mergers and acquisitions on commercial
consideration and business strategies is the essential pre-requisite.

Today, the banking industry is counted among the rapidly growing industries in
India. It has transformed itself from a sluggish business entity to a dynamic
industry. The growth rate in this sector is remarkable and therefore, it has become
the most preferred banking destinations for the international investors. In the last
two decade, there have been paradigm shift in Indian banking industries. The
Indian banking sector is growing at an astonishing pace. A relatively new
dimension in the Indian banking industry is accelerated through mergers and
acquisitions. It will enable bank to achieve world class status and throw greater
value to the stake holders.

INTRODUCTION
MERGER:

Merger is defined as combination of two or more companies into


a single company where one survives and other lose
their corporate existence. The survivor acquires all
the assets as well as liabilities of the merged company or
companies. Generally, the surviving company is the buyer,
which retains is identity, and the extinguished company is the seller. Merger is also
defined as amalgamation. Merger is the fusion of two or more existing companies.
All the asset, liabilities and the stock of one company stand transferred to
transferee company.

Transferee Company in consideration of payment in the form of:

1.Equity shares in the transferee company.


2. Debentures in the transferee company.

INTRODUCTION

ACQUISITION:

Acquisition in general sense is acquiring the


ownership in the property. In the context of
business combination, an acquisition is purchase by
one company of a controlling interest in the share
capital of another existing company.
METHODS OF ACQUISITION:

An acquisition may be affected by:

1 .Agreement with the person holding majority interest in the company


management like members of the board or major shareholders commanding
majority of voting power.
2. Purchase of shares in open market.
3 .To make takeover offer to the general body of shareholder.
4. Purchase of new shares by private treaty.
5. Acquisition of share capital through the following forms of considerations viz.
Means of cash, issuance of loan capital, or insurance of share capital

TYPES OF MERGERS

Merger or acquisition depends upon the purpose of the offeror company it wants to
achieve. Based on the offerors objectives profile. Combination could be vertical,
horizontal, circular, and conglomeratic as precisely described below with reference
to the purpose in view of the offeror company

A). Vertical combination:

A company would like to take over another company or seek its merger with that
company to expand espousing backward integration to assimilate the resource of
supply and forward integration towards market outlets. For example, if a clothing
store takes over a textile factory, this would be termed as vertical merger, since the
industry is same, i.e. clothing, but the stage of production is different: one firm is
works in territory sector, while the other works in secondary sector. The acquiring
company through merger of another unit attempts on reduction of inventories of
raw material and finished goods, implements its production plans as per the
objectives and economizes on working capital investments. In the other words, in
vertical combination, the merging undertaking would be either a supplier or a
buyer using its product as intermediary material for final production. E.g.: A
mobile producing company merges with the company which provides those parts
of mobile and software.

The following main benefits accrue from the vertical combination to the acquirer
company i.e.

It gains a strong position because of imperfect market of the intermediary products,


scarcity of resources and purchased products.
Has control over products specification.

B). Horizontal Mergers:

Horizontal mergers happen when a company merges or takes over another


company that offers the same or similar product lines and services to the final
consumers, which means that it is in the same industry and at the same stage of
production. Companies, in this case, are usually direct competitors. For example, if
a company producing cell phones merges with another company in the industry
that produces cell phones; this would be termed as horizontal merger. The benefit
of this kind of merger is that it eliminates competition, which helps the company to
increase its market share, revenues and profits. Moreover, it also offers economies
of scale due to increase in size as average cost decline due to higher production
volume. These kinds of merger also encourage cost efficiency, since redundant and
wasteful activities are removed from the operations i.e. various administrative
departments or departments such as advertising, purchasing and marketing. E.g.:
Merger of bank with another bank

C). Circular combination:

Companies producing distinct products seek amalgamation to share common


distribution and research facilities to obtain economies by elimination of cost on
duplication and promoting market enlargement. The acquiring company obtains
benefits in the form of economics of resource sharing and diversification.

D). Conglomerate Merger:

When two companies that operates in completely different industry, regardless of


the stage of production, a merger between both companies is known as
conglomerate merger. It is the amalgamation of two companies engaged in
unrelated industries .The basic purpose of such amalgamation remains utilization
of financial resources and enlarges debt capacity through re-organizing their
financial structure. Merger enhances the overall stability of the acquirer company
and creates balance in the company’s total portfolio of diverse products and
production process. This is usually done to diversify into other industries, which
helps reduce risks

BENEFITS OF BANK MERGER AND ACQUISITION

A). SCALE:

A bank merger helps your institution scale up quickly and gains a large number of
new customers instantly. Not only does an acquisition give your bank more capital
to work with when it comes to lending and INVESTMENTS, but it also provides a
broader geographic footprint in which to operate. That way, you achieve your
growth goals quicker.

B). EFFICIENCY:

Acquisitions also scale your bank more efficiently, not just in terms of your
efficiency ratio, but also in terms of your banking operations. Every bank has an
infrastructure in place for compliance, risk management, accounting, operations
and IT – and now that two banks have become one, you’re able to MORE
EFFICIENTLY CONSOLIDATE AND ADMINISTER THOSE OPERATIONAL
INFRASTRUCTURES. Financially, a larger bank has a lower aggregated risk profile
since a larger number of similar-risk, complimentary loans decrease overall
institutional risk.

C). BUSINEES GAP FILLED:

Bank mergers and acquisitions empower your business to fill product or


technology gaps. Acquiring a smaller bank that offers a unique revenue model or
financial product is sometimes easier than building that business unit from
scratch. And, from a technology perspective, being acquired by a larger bank
might allow your institution to upgrade its technology platform significantly.

D). TALENT AND TEAM UPGRADE:

While not a factor on the balance sheet, every bank benefits from a merger or
acquisition because of the increase in talent at leadership’s disposal. An acquisition
present the possibility of bolstering your sales team or strengthening your team of
top managers, and this human element should not be ignored or downplayed.
REASONS FOR MERGER

1) Merger of weak banks- Practice of merger of weak banks with strong banks was
going on in order to provide stability to weak banks but Narsimhan committee
opposed this practice. Mergers can diversify risk management.

2) Increase in market competition- Innovation of new financial products and


consolidation of regional financial system are the reasons for merger.

3) Markets developed and became more competitive and because of this market
share of all individual firm reduced so mergers and acquisition started.

4) Capability of generating economies of scale when firms are merged.

5) Transfer of skill takes place between two organisation takes place which helps
them to improve and become more competitive.

6) Globalisation of economy impacted bank mergers.


7) New services and products- Introduction of e- banking and some financial
instruments / derivatives.

8) Technology- Removal of entry barrier opened the gate for new banks with high
technology and old banks can’t compete with them so they decide to merge.

9) Positive synergies- When two firms merge their sole motive are to create a
positive effect which is higher than the combined effect of two individual firms
working alone. Two aspects of it are cost synergy and revenue synergy. Cost
Synergy is the savings in operating costs expected after two companies that
complement each other's strengths join. Revenue Synergy is refers to the
opportunity of a combined corporate entity to generate more revenue than its two
predecessors stand-alone companies would be able to generate.
BASIC GUIDELINES FOR BANK MERGER AND ACQUISITION

Mergers and acquisitions have become a common feature in corporate circles in


both developed and developing countries. In line with this trend, banks have not
been left out as we have seen in the last decade several bank mergers or
acquisitions in Africa, Europe and the United States. In Nigeria for instance, there
were several bank mergers and acquisitions in 2005 due to the directive by the
Central Bank of Nigeria (CBN) that banks recapitalize.

Where a bank merger or acquisition occurs, both banks should observe a common
economic vision; this is important because the vision provides the bedrock upon
which constant evolutionary opportunistic change can occur. It also directs the
partners of the merger or acquisition towards common goals and in this regard, the
following questions are relevant:

a).Do the merging banks have shared values and beliefs?

b).Do they have well defined strategic goals?

c). Would the merger or acquisition result in long-term business harmony, thinking
together and growing together towards a common purpose?

All mergers and acquisition must produce a synergy – the synchronization of the
different energies of each partner in the deal aimed at creating a powerful, more
valuable post-merger entity. The synergy must produce a new post merger bank,
which is better positioned competitively, more dominant and more valuable than
the sum of its pre-merger individual banks. The synergy must also exploit
complimentary technologies and be involved in cultural compatibility among the
merging partners.

In evaluating bank mergers and acquisitions, it is important that certain


fundamental criteria be applied in order that the present and potential worth of each
bank will be determined as a growing concern.

The Merger And Acquisition Criteria Are:

1.The worth of the assets of each bank (physical and financial).

2.How much productive investment has each bank in terms of assets, loans and
advances?

3.What are the profit and cash flow potential of their loans, advances and
investments?

4.How easily recoverable are the loans and advances?

5.Is there likely to be loss of shareholders resulting from asset-write-down,


revaluation of ideal assets, loans and advances write-down; if so, by how much?

6.Estimate the sustainable earning streams from each bank and then use an
appropriate risk factor to capitalize in order to have some working idea of its value.

7.Check the degree of innovativeness of each bank and its management in


generating new and potential profitable opportunities. This is because, the only
way of making true profit is through innovative profit; other profits are like trying
to make last year’s profit over again the following year.

8.In the evaluation of each banks financial statement, apply the CAMEL rule –
Capital, Assets, Management, Earnings and Liquidation. CAMEL must be seen as
a whole and not as discreet measures. It takes a visionary management to build and
leverage the capital over and above the asset of the generated earnings, which can
be translated into cash flow and liquidity.

9.A thorough investment analysis must be done by stripping the financial statement
of all the facts thereby exposing all the muscles that drive the bank. This includes
down grading all loans and advances, using the rule for non-performing,
substandard and lost loans. Down grading all ideal assets to the level of their
capacity utilization, ignoring all extra-ordinary income that is non-recurring, non-
operational and therefore unsustainable; recognizing extra-ordinary expenses
which may be the result of creative accounting increase expense, reduce taxable
income and engineer high profits.

10.Place a higher value on fee-based income than on interest-earning profit; for the
current interest earned by many banks is paper income on non-performing loans
and advances on sustainable non-productive investment.

All these must be thoroughly assessed, valued, planned and budgeted for, in other
to reduce post-merger stress. They will assist in pricing and proper merger and
acquisition deal structuring.

There are always pit falls ahead – often, the tyranny of the movement prevents the
chief executive from paying attention to the opportunistic potentials of the future
or indeed the problems associated thereto. Some risk areas to pay attention to in
merger negotiations includes, for instance not having a clear and well articulated
policy for developing competitive advantage and creating shareholders value after
the merger. Secondly, not knowing what to do with an enhanced and more
resourceful financial powerhouse thereby leading to the temptation of falling into
‘’the business as usual trap’’ is a major cause of corporate failure. Thirdly, not fully
identifying and understanding the accounting and tax implication of the merger and
acquisition thereby paying more in capital. Fourthly, not structuring the best
merger and acquisition-financing package that is tailored to the deal, not fully
undertaking and implementing successful restructuring and divestitures attendant
to the merger. Fifthly, not fully estimating the cost of maintaining several low
deposit accounts, planning for the increased cost of complexity of servicing a
larger number of shareholders and evaluating the power of vested interest in labour
unions, labour laws and politicians.

The extent of labour militancy and its effects on the smooth consummation of the
merger deal must also be taken into consideration. Compensation packages for job
losses must be budgeted for and should be realistically sustainable. The effect of
compensation programmes on profit and cash flow of the merger and acquisition
candidates must be thoroughly considered. The tendency of the acquiring bank to
force the acquired bank to adopt and assimilate the operational culture as the
dominant partner, thereby creating post-merger cultural incompatibility is also an
issue of utmost concern. The inability of a medium management to adjust to a new
higher quality-demanding environment is an issue that must be promptly
addressed. Although mergers and acquisition will lead to the company having
better access to capital for expansion of its operations, it must be emphasized that
the fate of employees lie in the hands of the parties entering into the merger or
acquisition.
In the process of mergers and acquisitions, the cards for negotiation are the
quantum of what each party is bringing to the negotiation table. For instance, the
value of the fixed assets of a bank, which is provided by a valuation report or the
fundamental component of the balance sheet that pictures the financial health of
the bank.

There is really not much to fear from mergers and acquisitions in the finance
industry. The companies and the concerned banks stand to gain more through
mergers and acquisitions than allowing their individual companies to be forced into
liquidation whether voluntarily or involuntarily, by the forces of the operating
environment. It is however necessary that in going into a merger or acquisition
arrangement, a realistic assessment of each case should be carried out in order to
guarantee the interest of all parties concerned, especially protecting the jobs of the
employees or minimizing job losses.

IMPACT OF MERGER

1) Diversification- When two firms merge their risk in investing assets diversify
accordingly. When a firm is operating alone then they don’t have many options to
diversify their portfolio investment that they can get after merger.

2) Mergers and Acquisition allows firms to obtain efficiency gains through cost
reductions (cost synergies), revenue increases (revenue synergies)
3) Broader array of products- When two firms merge they have diversified variety
of products and after the merger each consumer in both the firms will be benefited
with the range of products or services to choose from

4)Mergers and Acquisition helps firms to widen its consumer portfolio but it also
leads to a more diversified range of services and offer scope economies by
optimizing the synergies between the merged activities.

5) Domestic mergers cut costs for both the partners whereas for the majority of
cases including domestic and cross border mergers and acquisition, the impact on
profitability is insignificant but a clear trend to diversify the sources of revenue
was apparent.

6) In terms of cost efficiency and revenue efficiency it has been noticed that in
domestic merger organisation get the benefit of cost efficiency( reduction in
operating cost) and in cross border merger organisation get the benefit of revenue
efficiency (increase in revenue) because of the benefit of geographical expansion
and diversification.

7) Improvement in the activities of organisation, however, offer benefits from


product complementarities which helps to enhance revenues.

8) Efficiency may be improved after merger and acquisition, if the acquiring


company is more efficient already and brings the efficiency of the target up to its
own level by providing its managerial expertise, policies and other operation
DANGERS OF BANK MERGERS AND ACQUISITIONS
A). POOR CULTURE FIT:

Plenty of prospective bank mergers and acquisitions only look at the two banks on
paper – without taking their people or culture into account. Failure to assess
cultural fit (not just financial fit) is one reason why many bank mergers ultimately
fail. Throughout the merger and acquisition process, be sure to thoroughly
communicate and double-check that employees are adapting to the change.

B). NOT ENOUGH COMMITMENT:

Execution risk is another major danger in bank mergers. In some cases, banking
executives don’t commit enough time and resources into bringing the two banking
platforms together – and the resulting impact on their customers causes the newly
merged bank to fail completely. Avoid this mistake by DEDICATING ENOUGH
RESOURCES FOR A FULL INTEGRATION of the two financial institutions.

C). CUSTOMER IMPACT:

While undergoing an M&A event at your bank, it’s critical that you pay attention to
the impact it has on your customers. BANKS, customers often respond very
emotionally to a bank acquisition – so it’s essential that you manage customer
perception with regular, careful communication. And once the merger or
acquisition is fully underway, remember to consider the impact on your customers
at every stage: Anything from changing technology platforms to financial products
could impact your customers negatively if you don’t pay attention.
D). COMPLIANCE AND RISK CONSISTENCY

A final danger to consider during your next merger or acquisition is the risk and
compliance culture of each bank involved. Every financial institution handles
BANKING COMPLIANCE AND FEDERAL BANKING
REGULATIONS differently, but it’s important that the
two merging banks agree on their approach moving
forward. When two mismatched risk cultures
clash during a bank merger, it negatively affects the
profitability of the business down the road if they haven’t come to working
solution. Bank mergers and acquisitions are complex procedures with the
possibility of extraordinary payoff – or extraordinary peril – so it’s important that
you handle your upcoming M&A event with care. Keep these benefits and dangers
in mind as you combine the processes of each different bank, and you’ll be on your
way to a successful merger or acquisition.

CHANGES IN INDIAN BANKING SCENARIO


Like all business entities, banks want to safeguard against risks, as well as exploit
available opportunities indicated by existing and expected trends. M&As in the
banking sector have been on the rise in the recent past, both globally and in India.
In this backdrop of emerging global and Indian trends in the banking sector, this
article illuminates the key issues surrounding M&As in this sector with the focus
on India. It seeks to explain the motives behind some M&As that have occurred in
India post 2000 analyze the benefits and costs to both parties involved and the
consequences for the merged entity. A look at the future of the Indian banking
sector, and some key recommendations for banks follows from this analysis.

The International banking scenario has shown major turmoil in the past few
years in terms of mergers and acquisitions. Deregulation has been the main driver,
through three major routes – dismantling of interest rate controls, removal of
barriers between banks and other financial intermediaries, and lowering of entry
barriers. It has lead to disintermediation, investor demanding higher returns, price
competition, reduced margins, falling spreads and competition across geographies
forcing banks to look for new ways to boost revenues. Consolidation has been a
significant strategic tool for this and has become a worldwide phenomenon, driven
by apparent advantages of scale-economies, geographical diversification, lower
costs through branch and staff rationalization, cross-border expansion and market
share concentration. The new Basel II norms have also led banks to consider
M&AS.

M&AS that have happened post-2000 in India to understand the intent ( of


the targets and the acquirers), resulting synergies (both operational and financial),
modalities of the deal, congruence of the process with the vision and goals of the
involved banks, and the long term implications of the merger. The article also
analyses emerging future trends and recommends steps that banks should consider,
given the forecasted scenario.

THE INDIAN BANKING SECTOR:

The history of Indian banking can be divided into three main phases:

Phase II (1786-1969)- Initial phase of banking in India when many small banks
were set up
Phase II (1969-1991)-Nationalization , regularization and growth
Phase III (1991 onwards)-Linearization and its aftermath

With the reforms in phase III the Indian baking sector, as it stands today, is
mature in supply, product range and reach, with banks having clean, strong and
transparent balance sheets. The major growth drivers are increase in retail credit
demand. Proliferation of ATMs and debit-cards, decreasing NPAs due to spreads,
and regulatory and policy changes (e.g. amendments to the Banking Regulation
Act).

Certain trends like growing competition, product innovation and branding, focus
on strengthening risk management systems. Emphasis on technology have emerged
in the recent past. In addition, the impact of the Basel II norms is going to be
expensive for Indian banks, with the need for additional capital requirement and
costly database creation and maintenance process. Larger banks would have relative
advantage with the incorporation of the norms.

EARLY MERGER MOVEMENTS

Several major merger movements have occurred in the United States (Golbe and
White 1988), and each was more or less dominated by a particular type of merger.
All of the merger movements occurred when the economy experienced sustained
high rates of growth and coincided with particular developments in business
environments. According to the general hypothesis developed in the following
chapters, this is not a mere coincidence. In our hypothesis, mergers represent
resource allocation and reallocation processes in the economy, with firms
responding to new investment and profit opportunities arising out of changes in
economic conditions and technological innovations impacting industries. Mergers
rather than internal growth may sometimes expedite the adjustment process and in
some cases be more efficient in terms of resource utilization.

One reason why merger activity is concentrated in periods of high


business activity may be that firms are not motivated to make large investment
outlays when business prospects are not favorable. Only when future benefits
accruing to a business endeavor exceeds its cost is the action warranted. When such
favorable business prospects are joined with changes in competitive conditions
directly motivating a new business strategy, M&A activities will be stimulated.

MERGER IN BANKING SECTOR: 1992–1994

During 1991-92, 28 banks under liquidation were treated as dissolved and two
banks were placed under liquidation. On 31st March 1992, 96 banks went under
liquidation. On July 6, 1991, the RBI suspended all payments and other transactions
of Bank of Credit and Commerce International (Overseas) ltd. and the SBI was
appointed as the provisional liquidator of BCCI. In February 1993, the Grand Court
of Cayman Islands approved the terms and conditions for the sale of BCCI (O) ltd.,
to the SBI. The SBI offered to purchase the business of Bombay branch BCCI (O)
ltd. for a consideration of Rs. 40 r. Following the agreement of promoters a wholly
owned subsidiary of SBI viz. SBI Commercial and International Bank ltd. (SBICI)
was incorporated on October 1993, and it started its business from January 31,
1994. The Bank of Karad ltd. also fell into financial crises due to the large scale
irregularities by certain stock brokers. The crises affected the depositor’s interest
and the survival of the bank. Then RBI took over the matter and issued an interim
order for liquidation of the bank on May 27, 1992. The scheme of amalgamation
with Bank of India came into force on July 20, 1994.

BANK MERGERS: 1995-2000

A very important merger of the early 1990s was that of a nationalised bank viz.
New Bank of India with Punjab National Bank. The New Bank of India had
incurred losses during the last four proceeding years. With the introduction of
prudential accounting standards and new NPA norms, the financial position of the
New Bank of India further worsened. The cumulative losses and the erosion of
deposits weakened the liquidity position of New Bank of India and threatened its
existence. Thus for the interest of the depositors the RBI took a decision in
September 1993 for merging the New Bank of India with PNB. In January 1996,
the Kashinath Seth bank ltd. was also merged with SBI. The Punjab Cooperative
bank ltd. and Doab Bank ltd. were also merged with Oriental Bank of Commerce
ltd. on April 8, 1997. In June 1999, Bareily Corporation Bank ltd. merged with
Bank of Baroda.

BANK MERGERS: 2000-2005

The year 2001 witnessed the merger of the 57 years old Tamil Nadu based private
sector commercial bank “Bank of Madura Ltd.” with a new generation private bank
i.e. ICICI bank. The RBI approved the merger of Bank of Madura with ICICI Bank
ltd. with effect from March10, 2001. As per the scheme of amalgamation, the swap
ratio was fixed at two equity shares of ICICI Bank for every one equity share of
Bank of Madura ltd. On 26th April 2002, the RBI also accorded approval for
merger of ICICI ltd. with ICICI Bank. The Benares State Bank ltd. was also merged
with Bank of Baroda on July 19, 2002.The Nedungadi Bank which was incurring
huge losses was also placed under moratorium for a period of 3 months from
November 2, 2002 and the scheme of amalgamation of Nedungadi Bank ltd. with
Punjab National Bank came into effect on February 1, 2003. The Global Trust Bank
(GTB), which was granted license in 1994, began showing adverse growth in 2002.
The RBI instructed the bank to adopt prudential norms for reducing its adverse
futures. But the bank was not able to finalise the programme of capital expansion
from domestic sources as advised by RBI. As the financial position of the bank was
steadily deteriorating and its solvency getting seriously affected, the RBI had placed
the bank under moratorium on July 24, 2004, to protect the interests of the small
depositors and that of the banking system. Of the various merger proposals, the one
proposed by the Oriental Bank of Commerce was found acceptable by the RBI and
was forwarded to the central government for approval. As per the notification of the
government the GTB was merged with OBC on August 14, 2004. In 2005, a
proposal of voluntary amalgamation was submitted by two new generation private
sector banks viz. “Bank of Punjab” and Centurian Bank Ltd.”. The scheme of
amalgamation of these two banks was approved by the RBI in terms of Sec. 44A of
the Banking Regulation Act , and the became effected from October 1, 2005. The
Centurian Bank subsequently changed its name to Centurian Bank of Punjab Ltd.

BANK MERGERS DURING THE YEAR 2006-2013


On January 7, 2006, the Ganesh Bank of Kurundwad Ltd. was placed under
moratorium for three months, as the net worth of the bank was turned negative and
it failed to maintain the capital adequacy requirements for several years. This Bank
was merged with Fedral Bank Ltd. on September 2,2006.The Capital to Risk
Weighted Ratio of the United Westron Bank Ltd (UWB) had turned negative and
failed to maintain it and this bank was merged with Industrial Development Bank of
India ltd. on October 3, 2006. The year 2007, witnessed the merger of an old private
sector bank “Bharat Overseas Bank Ltd.” with a nationalised bank viz. Indian
Overseas Bank. The bank with a network of 103 branches was taken over by India
Overseas Bank in April 3, 2007.On May 23, 2008, Centurian Bank ofPunjab was
merged with HDFC Bank. Centurian Bank of Punjab had around 400 branches out
of about 180 locations supported by an employee base of over 7500 employees. The
Bank of Rajasthan with asset size of Rs. 17300.06 cr. incurred the net loss after
provision and taxes remained at Rs. 102.13 cr. for the year ending March 31, 2010.
On august 13, 2010 Bank of Rajasthan was also merged with ICICI Bank.
Mergers and Acquisitions in Banks

The recent Mergers and Acquisitions of Banks throws us to the


back to the History of India when various small banks were
merged together or with some large bank.

In 1921, Imperial Bank of India was formed by the amalgamation of


the three presidency banks viz. The Bank of Calcutta, The Bank of
Bombay, and The Bank of Madras. Then on 1 July 1955, the Imperial
Bank of India became the State Bank of India. Since then there
have been various mergers in the Indian Banking Industry.

First in 1998, the Narasimham-II Committee recommended for


merger of large Indian banks to make them strong along with
other recommendations. Then in line with the Committee’s
recommendations, there were a string of mergers in banks of India
during the late 90s and early 2000s.The idea of consolidation
among public sector banks was pushed by P Chidambaram, when
he was fnance minister under the United Progressive Alliance
(UPA) government.

Here is a list of some mergers in the Indian Banking Industry:


THE BANK WHICH ACQUIRED THE BANK WHICH GOT MERGED YEAR OF MERGER

State Bank of India *5 SB Associate Banks and 2017


Bharatiya Mahila Banks

Kotak Mahindra Bank ING Vysya Bank 2016

ICICI Bank Bank of Rajasthan 2010

State Bank of India State Bank of Indore 2009

State Bank of India State Bank of saurashtra 2008

HDFC Bank Centurion Bank of Punjab 2008

Centurion Bank of Punjab Lord Krishna Bank 2007

Indian Overseas Bank Bharat Overseas Bank 2007

IDBI Bank United Western Bank Ltd. 2006

Federal Bank Ganesh Bank of Kurundwad 2006

*Centurion Bank Bank of Punjab(BOP) 2005

IDBI Bank Ltd. IDBI Ltd. 2005

Oriental Bank of Commerce Global Trust Bank(GTB) 2004

Punjab National Nedungadi Bank 2003

Bank of Baroda Benaras State Bank 2002

ICICI Bank Ltd. ICICI Ltd. 2002

ICICI Bank Bank of Madura 2001

HDFC Bank Times Bank 2000

Union Bank of India Sikkim Bank 1999

State Bank of India Kashinath State Bank 1995

Bank of India Bank of Karad 1994

Punjab National Bank New Bank of India 1993

State Bank of India Bank of Cochin 1985

Canara Bank Lakshmi Commercial Bank 1985


*State Bank Associate Banks- State Bank of Bikaner and Jaipur, State Bank of Hyderabad, State Bank of
Mysore,State Bank of Patiala and State Bank of Travancore.

*Centurion Bank and Bank of Punjab merged to form Centurion Bank of Punjab.

RECENT MERGERS AND ACQUISITIONS NEWS IN INDIA

The government is working on a consolidation plan for various public sector banks in order to create 3-4
global-sized banks and reduce the number of state-owned lenders to about 12 from the existing 21, an
official told PTI.

The 21 public sector banks would get consolidated to 10-12 in the medium term, the official said. As part
of a three-tier structure, the official said, there would be at least 3-4 banks of the size of State Bank of
India (SBI), the country's largest lender.

Some region-centric banks like Punjab and Sind Bank and Andhra Bank will continue as independent
entities while some mid-size lenders would also co-exist, the official added.

Last month, finance minister Arun Jaitley said the government is 'actively working' towards consolidation
of public sector banks but declined to provide details, saying this was a price-sensitive information.
Enthused by the success of SBI merger, the finance ministry is considering clearing another such
proposal by this fiscal if bad loan situation comes under control by then.

According to former RBI governor C. Rangarajan, the system will have some large banks, some small
banks, some local banks and so forth. "What is needed in the system is variety," Rangarajan said.
One of the possibilities is that large public sector banks (PSBs) like Punjab National Bank, Bank of Baroda,
Canara Bank and Bank of India could try looking for potential candidates for acquisition, another official
said, who did not wish to be identified.

Factors like regional balance, geographical reach, financial burden and smooth human resource
transition have to be looked into while taking a merger decision, they said, adding a very weak bank
should not be merged with a strong one "as it could pull the latter down".

In the last consolidation drive, five associate banks and Bharatiya Mahila Bank (BMB) became part of SBI
on 1 April, 2017, catapulting the country's largest lender to among the top 50 banks in the world.

State Bank of Bikaner and Jaipur (SBBJ), State Bank of Hyderabad (SBH), State Bank of Mysore (SBM),
State Bank of Patiala (SBP) and State Bank of Travancore (SBT), besides BMB, were merged with SBI. With
the merger, the total customer base of SBI reached around 37 crore with a branch network of around
24,000 and nearly 59,000 ATMs across the country. The merged entity began operation with deposit
base of more than Rs 26 trillion and advances level of Rs 18.50 trillion.

The government in February had approved the merger of these five associate banks with SBI. Later in
March, the cabinet approved merger of BMB as well. SBI first merged State Bank of Saurashtra with itself
in 2008. Two years later, State Bank of Indore was merged with it.
CURRENT SCENARIO OF INDIAN BANKS:

The total assets of Indian banks, which are regulated by the Reserve Bank of India
(RBI) and the Ministry of Finance (MoF)1, were pegged at Rs 82,99,220 crore
(US$ 1564.8 billion) during FY122
AFTER MERGER SCENARIO (HERE WE MERGERD ALL SUBSIDIARIES
OF STATE BANK OF INDIA)

Question arises that if these five (SBI, PNB, CANARA BANK,


BANK of INDIA, And BANK OF BARODA) major Public sector
banks merge together what will be the impact on competition and
the economy.

Whether or not these mergers are socially beneficial on average, there may be
identifiable circumstances that may help guide the policy decisions about
individual mergers. Current antitrust policy relies heavily on the use of the ex-ante
Herfindahl index of concentration for predicting market power problems and
considers operating efficiency only under limited circumstances. Mergers and
acquisitions could raise profits in any of three major ways. First, they could
improve cost efficiency, reducing costs per unit of output for a given set of output
quantities and input prices. Indeed, consultants and managers have often justified
large mergers on the basis of expected cost efficiency gains. Second, mergers may
increase profits superior combinations of inputs and outputs. Through
improvements in profit efficiency that involves Profit efficiency is a more inclusive
concept than cost efficiency, because it takes into account the cost and which is
taken as given in the measurement of cost revenue effects of the choice of the
output vector, efficiency. Thus, a merger could improve profit efficiency without
improving cost efficiency if the reconfiguration of outputs associated with the
merger. Third, mergers may improve profits through the exercise of additional
market Power in setting prices. An increase in market concentration or market
share may allow the consolidated firm to charge higher rates for the goods or
services it produces, raising profits by extracting more surplus from consumers,
without any improvement in efficiency. See U.S. Department of Justice and
Federal Trade Commission (1992).

According to the study conducted by US it has been seen that borrowers lose on
average about 0.8% in equity value when an announcement identifies their bank as
a merger target. Small borrowers of target banks are especially hurt. As we can see
from the data of market share that if we merge top five public sector banks then
more than 39% share out of whole 75% share corresponding to government banks
will go in the hands of these banks which can arise competition issues in banking
sector.
Post-merger increase product switching may indicate reduced customer satisfaction
or that merged firms effectively drive out customers. Sapienza (2002) finds that
exit rates for borrowers of target banks increase after a bank merger, and suggests
that management of newly merged banks effectively kicks out small borrowers.

Small firms may also be very sensitive to changes in market power resulting from
bank mergers since they are unlikely to have many sources of finance like large
banks.

In the past studies it has been noticed that when banks with such a large share
merge together then operating cost reduces because doubling of activities reduces.

The banking industry has relatively clean, detailed data available from regulatory
reports that give information on relatively homogeneous products in different local
markets with various markets. Complexity will also become greater as financial
services industries evolve, as financial markets and products become more
complex and global.

Instability relates to bank risk-taking on the asset side. Because of their substantial
financing from many small, relatively uninformed depositors and an often-existing
public safety net in response to the previously mentioned vulnerability, banks can
be prone to taking on ‘excessive’ risk in the choice of which projects to finance.

It has been noted that after merger they get more access to new markets because of
the fact that some banks have access in remote areas which other banks don’t have
so after merger the acquiring bank also gets the access to these areas. If merging
banks have significant geographical overlap in their markets of operation, mergers
can lead to an increase in market power, which would in turn increase the cost of
capital for borrowers. After the merger of banks who contains most of the market
share then access to these remote place will increase and bank will better
understand the needs of the people in remote areas

The report attributes much of the foundering of M&A expectations to


shortcomings in dealing with the human resource fallout of redundancies, which
may seriously undermine operational capabilities and employee morale. Among
the consequences of heightened merger activity for the financial sector workforce
that survives the restructuring, the report cites "reduced job security, increased
workloads, anxiety and stress," all of which can impinge negatively on
performance in an intensely competitive work climate. The report cites,
conservative estimates indicating that at least 130,000 finance jobs have
disappeared in western Europe asa result of M&As during the 1990s and there are
predictions of "the disappearance of approximately 300,000 banking jobs between
1999 and 2002 through mergerled consolidation. British banks, for a variety of
reasons including M&As, "reduced their employees by 150,000and shut a quarter
of their total network of branches" between 1990 and 2000. In the United States,
the number of commercial banks dropped by 30 per cent over the decade up to
1995, while employment levels declined by about 5 per cent between 1984 and
1994. The acquisition of Bank of America by Nations Bank in 1998 included plans
to lay off 18,000 workers by 2002.1999merger between BNP and Paribas, that the
combined bank would shed 5,700 posts, including some 3,600 in France.
The inevitable decline in sectorial competition and service that results from greater
concentration in the financial industry, leading to reduced credit support to small-
and medium-sized enterprises, which are the major generators of employment in
all economies.

Bank mergers will increase or decrease loan spreads, depending on whether the
increased market power outweighs gains in operating efficiency. This is consistent
with the theory of merger that large banks rely heavily on hard information and,
consequently, lend mostly to large and transparent borrowers while small banks
better utilize soft information and specialize in lending to small and opaque
borrowers

Some banks joined in the merger at their hard economic times (Bank of America
and Merrill Lynch) and survived collapse since they were able to acquire operating
capital from the other members in the merger. Therefore, financial benefit for the
individual firms and desires to access global market was the initial driving forces
to joining the merger.

The major benefit accrued from this consolidation is the reduction of charges to
costumers due to the stiff competition facing the industry thus making them offer
better rates. This has been made possible since the mega-banks enjoy high
economies of scale and therefore are capable of offering relatively low rates
compared to other small banks. The small banks are left to try strengthening their
costumer relation system to maintain their clients since they cannot out do the
mergers in the monetary competition. The shareholders of the mergers are also
assured more benefits due to the greater income associated with the mergers and
therefore are even enticed to invest more into the business.
A rise in operating risk might also occur if top management is less able to
supervise its employees directly because of an increase in size (before Merrill
Lynch Bank of America acquired Fleet Boston, MBNA, Losalle bank, and
Countrywide) which later resulted as a collapse of management and after that
Nations bank acquired Bank of America.

An expansion in the range of services made available to the public-In the studies of
US merger during period 1980-1990 ,the consolidation process has brought in
more competition, thus resulting in delivery of innovative financial products with
more efficiency and more variety. This includes availability of specialized
electronic systems which could be otherwise exorbitant to be acquired by single
banks. After merger every bank learns something from each other and this learning
process help them to grow in the competition. Merger of Citicorp and Travelers
group was held because of the fact that Travellers group had client base of
investors and insurance customers. They provided Citi a sound market of mutual
fund, investment product fir middle class and retail customers. One more example
regarding this topic was merger of BANK OF AMERICA AND MBNA- This
merger bought expertise in affinity market and electronic transaction processing
and provided new opportunities to cross sell each other’s product. After this merger
Bank of America became one of the leaders in debit card transaction. When Bank
of America acquired Losalle bank they gained a huge share in Chicago and Detroit.
Additional branches and 17000 commercial clients took them ahead of JP Morgan
and co.

Coordination problems raised in past -Different banks have different culture so


after merger it takes a lot of time for the employees of acquired bank to change the
culture and environment suddenly. It may make employees of acquired bank less
efficient and demoralized. So after merger it is the duty of the acquiring banks to
coordinate with them in every aspect. This issue has been noticed in the merger of
PNC FINANCIAL SERVICES MERGER WITH NATIONAL CITY BANK. It has
been noticed that a reverse trend happened and acquiring company provided shares
of their banks to the employees of the target company and it created problem inside
the system of the bank.

Diversification of portfolio- The data of US mergers shows that these are


consistent with the hypothesis that megamergers tend to diversify the portfolio and
reduce risk, which allows the consolidated bank to issue more loans for about the
same amount of equity capital, raising profits on average. Consolidated banks try
to expand their loan portfolios. Because of mergers banks get expanded
geographical areas for expanding their loan portfolio and to take risk

Better pays, incentives and career opportunities for employment. Post mega
mergers effects can be seen in the hire and fire system of banks. Since large banks
merged together so for them hiring a new employee and firing a employee is easy.
But it will provide opportunities for banks as well as the employee to improve their
performance and growth.
TECHNOLOGY ISSUES IN MERGERS OF BANKS

IT IN BANKS:

Computerization in banks began way back in


1985 to bring in efficiency in operations.
Subsequently, complete computerization has
been insisted for bringing in a total
transparency in the economic transactions
(The Chief Vigilance Commissioner of India
Shri Vittal was very vociferous on this issue). However, the pace of adaption of
automation, the main reason here again being technology. Understanding the
implications of technology, adaption to automation, skills set requirements are
some of the reasons attributable for the slow pace of adaptions. The process of
computerizations in banks was taken up by various banks on their own, and in
some instances even at branch levels, resulting in islands of computerization in the
respective banks. Customized software was developed by a number of isolated
groups of developers and programmers on multiplicity of platforms and languages.
Further, each bank had its own priorities about the functions /operation to be
computerized. Even the computerized functions and operations were not integrated
into comprehensive system within bank itself. Thus, the earlier computerization
also suffered from incompleteness and unintegrated systems.

Though the banking operation to a large extent are common with all
the banks, the computerization did not result in any standard or centralized system
or software owing to the development by isolated teams and variations in
customization by different banks. As a result, a bank has to look up for
development and operation of centralized software. The process still continues in
the form of ‘core banking solution’ by many banks. On the hardware front, in the
beginning bank use slower legacy systems, in comparison to today’s banking
environment, which is fast and technologically advanced. It is these
incompatibilities with modern technologies that pose a greater challenge for the
mergers and consolidation of bank operations.

IT INTEGRATION MODELS

In banking M&A there are four IT integration models commonly selected by


acquiring banks, based on their business strategy and the target bank’s size
DISPARATE:
In this strategy, the IT systems of both the acquirer and acquired banks are kept in
place and are not integrated. This commonly happens in the case of business
expansion M&A.

BIGGER IS BETTER:
In this model, it is assumed that the bigger banks have better technology in
place.The IT systems of the smaller bank are replaced by that of the bigger bank.

BEST OF BOTH WORLDS:


In this strategy, the IT systems of both banks are fully assessed, and the most
effective and efficient systems from either bank are retained.

A NEW AND BETTER WORLD:


Instead of spending money on integrating two separate systems, the acquiring bank
can choose to go for an overall system transformation. The existing IT systems in
both banks would be replaced.

Each of the IT integration models has its own strengths and weaknesses, and
should be selected based on the specific business strategy.
CONCLUSION

Primary purpose of mergers and acquisition is to reduce competition and


protect existing markets in the economy. Overall mergers and
acquisitions have their own pros and cons. But mergers are good for the
growth and development of country only when it does not give rise to
competition issues.

Mergers improve the competition edge of the industry in order to


compete in the global market but mergers shrink the industry because
number of firms reduces. Mergers help banks to strengthen their
financial base and access tax benefits and direct access to cash
resources.

After analysing the merger trends in European Union (1990s) we can say
that merger has led not only to the emergence of large banking groups
but also helped in consolidating fragmented markets.
But in the recent years these trends has been changed. One striking
feature which was noticed in comparison to domestic mergers and cross
border mergers was that in domestic mergers if no competition issue
were raised then cost will reduce because of reduction in operating cost.
But in case of cross border mergers it has been noticed that revenue
tends to improve without imposing negative impact on consumers.
Setting of priorities in advance is beneficial for the acquiring company.

If banks have priority to reduce capacity in domestic market then further


consolidation is required in domestic market. Banks should opt for cross
border merger if they have managed to reach the threshold level of
concentration in domestic market.

Mergers and acquisition are done for consolidating strategies in order to


expand the geographical area of operation but optimal level of
cooperation should be allowed and followed so as to gain proper
advantage of mergers.

Too many mergers inside or outside can be harmful for the economy and
leads to economic failure. From society’s point of view too many
mergers should be avoided. But we cannot restrict all mergers which
includes at least one big player in the economy instead we should
reconsider our competition policies.
CCI aimed at ensuring that banks compete among themselves in fighting
for customers by offering the best terms, lower interest rates on loans
and higher interest rates on deposits and securities. Merger regulation by
CCI would be therefore intended to ensure that such activities are not
motivated by the desire to collude and make excessive profits at the
expense of customers or to squeeze other players out of the market
through abusive practices.

REFERENCE
BIBLIOGRAPHY:
BANK MERGER GLOBAL SCENARIO
MERGER RESTRUCTURE & CORPORATE CONTROL
MERGER AND ACQUISITION IMPLICATIONS AND
IMPEDIMENTS

WEBLIOGRAPHY:
WWW.GOOGLESEARCH.COM
WWW.WIKIPEDIA.COM

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