Mergers & Acquisitions : Indian Banking Scenario

Only available on StudyMode
  • Download(s): 70
  • Published: February 25, 2011
Read full document
Text Preview
Mergers & Acquisitions : Indian Banking Scenario
Source - Banking Events Update (December 2004 issue)
The Indian financial system would be open to intense international competition with complete implementation of the provisions of WTO agreement on services (GATS) during the year 2005-06 when banks will be required to compete across the globe with multinational banks having greater financial strengths. The banks will also be required to strengthen their capital position to meet stringent prudential capital adequacy norms under Basel-II (beginning 2006-07). In the backdrop of growing openness of Indian financial system, there is growing interest in mergers and acquisition with focus on size of the banking organisation. It is inevitable that banks in India, particularly the public sector banks, could no longer afford to operate as a monolith and the Central govt. has already indicated that the banks have to consolidate, not just to create behemoths, but to create synergies. In the past, the mergers were initiated by regulator (RBI) to protect the interest of depositors of weak banks but the market led mergers have been gaining momentum in the present day context and these cannot be seen as a means of bailing out weak banks any more. Mergers between strong banks/FIs make greater economic and commercial sense and have a “ force multiplier effect”. Focus of mergers: The growing tendency towards mergers in banks world-wide, has been driven by intensifying competition, need to reduce costs, need for global size, take benefit of economies of scale, investment in technology for technology gains, desire to expand business into new areas and need for improvement in shareholder value.The underlying strategy for mergers, as it is presently being thought to be, is, ‘larger the bank, higher its competitiveness and better prospects of survival’. Due to smaller size, the Indian banks may find it very difficult to compete with international banks in various facets of banking and financial services. Hence, one of the strategies to face the intense competition could be, to consolidate through the process of mergers. Recent scenario of mergers in India : In India, the mergers in 60s had taken place under the direction of RBI and as a result from 566 banks during 1951, the no. came down to 85 (14 non-scheduled) by 1969. During 90s, the merger of eNBI with PNB created personnel integration problems and as a result, PSB mergers were not contemplated, subsequently. However private bank mergers continued with merger of Bank of Madura with ICICI, that of Times Bank with HDFC, Benares State Bank with BoB in 2002, Nedungadi Bank with PNB in 2003 and more recently that of the Global Trust Bank with OBC in 2004. Reverse merger of ICICI Ltd also took place with ICICI Bank, during the year 2001. These mergers did help in strengthening financially, helped to avoid the complex processes of restructuring the weaker of the units and foster financial stability and opened the possibility of actively promoting universal banking. It is encouraging that these mergers were facilitated to a large extent by banking sector reforms. However, there is little published empirical literature on the impact of mergers in banking in India. Case for mergers : The mergers and acquisitions can be thought of in India on merit, due to following factors also: a: Top 5-6 Indian banks have solid management and they can improve the functioning of some of the smaller banks, through changes in their management. b: Indian banks are scattered regionally and can consolidate to improve their client and industry positions. There is an opportunity for smaller banks to become large and larger banks to consolidate and become even larger. c: There are other cost cutting opportunities in IT implementation, branch rationalisation and staff rationalisation. d: M & A provides a fast and easy method for many banks to enter areas where they lack a presence. Structured framework of merger...
tracking img