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Mergers & Acquisitions : Indian Banking Scenario

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Mergers & Acquisitions : Indian Banking Scenario

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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...