Consolidation in the Banking Industry through Mergers and Acquisitions Banking scenario since 1991 has been a process of transformation and consolidation. With financial sector reforms implementation, the micro environment of banking sector has undergone a radical change. Almost all insulations to commercial banking have been peeled off and it has been susceptible to all types of exposures now. There has been paradigm shift in operational, functional, environmental, technological spheres. The reforms emphasised the “commercial character” of the banking system and helped the banks to stand on a firm footing. The first phase of reforms directed mainly towards the operational efficiency has brought concepts like prudential accounting norms, Deregulation of Interest Rates, Credit Delivery, Transparency, Capital Adequacy Norms, Autonomy in Management etc.
Banks started cleansing their balance sheets, competition led to improvement in their efficiencies and profit concept being recognised as a test of commercial viability. The transparency made them to realise their own strengths. In today’s world, banking structures are important and size does matter, however beautiful “small” may be. Consolidation is an inevitable process in the banking sector as banks seek to reap economies of size. Mergers and Acquisitions are considered useful to achieve the requisite size in the short run. Dr.
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P. Lakshminarayan is presently Chairperson of Indian Institute of Bankers, Nagpur Centre, Secretary of Indian Institute of Public Administration, Nagpur and Bankers’ Club, Nagpur and also Vice President of South India Association, Nagpur. Besides the above, he is Associate Member of IndianInsitute of Banks, Life Member of South Indian Education Society, Nagpur, Examiner for M. A. Final Exams. of Nagpur University and for JA AIB/CAIIBExams.
conducted by I. I. B. F.
Dr. Lakshminarayan has worked in Reserve Bank of India for more than 41 years. He worked in almost all the Departments of RBI and retired as Manager (PP), Nagpur. He is Guest Faculty of Dept.
of Business Management, Nagpur University Academic Staff College, Nagpur University, Training Centres of All Public Sector Banks, Guide of MBA Project of IIM, Ahmedabad, National Academy of Direct Taxes, Nagpur, Regional Telecom Training Centre, Nagpur. He has published more than 100 papers in leading journals including IBA Bulletin. He was awarded first prize in National Level Essay Competition on the topic “Disaster Management” from Vice President of India and second price from Reserve Bank of India for the paper on “Relevance of nehruvianPlanning in the present day context.” Research reviewing banking crisis across 43 countries indicates that the cumulative loss of GNP could amount to around 15 percent – 20 percent. There is also evidence that the incidence of banking crisis has become more frequent in the past 20 years. In fact four of the Group of 10 countries has suffered a banking crisis of one sort or another in the past 10 years. It is thus clear that financial instability remains hugely relevant topic to both developed and emerging market economies.” result, innovations and improvement assumed greatest significance in institutional performance.
This trend of global banking has been marked by twin phenomena of consolidation and convergence. The trend towards consolidation has been driven by the need to attain meaningful balance sheet size and market share in the face of intensified competition. The trend towards convergence is driven by a move across industry to provide most of the financial services under one roof. Indian banking experienced wide-ranging reforms in the last decade and these reforms have contributed to a great extent in enhancing their competitiveness. The issue of bank restructuring assumes significance from the point of view of making Indian banking strong and sound apart its growth and development to become sustainable. International evidence also strongly indicates greater gains to banking industries after the restructuring process.
... 8). For citizens, a single market for financial services meant that the capability to open bank accounts in any country in ... introduced a single banking license wherein the bank’s home country is responsible for checking the financial institutions’ overall solvency ... The first directive in this sector paralleled the first banking directive wherein authorization procedures were outlined. In a ...
With the impending capital account convertibility, cross-border movement of financial capital would become a reality. Such a scenario would lead to the alignment of various structures with the international levels. Indian banks, for that matter almost all the banks in Asia, especially in small emerging countries are at a disadvantage on all fronts – size, technology, capital base, cost of fund, availability of highly trained personnel to deal in international market, world-wide networking, and freedom of actions. If we cannot consolidate our size, it is rather difficult to find reasons that could prevent Indian banks from being swallowed by the powerful foreign banks in the long run, under the free-for-all environment. The core objective of restructuring is to maintain longterm Profitability and strengthen the competitive edge of banking business in the context of changes in the fundamental market scenario. Restructuring can have both internal and external dimensions.
The pace of change in the financial market world over and in the external economic environment in which we work, shows no sign of slowing down. Commercial banks now have to think “global” to service the requirements of the highly sophisticated multinationals that are increasingly dominating the industrial world. The development of a global market-place have accelerated through the deregulation of domestic markets and the removal of barriers to cross-border trade. Even on the merger front, we have witnessed an increasing number of cross border alliances.
... the four main components of Indian Financial system. Financial institutions 2. Financial Markets 3. Financial Instruments/Assets/Securities 4. Financial Services. Financial institutions: Financial institutions are the intermediaries who ... cost. After the nationalization of large banks in 1969 and 1980, the Government-owned banks dominated the banking sector. The role of technology ...
As per the recent guidelines, the overall ceiling for foreign direct investment in private sector banks has also been enhanced. In the changed scenario, it has now become extremely important for Indian banks to remain competitive for surviving. Universally there is a move towards consolidation and convergence. The bank consolidation / merger process should be primarily market driven and such proposals should come voluntarily from the banks themselves, depending on the organisational synergy and the market share. If you look at our banks in the global context, we do not really feature high in the list of large banks. In the top 1000 list only 20 Indian banks feature and in the top 200 only one bank gets listed.
Even smaller countries like Taiwan have larger than the largest Indian bank. Certainly, there is need for us to pause and seriously think this issue out. Today banking is a competitive field, something which was not really conceivable a decade back. Niche players could play out for a while, but would have to be assimilated into the system as competition and profitability would put pressure on banks to reach a critical size of mass to succeed in business. Further, the pressure of capital would tend to surround the management of banks, which in turn requires enough clout to access markets. As is true, only the best or largest would survive.
Bank mergers would be the rule rather than exception in times to come and there is a need for banks to check their premises before embarking on their future plans. There are synergies to be leveraged through consolidation where factors such as size, spread, technology, human resource and capital can be reconciled. We could hence think of a situation where we have 4-5 global players which are really large, a handful of regional banks which will gradually set to merge and some other players which will get to acquire special niche to serve limited market. But it involves the sorting of various issues such as legal, regulatory, procedural, etc. (Statement of Shri V. Leela dhar, Chairman, IBA on 28 th August, 2004).
History has proved beyond doubt that strong banking systems are critical for sound economic growth. It is important to improve the comprehensiveness and quality of the banking system to bring efficiency in the performance of the real sector in India. Throughout the world, banking industry has been transformed from a highly protected and regulated situation to competitive and deregulated. Globalisation coupled with technological development has shrink ed the boundaries. Financial services and products are being provided to the customers across the length and breadth of the globe. Due to this, domestic and foreign currency, banking and non-banking financial services are getting closer.
... shareholders is generally required to approve a merger. A merger is just one type of acquisition. One company can acquire another in several other ... corporation that has not been involved in any mergers or acquisitions, identify one (1) company that would be a profitable candidate for the ...
Correspondingly innovations and improvements assumed greater significance in institutional performance. This trend of ” global banking has been marked by twin phenomena of consolidation and convergence. The trend towards consolidation has been driven by the need to attain meaningful balance sheet size and market share in the face of intensified competition. The trend towards convergence is driven by a move across industry to provide most of the financial service viz. , banking, insurance, investment etc. , to the customers in one roof.
Consolidation of banking industry is critical from several aspects. The factors inducing mergers and acquisitions include technological progress, excess capacity, emerging opportunities and deregulation of geographic, functional and product restrictions. It may also bring the performance of public sector banks to a remarkable level without variation between banks in the public sector. The following are the important aspects for staying in the market: – Competition from Global Majors.
– Competition from New Indian Banks. – Disintermediation and competition resulting into pressure on spread. – Qualitative change in the banking paradigm. – The competencies required from a banker would be sharper information technology and knowledge centric. Because of the forces that are likely to impinge upon the banking industry in the years ahead, banks would be required to choose an appropriate organizational structure. A choice will have to be made between the ” universal banking model” where a single business entity in providing services ranging from financial intermediation to investment banking, insurance leasing, project finance etc.
, and “the holding company model” where the holding company owns various subsidiaries, each specializing in a particular activity. While both models have their strong and weak points, the holding company models scores over the universal banking model in certain respects, in the present day. An important trend was gradual blurring of distinction between the roles of commercial banks and financial institutions. This development had brought us a step closer to the concept of universal banking. The process of globalization of Indian economy has become irreversible and will be further intensified in future. Globalisation has brought about fierce competitive pressures on the Indian banks from International banks.
... the purpose of inorganic growth, BHEL plans to pursue mergers and acquisition and joint ventures and grow operations both in domestic ... an ETOP for a company interested in entering the retailing industry in India. Case III HELPAGE INDIA Questions 1. In your ... and threats that the retailing industry in India offers to local and foreign companies. Opportunities Economic growth Positive growth Growing ...
In order to compete with the new entrants effectively, Indian commercial banks need to posses matching financial muscle, as a fair competition is possible only among the equals. Size has, therefore, assumed criticality. A bank’s size is really to be determined by the size of its balance sheet. The question before major commercial banks, therefore, is how to acquire a competitive size. Mergers and acquisition route provides a quick step forward in this direction offering opportunities to share synergies and reduce the cost of product development and delivery. Different types of banks, even though they themselves belong to the public sector, spend considerable time competing among themselves without increasing commensurate benefits to the system as a whole.
As a result, the focus on banks has shifted away from the areas of real productivity. The present system is not ideal for simultaneously retaining separate identities as well as preserving the very characteristics of competitiveness. Our banks are really small in terms of business size or capital when compared with banks in the West or even China. None of our banks has a sizeable international presence as of date.
The lesson here is to think of consolidation of our efficient banks to build up global scale institutions. Consolidations would also enable us to go for global technologies benefiting the customers and efficiency of our banks (A. T. Pannier Selv am -Future of the Indian Financial Sector – 2002).
If Indian banks are to be made more effective, efficient and comparable with their counterparts from abroad, they would need to be more capitalized, automated and technology oriented, even while strengthening their internal operations and systems.
... barriers to mergers and acquisitions across state lines have been crumbling for almost two decades, making way for bigger and bigger companies every day ... , feeling that big businesses form monopolistic power (Balassa 10) Although bank mergers are highly beneficial to merging corporations and their CEOs, these ...
Further, in order to make them comparable with their competitors from abroad with regard to the size of their capital and asset base, it would be necessary to structure these banks. Mergers and Acquisitions are considered useful to achieve the requisite size in the short run. Clarification of Concepts: Merger is defined as combination of two or more companies into a single company where one survives and the other (s) lose (s) their / its corporate existence. The survivor acquires the assets as well as liabilities of the merged company or companies. It can also be defined as the fusion of two or more existing companies. All assets, liabilities and stock of one company stand transferred to transferee company in consideration of payment in the form of equity shares of transferee company or debentures or cash or a mix of these modes.
Acquisition is the purchase by one company of controlling interest in the share capital of another existing company. This means that even after the takeover although there is change in the management both the firms retain their separate legal identity. Amalgamation: Halsbury’s laws of England describe amalgamation as a blending of two or more existing undertakings into one undertaking, the shareholders of each blending company becoming substantially the shareholders in the company which is to carry on the blended undertaking. A Takeover generally involves the acquisition of a certain block of equity capital of a company which enables the acquirer to exercise control over the affairs of the company.
Normally merger / amalgamation and acquisition / takeover are used interchangeably. Categories of Mergers and Acquisitions: Merger and Acquisition depends upon purpose, the offerer company wants to achieve. Based on the offerer’s objective profile, combinations could be horizontal, vertical, etc. Horizontal Merger is a merger of two competing firms which are in the same line of business. The main purpose of such merger is to obtain economies of scale in production by eliminating duplication of facilities and operations and broadening the product line, elimination of competition, reduction of cost, increase in market segments and exercise of better control on market. Vertical Merger is a merger of one company with another which is involved in a different stage of production and / or distribution process thus espousing backward integration to assimilate the sources of supply and or forward integration towards market outlets.
The main motives are to ensure ready take off of the materials, gain control over product specifications, increase profitability by gaining the margins of the previous supplier / distributor, gain control over scare raw material supplies. Conglomerate Merger is an amalgamation of two companies engaged in different line of business. The motive is to ensure better utilization of financial resources, enlarge debt capacity, and to reduce risk by diversification. Difference between Merger and Acquisition: Basically, there is no difference between merger and acquisition.
Both relate to an investment in acquisition of a bank / company. The difference lies only in the operational process of acquisition. In merger, one bank gets merged with the other losing its own identity byway of share transactions / asset /liability transfers. In acquisition / takeover, one company / a group of companies acquires the controlling interest on ownership of capital without making any corporation to lose its own individual identity.
But in the eyes of law, the operational process marks a big difference. While merger is covered regulated / covered by the Companies Act, 1856, the acquisition / takeover is regulated / covered by the takeover norms prescribed by SEBI. As such, the process is supervised by the High Court and the Registrar of Companies, while the process of acquisition / takeover is undertaken as per norms of SEBI. Consolidation Process – Not new to Indian Banking: The consolidation process of Indian banks has started in the early 1960 s itself. The rapid branch expansion resulted in stretching beyond the optimum level of supervision and control.
The banks were faced with losses. Then there were a series of policy initiatives taken by the RBI. As a result of these measures, there was marked slowdown in the branch expansion and attention was paid to improve housekeeping, customer service, credit management, staff productivity and profitability of banks. Steps were also taken to reduce the structural constraints that obstructed the growth of banking industry. Banks merged since 1961 All the banks listed below (except New Bank of India) were amalgamated under Section 45 of the Banking Regulation Act, 1949 while the New Bank of India amalgamated under Section 9 of the Banking Companies (Acquisition of Undertakings) Act, 1980. Besides these banks, from 1960 to June 1993, there were 21 voluntary amalgamations, 18 mergers with the State Bank of India or its Associates and 132 transfers of assets and liabilities.
The following list of banks merged since 1961 to October 1992, is reproduced from RBI Newsletter. Sr. Name of Bank Merged With whom Merged Date of Merger 01. Pra bhat Bank Ltd. National Bank of Lahore Ltd. 09-03-196102.
Indo-Commercial Bank Ltd. Punjab National Bank 25-03-196103. Bank of Nagpur Ltd. Bank of Maharashtra 27-03-196104. New Citizen Bank Ltd. Bank of Baroda 29-04-196105.
Travancore Forward Bank Ltd. State Bank of Travancore 15-05-196106. Bank of Kerala Ltd. Canara Bank 20-05-196107. Bank of Poona Ltd.
Sangli Bank Ltd. 03-06-196108. Bank of New India Ltd. State Bank of Travancore 17-06-196109.
Vena du Bank Ltd. South Indian Bank Ltd. 17-06-196110. Wankaner Bank Ltd. Dena Bank 17-06-196111. Se asia Midland Bank Ltd.
Canara Bank 17-06-196112. Kottayam Orient Bank Ltd. State Bank of Travancore 17-06-196113. Bank of Kon kan Ltd. Bank of Maharashtra 19-06-196114. Poona Investors Bank Ltd.
Sangli Bank 28-06-196115. Bharat Industrial Bank Ltd. Bank of Maharashtra 01-07-196116. Rayalaseema Bank Ltd.
Indian Bank 01-09-196117. Cuttack Bank Ltd. United Bank of India 04-09-196118. Pie Money Bank Pvt. Ltd.
Syndicate Bank 04-09-1961 19. Moolky Bank Ltd. Syndicate Bank 04-09-1961 20. Merchants Bank Ltd. Tanjore Permanent Bank Ltd. 04-09-196121.
Tempur Industrial Bank Ltd. United Bank of India 04-09-196122. G. Raghunathmull Bank Ltd. Canara Bank 04-09-196123. Sahara Swadeshi Commercial Bank Ltd.
United Western Bank Ltd. 06-09-196124. Catholic Bank Ltd. Syndicate Bank 11-09-196125. Phaltan Bank Sangli Bank Ltd.
07-10-196126. Jodhpur Commercial Bank Ltd. Central Bank of India 16-10-196127. Bank of Citizen Ltd. Canara Banking Corporation Ltd. 17-10-196128.
Karur Mercantile Bank Ltd. Laxmi Vilas Bank Ltd. 19-10-196129. Peoples Bank Ltd. Syndicate Bank 14-11-196130. Pratap Bank Ltd.
Lakshmi Commercial Bank Ltd. 11-12-196131. Unity Bank Ltd. State Bank of India 20-08-196232. Bank of Alga puri Ltd. Indian Bank 14-08-196333.
Metropolitan Bank Ltd. United Industrial Bank Ltd. 06-02-196434. Cochin N ayar Bank Ltd. State Bank of Travancore 08-02-196435. Salem Shri Kannikaparameshwari Bank Ltd.
Karur Vsya Bank Ltd. 01-06-196436. Unna o Commercial Bank Ltd. Bareilly Corporation Bank Ltd. 12-08-196437. Latin Christian Bank Ltd.
State Bank of Travancore 17-08-196438. Southern Bank Ltd. United Industrial Bank Ltd. 24-08-196439. Shri Jade ya Shankar ling Bank Ltd.
Belgium Bank Ltd. 26-10-196440. Bareilly Bank Ltd. Benaras State Bank Ltd.
16-11-196441. T hiya Bank Ltd. Lord Krishna Bank Ltd. 16-11-196442. Allahabad Trading & Bkg. Corp.
Ltd. State Bank of India 25-08-196543. Vettaikaran Parur Mahajan Bank Ltd. Bank of Madura Ltd.
01-09-196544. Malad Bank Ltd. State Bank of Mysore 06-10-196545. Jos na Bank Ltd. Lord Krishna Bank Ltd. 13-10-196546.
Amrit Bank Ltd. State Bank of Patiala 03-02-196847. Chawla Bank Ltd. New Bank of India 23-04-196948.
Bank of Behar Ltd. State Bank of India 08-11-196949. National Bank of Lahore Ltd. State Bank of India 20-02-197050.
Miraj State Bank Ltd. Union Bank of India 20-07-198551. Lakshmi Commercial Bank Ltd. Canara Bank 24-08-198552.
Bank of Cochin Ltd. State Bank of India 26-08-198553. Hindustan Commercial Bank Ltd. Punjab National Bank 19-12-198654. Traders Bank Ltd. Bank of Baroda 13-05-198855.
United Industrial Bank Ltd. Allahabad Bank 31-10-198956. Bank of Tamilnad Ltd. Indian Overseas Bank 20-02-199057. Bank of Thanjavur Ltd. Indian Bank 20-02-199058.
Parur Central Bank Ltd. Bank of India 20-02-199059. Purbanchal Bank Ltd. Central Bank of India 29-08-199060. New Bank of India Punjab National Bank 04-09-1993 Some of the banks merged after the reform process started, are listed below. 61.
Bank of Karad Ltd. Bank of India 1993-199462. Kashinath Seth Bank State Bank of India 1995-199663. Punjab Co-op. Bank Ltd. Oriental Bank of Commerce 1996-199764.
Bari Do ab Bank Ltd. Oriental Bank of Commerce 1996-199765. Bareilly Corp. Bank Ltd.
Bank of Baroda 03-06-199966. Sikkim Bank Ltd. Union Bank of India 22-12-199967. Times Bank Ltd.
HDFC Bank Ltd. 26-02-200068. Benaras State Bank Ltd. Bank of Baroda 20-07-200269.
Nedungadi Bank Ltd. Punjab National Bank 01-02-200370. Bank of Madura ICICI Bank Mar. 200171. Global Trust Bank Ltd.
Oriental Bank of Commerce 24-07-2004 Sr. Name of Bank Merged With whom Merged Date of Merger As per the supplement to RBI Bulletin, December 2002, there were 78 banks under liquidation as on June 30, 2002. The matter regarding early completion of liquidation proceedings is being pursued with Official/Court Liquidations. Motives and Advantage of Merger and Acquisition: The overriding goal for merger or acquisition is of the owners wealth. Specific motives as discussed below should be pursued when they are believed to be consistent with owner’s. Economy of Scale: When larger volume of operations is performed for a given level of overhead of investment, average cost will be reduced.
So, by increasing the volume of business, one can reduce cost. Economy of Scope: The cost of offering various products and services by different units will be greater than that of the cost, when they are provided by one unit. In this way by providing various services, one can increase the revenue. Growth or Diversification: Merger or acquisition can be used to fulfill the desire of rapid growth in size or market share or diversification in range of products and services.
By merging or acquiring an existing firm that provides services other than what are provided by us. In this way it can save a lot of funds, time and various risks by acquiring a suitable going concern. We can also increase the products and services for the benefit of our existing customers. Avoid/Reducing Competition: Competition among the units providing the same product / services in same area of operation may be reduced through mergers and acquisitions. Use of the best human resources available in both the firms can result in maximis ing the profit. Rehabilitation of Sick Units might allow claiming of tax concessions u / s 72 of Income Tax Act, 1961.
Tax benefits may be allowed in the form of carry forward of loss and unabsorbed depreciation in case of sick unit with a healthy unit. Thus, mergers and acquisitions can help in granting us certain amount of tax benefits also. In the wake of globalization, the international experience has shown a steep surge in mergers and convergence in the banking industry. And their efforts have shown remarkable results in their profit. It is observed that return on assets of a large number of banks that undertook mergers and acquisition increased immediately after the merger and continued to remain higher in successive years. Restructuring is also considered critical from the point of view of quantum of resources required for strengthening the ability of banks in asset creation.
With the international banking scenario being dominated by larger banks, it is important that India too should have a fair number of large banks which could play a meaningful role in the emerging competitive global environment. Mergers and acquisitions are also influenced by motives of reduction cost, efficiency gains, economy of scales, increasing customer base and market coverage, to bring in new products and specialization thereof. It has been observed that most of the banks increased their world ranking immediately after the merger. A notable aspect is while the banks have been highly successful in improving the ranking immediately after the merger quite a few are not able to maintain the high ranking after a lapse of time. The following mergers indicate how the merged banks improved their status.
Name of Name of CAR Net Return merging entity merged entity NPA on Ratio Assets Bareilly Corp. Bank of Bank Ltd. Baroda 12. 10 06. 95 00. 85 Sikkim Union Bank 11.
42. 07. 97. 00. 29 Bank Ltd. of India Times Bank Ltd.
HDFC Bank Ltd. 12. 19 01. 01 01. 84 Bank of Madura Ltd.
ICICI Bank Ltd. 11. 57 02. 19. 00. 82 Source: RBI In today’s world, banking structures are important and size does matter, howsoever beautiful “small” may be.
Consolidation is an inevitable process in the banking sector as banks seek to reap economies of size. The restructuring exercise has to be comprehensive and must address operational and financial restructuring simultaneously. There is no room for half way measures or gradualism. It is tempting to confine restructuring to financial aspects since solvency in immediately restored and there is a visible impact on the balance sheet.
But, if operational aspects are not attended to, long-term sustainability cannot be ensured. This will only lead to additional problems necessitating further and costlier restructuring down the road. In general, these mergers have come about as a result of government efforts to restructure inefficient national financial systems. Market-driven consolidation is a relatively new phenomenon in these countries.
A critical issue in all emerging economies is a reassessment of the ownership of the State in the financial system and redefinition of the State-owned banks and financial institutions. No amount of regulatory interventions can be a substitute for processes and systems that are internalized by banks themselves. Banks, as a part of strategy must prepare themselves for mergers and acquisitions that market driven and not prescribed by the regulator. Operating successfully in a market economy will call for a careful restructuring of the banking industry. Competitive pressures are likely to lead to the process of deconstruction as banks and financial institutions will continue on those areas where they have a comparative and competitive advantage. There may also be a trend towards “outsourcing” as a part of this general trend.
Further, lowering of entry barriers and inviting foreign investment in the industry, the banking sector is already experiencing symptoms of excess capacity. This trend is likely to be accentuated as more and more national and international players are planning entry into an already overcrowded turf. This may force banks to consolidate into a smaller number of larger banks. The Bank for International Settlements Report – 1992 note.” …
forces are obliging many banks to consolidate… Whether the competition stems from within the industry or outside it… .” A merger movement may become pronounced feature of the banking industry, which may be viewed as a solution to excess capacity, a lack of capital and to poor profitability. The 21 st Century may see the dawn of “DARWINIONBANKING.” Only the banks that could fulfill the demands of their markets and changing times would survive and prosper. It is time that the Indian banks should think in terms of expanding globally by proper restructuring exercise at the earliest. We are sure that our banking institutions, as in the past, shall rise to the occasion and show the required flexibility to absorb and adopt the institutional change to consolidate their position in the world market.
This aspect has been rightly emphasised by Dr. BimalJalan, in his address at the Bank Economists’ Conference 2001, where he has said,’ “I believe that the task that India should set for itself in the new millennium is to transform our banking system from being largely domestic one to truly international one. Under the new circumstances, there is no reason why India should not emerge as a major international banking center, just as it has emerged as an important location in the field of Information Technology and software.” Balla V. K.
, Financial Management & Policy, Chapter 25, Merger & Acquisition 1997, A nmol Publications, New Delhi. Halsbury’s Laws of England, 3 rd Edition, Vol. 6 p. 764. IIB Journals – various issues and volumes. Lakshminarayan an P.
Dr. – “Indian Banking -Preparedness for emerging Challenges” – IBA Bulletin- Vol. XXIII No. 3, Special Issue 2000-2001 RBI Bulletins – various issues / volumes.
Shyam ji Agarwal – “Mergers and Acquisitions of Commercial Banks in Indian Context” – IBA Bulletin -Vol. XXII Nos. 4 & 5 April/May 2000. Information Security Policy The objective of the Information Security Policy is “to provide the Reserve Bank with a critical minimum information security framework to address and manage various security risks to information assets and quality maintenance.” These assets include information processing facilities, information system functions, and information shared electronically, information transmitted by mail or through other communication media, information transmitted through computer network or other electronic means and information stored or reprinted on paper. The IS Policy categories information based on its nature of sensitivity. The Policy will apply to all the units of the Reserve Bank, subsidiaries and managed affiliates which share IT resources.
It will also apply to all service providers who perform any function of relevance. The policy will be supplemented by the best practices, procedures and guidelines for IT / Information Security. Source: RBI Annual Report 2004 Consolidation in Banking Industry through Mergers andAcquisitionsShyam Ji AgarwalKanpurThe banking system in India went through various stages before it emerged into modern banking system. With increase in trading and administration of East India Company, the early banking system of bani as, c hetty, , pod ars and shroff’s, was replaced by banks established by English agency houses during the end of eighteenth century.
But almost all of them failed due to failure of parent agency houses during the trading crisis of 1829-33 as they mixed bank with trading. The next setback by the banks was faced during 1862-65 during American civil war, which led to a speculating boom in the Indian cotton trade, as a result of which many banks and companies were formed. Although almost all of them failed as soon as the Civil War was over and the boom collapsed. The three presidency banks set up by respective Governments, also failed due to handicap of inexperience and their inability to conduct foreign exchange business. A list showing banks failures and mergers from 1720-1885 is enclosed as 1. Under the impetus of the Swadeshi movement, the hitherto slow growth of Indian banking picked up pace, and between 1900-1914, a large number of new banks came up.
Further the growth of Indian banks suffered its first and major setback in 1913, during the worst ever banking crisis in India, starting before the war and accentuated by it followed by post war depression (1922-23) wherein the rate of bank failure was very high and thereafter followed by incident of partition during 1947. Probably till that time no proper attention was paid to rescue these banks besides proper controlling and monitoring, to check the failures. After 1951, with the emergence of Reserve Bank as a decisive factor armed with new power it acquired in 1949 under Banking Companies Act to intervene in the event of crisis in a bank, the picture totally changed. The failure of Nath Bank created a panic among the depositors, and had it not been for the amalgamation of four banks in Bengal into United Bank of India, there might well have been another major banking crisis. With the liquidation of two scheduled banks, the Laxmi Bank and the Pala i Central Bank in 1960, several small and medium sized banks experienced serious runs on them. It was the first time that merger and amalgamation was used as an appropriate tool to provide relief to ailing banks besides maintaining public and depositors confidence in banking system in the country hence, a new Section 45 was inserted in Banking Companies Act in September 1960.
According to Section 45, the Reserve Bank of India can submit a scheme to the Central Government for amalgamation of a banking unit with a well managed bank within a period of not more than six months moratorium granted by the government on an application made earlier in that behalf by the Reserve Bank of India. One advantage of compulsory amalgamation over liquidation is that the depositors get immediate credit to the extent of readily reali sable assets at the Historical Perspective It is the need of the hour to restructure the banking sector in India through mergers and amalgamations in order to make them more capitalized, automated and technology oriented so as to provide environment more competitive and customer friendly. commencement of the amalgamation, additional payments being made as and when the remaining assets are realised. Thus, in 1961 alone thirty banks were merged compulsorily with other banks. As a consequence of improved atmosphere, bank failure decreased, while the number of mergers, amalgamation and transfers increased from one in 1954 to twenty-two in 1963 and seventy-nine in 1964.
A brief list of banks mergers, amalgamations, transfer of assets and liabilities are given in Table 1. The idea behind this merger was to strengthen the banking system. Small, weak and insufficient nonscheduled banks which could hardly, if ever have become viable and eligible for a license, were being merged with other scheduled bank. It is evident from the above that basic objective of banks merger or amalgamation in this period was to check the frequent failure of banks and to save them from facing crisis and maintaining public confidence. A brief list showing bank mergers and amalgamations since 1985 onwards is given in Table 2. Table 1 Bank Mergers, Amalgamations and Transfers of Assets and Liabilities Year Voluntary Compulsory Other Transfer of Total Amalgamations Merger Mergers Assets and under Sec.
44-A under Sec 45 liabilities 1950 4 – – – 41951 2 – 1 – 31952 – – 4 – 41953 – – 1 2 31954 – – – 1 11955 – – – 3 31956 – – – – -1957 2 – 2 – 41958 4 – 2 1 71959 4 – – 4 81960 2 – – 5 71961 1 30 2 3 361962 3 1 2 5 111963 2 1 4 15 221964 7 9 1 62 79 TOTAL 31 41 19 101 192 NE 102 JANUARY 2005 Table 2 Recent Banks Mergers/Amalgamations In India – 1985 Onwards Banks Merged/Amalgamated With Year Lakshmi Commercial Bank Ltd. Canara Bank 1985 Bank of Cochin Ltd. State Bank of India 1985 The Miraj State Bank of Ltd. Union Bank of India 1985 The Hindustan Commercial Bank Ltd. Punjab National Bank 1986 Traders’ Bank Ltd. Bank of Baroda 1988 United Industrial Bank Ltd.
Allahabad Bank 1989-1990 Bank of Tamilnad Indian Overseas Bank 1989-1990 The Bank of Thanjavur Indian Bank 1989-1990 Parur Central Bank Ltd. Bank of India 1989-1990 Purbanchal Central Bank of India 1990-1991 New Bank of India Punjab National Bank 1993-1994 Bank of Karad Ltd. Bank of India 1993-1994 Kashinath Seth Bank State Bank of India 1995-1996 Bari Daob Bank Ltd. The Oriental Bank of Commerce 1997 Punjab Co-operative Bank Limited The Oriental Bank of Commerce 1997 Bareilly Corp. Bank Bank of Baroda 1998-1999 Beneras State Bank Ltd. Bank of Baroda 2002 Nedungadi Bank Punjab National Bank 2003 Global Trust Bank The Oriental Bank of Commerce 2004 Post Nationalisation Scenario Views on Restructuring Since nationalisation in 1969, banks and financial systems in India has made commendable progress in geographical spread and functional reach but at the same time due to deterioration in quality of loan portfolio, poor competition, unremunerative branch expansion, over manning, political interference in credit decision and internal management, trade union pressure and management weakness etc.
financial health of the System was deteriorated which was reflected by decline in productivity and efficiency, erosion of profitability and poor customer service, hence a need for improving operational efficiency and reappraisal of the structural inadequacies of the banking system was felt. Besides the second banking commission, various other committees and forums have also looked into the issue of restructuring of banking system time to time and recognising the need for restructuring they all had suggested various alternative for restructuring of banking system through mergers and amalgamations. Sarraiya Committee in 1972 examined the restructuring of banks in greater depth and recommended that there should be three all India banks and five or six regional banks plus a network of co-operative or rural banks in the rural areas. N.
Vague suggested the restructuring on the basis of location and functioning of the bank and recommended four sets of banks in the public sector. (i) There should be District Banks having the network of around 300 branches and Rs. 250 crores or more. Their functions similar to that of commercial banks.
(ii) National Savings Banks which will be located only in urban and metropolitan towns. (iii) The third and fourth set of banks will be Trade and Industry banks and Foreign Exchange banks and located at urban and metropolitan centers catering to the designate clientele only. In July 1976, a Commission under the Chairmanship of Shri Manu bhai Shah, suggested the reduction in the number of existing banks and making the banks bigger so as to have strong regional character in states of UP, MP, Bihar, Orissa and NorthEast part of the country. James Raj Committee appointed by the RBI in June 1977 recommended that (a) a bank’s size should be in the range of 1000 to 1500 branches, (b) SBI group should be converted into a Holding Company with five Zones subsidiaries and (c) streamlining of the rural and. Shri R. C.
Shah, the then Chairman of Bank of Baroda, speaking at third National Seminar on Banking held atM. S. University, Baroda, in March, 1981, on restructuring presented his views. The number of public sector commercial banks be reduced (through merger / amalgamation) to a maximum of 10 to 12, not more than 3 of which should have All India Character (and same size); the remaining would be zonal banks operating in (a zone comprising 2, 3); geographically contiguous states, with all India banks operating up to district Head Quarters levels and in urban areas. Shri Shah had also suggested some bifurcation of market segments for credit extension purposes amongst all India and zonal banks. Finally presenting the scenario of Banking, in the report of the Committee on the Financial System in Nov.
-1991, (Narasimham Committee-1) the committee observed that the deterioration of the financial health of the system has reached to a point where unless remedial measures are taken soon, it would not only impair its ability to serve efficiently the emerging needs of the real economy but could further erode the real value of and return on the savings entrusted to it by depositors and eventually have an adverse effect on depositor and investor confidence. With this background the Committee besides number of recommendation to improve productivity, efficiency and profitability recommended following structure for banking system. 1. 3 or 4 large banks (including the State Bank of India) having an international presence; 2. 8 to 10 national banks with a network of branches throughout the country engaged in general or universal banking; 3.
Local banks whose operations would be confined to specific regions; and 4. Rural banks (including R RBs) whose operations would be confined to rural areas and whose business would predominantly be financing of agriculture and allied activities. Experiences of Merger and Amalgamation in IndianBankingAfter the report of Narasimham Committee, the New Bank of India- a nationalized bank, governed by Banking (Regulation) Act, 1949 Banking (Acquisition and Transfer of undertakings) Act, 1980, Banking nationalisation Act, 1970/80, was merged with Punjab National Bank – a nationalized bank, governed by the same Acts, both having its head office at New Delhi. Reserve Bank of India under its supervisory and controlling role observed that New Bank of India was incurring heavy losses, NPA’s were becoming high, quality of assets were deteriorating and financial position was so unsatisfactory that its capital and to some extent the deposits were eroded. Under the circumstances in order to safeguard the depositors’ interest and image of banking, .
RBI suggested to Central Government that it could serve public interest if the said New Bank of India is merged with another stronger nationalized bank. But due to various constraints viz; non-clarity of legal provisions regarding adjustment and written off or loss against capital / reserve, political uncertainty, relocation of branches, redevelopment of manpower, affect on seniority / promotion of staff, cultural and systemic integration etc. number of cases were filed in various courts, which took about 5/6 years to get finally resolved by Supreme Court of India. During the period lateral / vertical, development of the bank was affected. The amalgamation of Kashi Nath Seth Bank Limited in State Bank of India was also done by RBI in 1995-96 with a view to provide relief to ailing bank and maintaining public confidence. The governments decision of merger of Bari Daob Bank Limited and Punjab Cooperative Bank Limited with the Oriental Bank of Commerce on recommendation of RBI was with similar view of relief to ailing bank and maintaining public interest and depositors confidence.
However on the other side globalization coupled with deregulation, automation and advancement in information technology has completely changed the scenario of financial service industry in the world and posed heavy competition throughout the globe. Under this backdrop Narasimham Committee-II in 1998 while suggesting action to be taken to strengthen the foundation of banking system (viz; further increasingCRAR, reducing NPA etc. ) streaming procedure, upgrading technology and human resource development, reiterated structural changes in the system so that it can provide efficient and cost effective services to various segments of the economy and face the global competition and challenges. The Committee suggested that the overriding concern of any proposal of merger should be, making the merged unit stronger by way of capital standard and make strong. Inspite of all these talks, the amalgamation of Bareilly Corporation Bank Limited with Bank of Baroda was mainly guided by the need of requirement of capital and net worth, which BCB Ltd. was advised to maintained through Reserve Bank of India directives.
Further recent mergers and amalgamations of Beneras State Bank with Bank of Baroda and Global Trust Bank with The Oriental Bank of Commerce were also mooted with similar objectives. Hence we can say that merger and amalgamation in Indian Banking so far has been to provide the safeguard and hedging to weak bank against their failure and that too at the initiative of RBI, rather than to pave the way to initiate the banks to come forward on their own record for merger and amalgamation purely with a commercial view and economic consideration. Need of the hour for successful Merger andAmalgamationLooking the global trend of consolidation and convergence, it is need of the hour to restructure the banking sector in India through mergers and amalgamations in order to make them more capitalized, automated and technology oriented so as to provide environment more competitive and customer friendly. Few most important impediments for paving the way towards merger and amalgamation on commercial consideration and mutual arrangements, such as Government shareholdings of public sector banks, legal provisions relating to banking and industrial matters must immediately be resolved if at all the pace of M&A has to be accelerated in Indian banking industry. On the basis of captioned facts, studies and their outcome it is therefore proposed that in order to boost the mergers and amalgamations on commercial considerations, following points should be taken care of-1. An atmosphere conducive for merger and amalgamation be created from all sides viz; Government, Banks, Unions and Staff etc.
2. Mindset should be changed from superiority / inferiority, egoism etc. towards friendly relations with a view to get best possible results out of available resources. 3. Bank suiting to each others requirements on the basis of strengths on the basis of capital, business, performance, system and procedures, technological advancement, geographical presence etc. should come up voluntary for mergers and amalgamations.
4. Cultural and human resource integration be given top priority. ANNEXURE 1 LIST OF BANKS MERGED / FAILED DURING 1720-1885 FOUNDED FAILED (F) /ME NAME OF BANK WHERERGED (M) FOUNDED 1720 1770 Bank of Bombay Bombay 1770 1832 (F) Bank of Hindostan Calcutta 1773 1775 (F) General Bank of Bengal & Bihar Calcutta 1784 1791 (F) Bengal Bank Calcutta 1786 1991 (F) General Bank of India Calcutta 1806 M 1920 Bank of Calcutta Calcutta Bank of Bengal, 1808 FOUNDED FAILED (F) /ME NAME OF BANK WHERERGED (M) FOUNDED 1819 1928 (F) The Commercial Bank Calcutta 1824 1829 (F) The Calcutta Bank Calcutta 1829 1848 (F) Union Bank Calcutta 1833 1866 (F) The Agra & United Service Bank Ltd. Agra 1835 1837 (F) The Bank of Mirza pore Mirza pur 1840 1859 (F) North Western Bank of India Musso orie 1840 1920 (M) Bank of Bombay: Re-formed in 18681841 1842 Bank of Asia London 1841 1849 (M) The Bank of Ceylon (Taken over Colombo by the Oriental Banking Corporation) 1842 1884 (F) The Oriental Bank Corporation Bombay 1842 1863 (F) The Agra Savings Fund Agra 1843 1920 (M) Bank of Madras Madras 1844 1850 (F) The Benaras Bank Benaras 1844 1893 (F) Simla Bank Ltd. Simla 1845 1866 (F) The Commercial Bank of India Bombay 1845 1851 (F) The Cawnpore Bank Kanpur 1846 1862 (M) Dacca Bank Dacca (merged into Bank of Bengal) 1852 1855 (F) Chartered Bank of Asia London Chartered Mercantile Bank of India, London & China 1854 1857 (F) The London and Eastern Banking Corp.
London 1854 The Comptoir D’Escompte of Paris Paris 1860 Central Bank of Western India Bombay 1862 Bank of Hindustan, China & Japan Ltd. Bombay 1862 Bank of Rohilkhund Ram pore 1863 Punjab Bank Limited Rawalpindi 1863 Sind, Punjab & Delhi Bank Corp. Ltd. Calcutta Leading to Grind lays Bank 1865 Allahabad Bank Allahabad 1881 1958 (F) The Oudh Commercial Bank Faizabad Consolidation in the Banking Industry with Mergers andAcquisitionsDr.
Fir dos T. Shroff ” FELLOW’ Indian Institute of Banking and Finance and Special Executive Officer (Govt. of Maharashtra) The concept of merger and takeover is not historically unknown to India’s corporate sector but its importance in nursing the corporate health and growth on the pattern of Japan and USA particularly in the context of eliminating sickness in industries has yet to be realised. Legal Concept: Mergers, consolidation, takeovers, amalgamations, acquisitions, combinations, restructuring and reconstructing are some of the terms which are required to be understood in the sense these are used. In the following, meaning of a few terms have been explained – (1) Merger: Merger is defined as combination of two or more companies into a single company where one survives and others loses their corporate existence. The survivor acquires the assets as well as liabilities of the merged company or companies.
Generally, the company which survives is the buyer which retains its identity and the seller company is extinguished. Merger is also defined as amalgamation. Merger is the fusion of two or more existing companies. All assets, liabilities and stock of one company stand transferred to transferee company in consideration of payment in the form of equity shares of transferee company or debentures or cash or a mix of the two or three modes. (2) Amalgamation: Ordinarily amalgamation means merger. Halsbury’s Laws of England describe amalgamation as a blending of two or more existing undertakings into one undertaking, the shareholders of each blending company becoming substantially the shareholders in the company which is to carryon the blended undertaking.
(3) Acquisition: Acquisition in general sense is acquiring the ownership in the property. In the context of business combinations, an acquisition is the purchase by one company of a controlling interest in the share capital of another existing company. An acquisition may be affected by (a) agreement with the persons holding majority interest in the company management like members of the board or major shareholders commanding majority of voting power; (b) purchase of shares in open market; (c) to make takeover offer to the general body of shareholders; (d) purchase of new shares by private treaty; (e) acquisition of share capital of one company may be by either all or any one of the following form of considerations, viz. , means of cash, issuance of loan capital, or insurance of share capital.
(4) Takeover: A ‘takeover’ is acquisition and both the terms are used interchangeably. Takeover differs from merger in approach to business combinations, i. e. , the process of takeover, transaction involved in Mergers and Acquisitions will encourage banks to gain global reach and better synergy, and allow large banks to acquire the stressed assets of weaker banks.