CHAPTER I

INTRODUCTION

8
1.1 Industry Overview

The Indian Banking system consists of 26 Public sectors, 25 Private sector banks, 43 foreign
banks, 56 regional rural banks, 1,589 urban cooperative banks and 93,550 rural cooperative
banks in addition to cooperative credit institutions. Public-sector banks control nearly 80 percent
of the market, thereby leaving comparatively much smaller shares for its private peers. (India
Brand Equity Foundation, 2017).
As per RBI (Reserve Bank of India), Indias banking sector is well regulated and sufficiently
capitalized. The economic and financial conditions of the country are far superior to any other
country in the world. The studies of liquidity, market and credit risk suggests that Indian banks
are resilient and are capable of withstanding the global downturns. The rising incomes of
individuals and institutions are expected to enhance the need for banking and financial services
in rural areas and contribute to the growth of the sector. In addition to this, RBI has also relaxed
its branch licensing policy by allowing banks which meet certain financial parameters to set up
new branches in tier II to tier VI centeres even without any prior approval from RBI. This has
been done in order to emphasize the need to focus on expanding the reach of banking services to
the population without the services.
The Indian economy is on the edge of major transformation with many initiatives in its policies
which are to be implemented shortly. Improved customer confidence, controlled inflation,
positive business sentiments are likely to drive the growth of economy. Enhanced and speedy
project implementations, spending on infrastructure and continuing reforms are expected to
contribute further impetus to growth. All of these aspects suggest that Indias banking sector is
self-assured for robust growth as the rapidly emerging and growing businesses would turn to
banks for their banking and credit needs. Few banks are exploring options to launch contact less
debit and credit cards that allows customers to transact even without swiping or inserting the
card. The transformation of technology has brought in the mobile and internet banking services
frontal. Currently the banking sector is putting its emphasis on upgrading its technological
infrastructure and providing advanced services to its clients in order to assure the customers
experience and gaining a competitive edge.
In general, the present financial health of banks in India is a mixed bag. The credit development
of banks across the banking sector is growing higher and higher while profits are moderating.

9
This can be attributed to the growing Non Performing Assets (NPAs) of banks and can be
reduced by taking some major steps like asset reconstruction and securitization.

The below graph shows the credit off-take from banks from FY 2007 to FY 2016. The trend
shows an increasing pattern year on year.
1200
984 969 996 983 1016
1000
864
800 684
587 602
600 Growth in credit off-take
428
US$ billion
400

200

0
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Chart 1.1.1 Growth in credit off-take

It is seen that the growth in credit take off by many individuals and institutions has been
increasing year on year till 2016. The average loan growth in India is 12.48% from 2012 until
2017 whereas it has reached an all time high of 18.70% in April 2012 and recorded the lowest of
4.8% in February 2017. This decline in credit demand from customers can be due to
demonetization that happened in 2016 and hence the customers are withdrawing their plans to
buy cars, houses and other consumption items.

10
The below graph shows the credit take-off from FY 2016 to FY 2017 alone.
(www.tradingeconomics.com)

Chart 1.1.2 credit take off from FY 2016 to FY 2017

Though the loan growth of Indian banks is declining, that can be considered to be short term due
to demonetization effect and the sector will boost its profitability soon as the economy is already
recovering from the effect.

1.2 Corporate restructuring

As restrictions and controls gave a new way to free trade and competition, reorganizing and
restructuring became an integral part of the economy and considered to be essential.
Restructuring results in organizational change of switch in corporate strategies in order to meet
the market conditions and increased competition. This can be done internally by investing in
R&D at process and product levels or by investing in plant and machinery. It can also be done
externally by M&As by which one firm acquires or merges with the other.
Firms are using mergers and acquisition mostly to enter new markets, to garner greater market
share, asset growth and to gain competencies and strengths to become more competitive and gain
competitive advantage in the market place.

11
Consolidation of business entities is a worldwide phenomenon. One such way is Mergers and
acquisitions. Mergers and Acquisitions is the consolidation of two companies while Merger is
defined as the combination of two companies to form a new company. On the other hand an
Acquisition is defined as the takeover of a company(target) by another company(Acquirer).There
are different types of mergers depending on the nature of the companies such as horizontal
merger, vertical merger, concentric merger, conglomerate merger etc.
There are two ways for a company to expand its business and grow, in order to compete with the
existing rivals in the industry. One is by enhancing its internal resources and the efficiency of its
operations, by capital restructuring, by introducing new line of products in its business and
eventually increasing the work efficiency contributing to organic expansion of the company. The
other way is through expanding the business externally by mergers, acquisitions, amalgamations
and takeovers which is termed as Inorganic expansion. These ways will help companies in
restructuring their businesses either to rebuild its processes or rearrange termed as Corporate
Restructuring.

1.3 Mergers and Acquisitions in Banking Industry

Mergers and Acquisitions in financial sector have become familiar all over the world. A large
number of domestic and international banks are involved in M&As. The basic idea behind for
banks to involve in this process is to achieve the benefits the economies of scale and to leverage
the synergies that arise in the process in M&A. With the help of M&As in this sector, banks tend
to achieve operational efficiency and also reduce the expenses to an acceptable extent. There is
also a great advantage for banks as M&As also eliminate the competition in banking industry.
Most of the mergers in banking industry are of horizontal mergers as banks consolidate with the
banks in the same business line and with same commercial activities. Through mergers and
acquisitions, banks try to enhance and improve their customer base. In this context, it can be
assumed that size matters and growth in it can be achieved by M&As easily. Also private banks
and government banks are adopting various policies for this purpose.
Now banks which are operating multinationally and globally started expanding their operations
in many countries with the regional or local banks in those countries. Such kind of M&As are
known as cross border M&As or international M&As in banking sector. By this banks are able
to put themselves into supreme position in banking sector, gain market share as well as achieve

12
economies of scale.
Mergers and acquisitions in banking industry have the potential to ensure profitability, efficiency
and synergy which in turn will also help to attain shareholder value.
In case of mergers or takeovers between/of financially distressed and weak banks in banking
sector will lead to job cuts and monopoly. Economic reforms, market liberalization, deregulation
in financial markets and many other factors contributed to the growth of mergers and
acquisitions in banking sector. However, there are also many challenges that are yet to be
overcome by taking suitable measures.
In every country mergers and acquisitions in banking sector are regulated and controlled by the
apex financial authority of that particular country. In India M&As in banking sector are
overseen by RBI (Reserve Bank of India).
In India the banking sector regulated by Banking Regulation Act of India, 1949 can be broadly
divided into two categories.
a) Scheduled Banks
b) Non-Scheduled Banks
Scheduled commercial banks are those banks, which are listed under the second schedule of RBI
Act, 1934. Scheduled banks are categorized into commercial and cooperative banks. The major
difference between commercial banks and cooperative banks is their holding pattern as the
cooperatives are listed as cooperative credit institutions under cooperative societies Act.
Scheduled commercial banks are further classified into public sector banks, private sector banks,
foreign banks, and Regional Rural Banks (RRBs).

Public Sector Banks

A public sector bank is a bank in which the government will hold more than 50% of shares.
There are a total of 27 public sector banks in India out of which 21 are nationalized banks and 6
are State Bank of India and its associates. The PSBs, which are the base for Indian Banking
system, control nearly 80% of the market. PSBs are composition of
SBI and its Associates
Nationalized Banks
Other Public Sector Banks.

13
Table 1.3.1 List of Public sector banks in India

S.NO PUBLIC SECTOR BANKS

1 Allahabad Bank
2 Andhra Bank
3 Bank of Baroda
4 Bank of India
5 Bank of Maharashtra
6 Bhartiya Mahila Bank
7 Canara Bank
8 Central Bank of India
9 Corporation Bank
10 Dena Bank
11 IDBI Bank Limited
12 Indian Bank
13 Indian Overseas Bank
14 Oriental Bank of Commerce
15 Punjab & Sind Bank
16 Punjab National Bank
17 State Bank of India
18 State Bank of Hyderabad
19 State Bank of Bikaner & Jaipur
20 State Bank of Patiala
21 State Bank of Travancore
22 State Bank of Mysore
23 Syndicate Bank
24 UCO Bank
25 Union Bank of India
26 United Bank of India
27 Vijaya Bank

14
By assets, State Bank of India is the largest banking and financial services company in India. It
has more than 14000 branches across India and 191 foreign branches in 36 countries. The roots
of SBI lie with three banks i.e. Bank of Calcutta (renamed to Bank of Bengal), Bank of Madras
and Bank of Bombay. These three banks formed into joint stock companies and resulted in the
formation of Royal Charters later, which they amalgamated and reorganized into Imperial
Bank of India. This bank was nationalized in 1955 and renamed as State Bank of India. SBI
has seven associate banks back in 1959 and continued till 2008 until the process of consolidation
of SBIs subsidiaries began. Later State Bank of Saurashtra merged in 2008 and State Bank of
Indore in 2012 leaving SBI with five subsidiaries. They were State Bank of Hyderabad, State
Bank of Bikaner & Jaipur, State Bank of Mysore, State Bank of Patiala and State Bank of
Travancore. Negotiations of merging these five associate banks businesses started in 2016.
Nationalization refers to assets or private assets owned by government, being transferred to the
state. Public sector banks in India are banks where the majority stake is held by government.
Thus all nationalized banks are PSBs and they are 19. The major nationalization happened in
1969 where 14 major commercial banks were nationalized with an objective to provide financial
services especially for people in rural areas and later in 1980, the second phase of nationalization
started where it nationalized seven more banks.

Other Public Sector Banks

There are two Scheduled Commercial Banks in India, which were categorized under other public
sector banks. They are:
IDBI Bank
Bhartiya Mahila Bank

Private Sector Banks

Private sector banks represent part of Indian banking sector where majority of stake or equity is
held by shareholders but not the government unlike Public sector banks. Private sector banks are
formed to supplement the needs of public sector banks. In India banking industry is highly
dominated by public sector banks till 1990s and then came liberalization in government banking
policies that made the old and new private sectors to re-emerge and grow rapidly. Private sector

15
banks are divided into old private banks existed before nationalization in 1969 and new private
banks formed since liberalization in 1990s. There are 13 old private sector banks and 7 new
private sector banks.
Table 1.3.2 Old private sector banks
S.NO OLD PRIVATE SECTOR BANKS
1 Catholic Syrian Bank
2 City Union Bank
3 Dhanalakshmi Bank
4 Federal Bank
5 ING Vysya Bank
6 Jammu and Kashmir Bank
7 Karnataka Bank
8 Karur Vysya Bank
9 Lakshmi Vilas Bank
10 Nainital Bank
11 Ratnakar Bank
12 South Indian Bank
13 Tamilnad Mercantile Bank

Table 1.3.3 New private sector banks

S.NO NEW PRIVATE SECTOR BANKS
1 Axis Bank
2 Development Credit Bank(DCB)
3 HDFC Bank
4 ICICI Bank
5 Induslnd Bank
6 Kotak Mahindra Bank
7 Yes Bank
8 Bandhan Bank
9 IDFC Bank

16
These are the public sector and private sector banks in Indian banking industry which dominate
the financial and banking industry in India.

There were major changes in the functioning of banks in India post Globalization, Liberalization
and Privatization. The economic reforms actually started in 90s but the progress can be traced
now. Financial sector being the back bone for the economy of India, it is dominated by Banking
Industry which forms the major amount of the asset in the financial sector. Any changes in
banking industry impact the macro economic variables such as economic output, national
income, investments and savings, employment etc. This industry is predominantly occupied by
Public and Private sector banks and accounts for major portion of banking businesses. New
information technologies, increased competition, global expansion, less government restrictions
etc. have made both public and private sector banks compete with each other significantly. The
Public Sector Banks hold a major portion of total assets of the Banking industry. Government has
approved significant economic and banking reforms since liberalization paving way for Public
sector banks to grow significantly in catering to the needs of public. While few banks focused on
the process of amalgamation, consolidation through Mergers and Acquisitions to increase the
profitability, gain competitive edge and to reduce the interference of government to certain
extent. Later as a supplement for public sector banks, in order to serve the customers better
private sector and foreign banks came into picture. Both public and private sector banks success
and existence depends on their ability in fulfilling the needs of its target customers. After Private
sector banks came into picture, they contributed in the major development of banking sector.
Though it is known that post nationalization, the banking industry has grown significantly; it did
not show a greater progress in public sector banks in long run. It has shown an unparalleled
growth over the years in their global coverage. The thrust to enunciate the policies by the
government during the period of post nationalization has coupled with the regional development
of the economy leading to allocation of inefficient resources and bad health of the banks. They
lacked in operational efficiency and characterized by low profitability and productivity resulted
in mounting Non Performing Assets (NPAs). (R, 1993)
Later to infuse efficiency in the performance of banking sector, as a broader program of
economic reforms, financial sector reforms were initiated in 1991. These reforms concentrated
on increasing the profitability, productivity and efficiency on the performance of banks.

17
The banking sector reforms initiated in 1991 were categorized into two phases i.e. form 1991-92
and 1997-98.
The reforms of the first phase (1991-92) focused on improving financial health of the banks. For
this purpose it introduced norms in 1992 focusing on asset classification, income recognition and
provisioning with capital adequacy. To forestall the banks resources in the form of SLR and CRR
has stood as the major factor affecting their profitability. The SLR rate was controlled from high
38.5% in 1992 to 25% in 1997 has made an ease to release the funds as per the banks
requirements.

The second phase (1997-98) reforms focused on the deregulation of interest rates where banks
were given freedom to set up their own lending and deposit rates. This was done in order to
increase the competitiveness among the banks and ultimately result in achieving operational
efficiency of the banks. Further the banks were allowed with more autonomy in opening and
closing of their branches in different areas. One of the most important norms during this period is
introduction of capital adequacy. Targets were set for the banks to achieve certain percentage of
capital adequacy ratio by end of certain period and the defaulted banks would be imposed with
penalty who fails to maintain the ratio. Under the first phase of reforms, in compliance with the
LPG policy, Private and Foreign banks were allowed to have a stand in Indian Banking Industry
in order to create a competitive environment.

18
 CHAPTER II
LITERATURE REVIEW

19
 The study on Impact of Mergers and Acquisitions on Indias Economy (Pahuja &
Samridhi, 2016), explores that every organization runs behind the growth substance to
expand itself either by organic or inorganic expansion, in other words corporate
restructuring. Corporate restructuring is the process of significantly changing a
company's business model, management team or financial structure to address challenges
and increase shareholder value. It also states the problems and reasons to adopt a merger
or an acquisition and the factors include economies of scale, operating economies,
synergy, growth, diversification, tax shields and elimination of competitors. It provides
solutions for avoiding the failure of M&A.

The research study on Strategic Management: Managing Mergers and Acquisitions

(Alam, Khan, & Zafar, 2014), states that todays merger or acquisition is strategic and
operational in nature by not just buying the undervalued assets but buying better
distribution channels, installed customer bases, organizational competencies and greater
geographical boundaries. These all offer new talent and strategic opportunities to
organizations and in turn gain competitive edge over the rivals. It also states the reasons
and rationale behind Mergers and Acquisitions and shows the life cycle of M&A
beginning with Inception phase, feasibility phase, pre-merger phase and implementation
phase.

The article on Critical Success Factors in Merger and Acquisition Projects (Hoang &
Lapumnuaypon, 2007), explores about the project success criteria from the perspective of
advisory firms and the main role of advisory firms in these projects. The reasons why
M&A happen and the process of conducting a Merger or an Acquisition is mentioned in
the article. Differentiation among critical success factors and project success criteria is
defined whereas the influences or the facts or the set of circumstances which contribute
for the outcomes of the project are termed as critical success factors and the set of
standards and principles by which a project can be judged is termed as project success
criteria.

20
 Dr.Suresh Chandra and Bihari in their study Are Mergers and Acquisitions beneficial
for banks: The Indian Experience (Bihari, 2012), tries to answer the question- Are bank
mergers desirable? By analyzing the post-merger effect and understanding whether the
synergies are able to generate values or not. For this purpose the period of study is carried
from the year 1999 to 2008.The paper analyzed the mergers of HDFC and Times Bank,
Bank of Madura and ICICI Bank, Oriental bank of Commerce and Global Trust bank and
HDFC bank and Centurion bank of Punjab.it tries to conclude the short term effects of
shareholders wealth in Indian banking sector and concluded that target banks were in
advantage than the bidder banks.

The article on Impact of Bank Mergers on the efficiency of Banks: A study of merger
of Bharat Overseas bank with Indian Overseas bank (Kumar, 2013), addresses the
question that whether the size of the banks matters for M&A and if so, till what extent. It
also studies about the profitability and efficiency parameters of banks. It used the
methodology of t-tests to derive the relationship between size and profitability of banks
and concluded that the size of the bank matters. It further studied that large banking firms
are more efficient and less risky than smaller firms by analyzing the merger of Bharat
Overseas bank with Indian Overseas bank as a sample.
Study on Mergers and Acquisitions in Indian Banking Sector- A Strategic Approach
(Kumari, 2014), studies about the impact of M&A in banking industry, their position pre
and post-merger and states the reasons of these mergers and acquisitions. It has taken the
merger of ICICI and Bank of Madura, Centurion bank and Bank of Punjab, IDBI bank
and United Western bank ltd, HDFC and Centurion bank of Punjab, HSBC, Canara and
Oriental Bank of Commerce. It concludes that there is increase in number of branches,
ATMs, deposit amount and Net profit and worth.

A research study on Mergers in Indian Banking: An Analysis (Jayadev & Sensarma, p.

41), reviews the trends in consolidation in Indian and global banking emphasizing on the
views of shareholders, stakeholders and managers. It says that neither the bidder nor the
target gets benefited in case of hostile mergers while both get benefited in case of

21
 voluntary mergers by conducting an event study analysis. It also addresses few critical
issues which hamper the success of consolidation.

Research study on Mergers and Acquisitions prospects: Indian banks study (Meena &
Kumar, 2014), studies the performance of banks pre and post-merger by taking sample of
three banks ICICI bank, State Bank of India and HDFC. It proves that in pre and post-
merger or acquisition, the profitability ratios did not have any change and even after ten
years the banks did not change their performance. Few banks which are of same business
and product line even showed declining performance yet says that there may be
improvements in profitability in future. The overall results of the study indicated that
there are higher levels of cost efficiencies for the merging banks. The findings of the
report says that the M&As in Indian Banking sector have been restricted to restructuring
of financially distressed and weak banks.

Dr.Tamragundi and Devarajappa in their research on Impact of Mergers on Indian

Banking Sector: A comparative study of Public and Private Sector merged banks
(Dr.A.N.Tamragundi & S.Devarajappa, 2016), has taken 6 Indian commercial banks
merged during 2004-2008 out of which three are merger of public sector banks with
private sector banks and the other three are the merger of private sector banks with
private sector banks. It emphasizes on the physical performance, financial performance
and the share price performance. The study concluded that there are significant
improvements in the physical performance of the banks while the financial performance
of the public sector banks did not show any improvements and the reason stated is, it
might be because of the policy matters of public sector banks. It concludes that merger is
not preferable to gain shareholders wealth in short-term.

A research study on Merger and Acquisition in banking industry: A case study on

ICICI Bank ltd. (Dr.K.A.Goyal & Joshi, 2012), explores that a firm must devise a
strategy in three phases i.e. Pre-merger, acquisition and post-merger phase by taking

22
 ICICI Bank ltd. as a sample where it has merged with 9 financial firms from the 1996-
2010.A critical analysis of all these mergers were done and concluded that M&As are
corporate events which creates synergy and also creates severe personal trauma and
stress.

A study on Performance of Indian Public Sector Banks and Private Sector Banks: A
Comparative Study (Chaudhary & Sharma, 2011) analyzes the efficiency of public and
private sector banks in managing their Non Performing Assets. The study included
statistical tools for the asset classification and also to determine the NPAs of public and
private sector banks. The paper suggests that banks should use efficient Management
Information Systems to get rid of the pertaining problem of NPAs in banks. It also
suggests that the bank staff should be properly trained and should ensure the
documentation while giving advances to individuals and monitor the advances so that
they dont turn into NPAs. More attention is needed for public sector banks to compete
with private sector banks.

A study on NPA management by public and private sector banks (Pharate, 2014)in
India explores the NPA management of private sector banks. With their entry, the Indian
banking industry has become more dynamic and competitive. It has led to the
improvement of efficiency, productivity and profitability of banking sector as a whole
and has a positive impact on banking reforms. As per the analysis made in the study, even
though there is an increase in gross NPAs and Net NPAs in absolute terms, the banks
has tried to improve their asset quality and managed to decrease their NPAs in
percentage terms. It concluded that public sector banks have to be stronger in order to the
challenges posed by private sector banks.

23
From the review of literature, it is observed that the Indian industry had witnessed and still
witnessing number of corporate restructuring activities. The process of restructuring increases
the competition among banks domestically and globally and also improves the core
competencies of banks.
The gap identified from all the literature review is that there is not much corporate restructuring
in public sector banks when compared to private sector banks. Liberalization, privatization and
globalization have brought many changes in financial and economic reforms for the benefit of
many industries. One such is the banking industry which is dominated by public and private
sector banks. This study answers the questions
i. Why public sector banks do not prefer consolidation of their businesses?
ii. What are the reasons behind the back step of public sector banks?

24
 CHAPTER III
RESEARCH METHODOLOGY

25
3.1 Problem statement
Mergers and acquisitions post liberalization has brought a new way of doing business for many
industries. One such which is growing at a fast pace is banking and financial services industry.
Bank mergers are not a new phenomenon for the banking industry in India but since
liberalization there has been many changes in the process of banks undertaking M&As and this
has brought few banks achieve economies of scale and the others run into operational
inefficiency. This study addresses
i. Factors that are causing the difference between public banks and private banks in going
through corporate restructuring
ii. The gaps created among these banks post M&A and suggesting measures to overcome
those gaps.

3.2 Scope of the study

The scope of the thesis is to connect with the pattern in which Public and Private sector banks
went through the process of restructuring either by a merger or an acquisition and also to
evaluate the extent of sustainability of these companies after restructuring. By this there will be
an understanding of the gap that is causing companies not to go through M&A.
3.3 Period of the study
Considering the history of evolution of mergers and the stand of Public and Private banks on
corporate restructuring in 2017.
3.4 Objectives of the study
To analyze the restructuring process in public and private sector banks and to identify the
reasons why these banks involve in M&As.
Identify the point of difference between public and private sector banks by analyzing the
selected banks.
To identify the reasons why private banks restructuring is more than public banks and to
suggest what can be done for public banks to go for corporate restructuring.

3.5 Data Collection

For the purpose of research study, the data used is secondary data. Data is collected through
internet searches,
publications of government, banks etc.

26
 Reports of various authors
Journals
Websites

3.6 Limitations of the study

The major limitations in this study are

The study is based on only secondary data derived from various sources and reports of
the banking industry. The reliability and the findings are contingent upon the data
published in the reports.
The study is limited to the last year of pre merger and current position (2017) only.
Analysis only considered the profitability of the banks and ignored the facts that cannot
be expressed in monetary terms such as reputation, efficiency of workers etc.
The study analyses the performance of only selected banks of public sector and private
sector, three in each. The conclusion might not stand accurate for all other banks.

27
 CHAPTER IV
DATA ANALYSIS

28
Data analysis is done only by analysing the secondary data available from various reports,
websites, articles etc of banking industry.
Data is also taken from the websites of banks and hence used for comparision.
This paper examines the post-performance of selected public sector and private sector banks
after merger. The performance of these banks is analysed by two prospectives
i. Reasons that has led the bank to merge or acquire
ii. The post effect of the merged banks.
For this purpose three public sector banks and three private sector banks are taken.
The merged public sector banks include
1) Global Trust Bank and Oriental Bank of Commerce.
2) Nedungadi Bank and Punjab National Bank.
3) Bank of Baroda and Banares state bank.
The merged private sector banks considered for the study are
1) Kotak Mahindra bank and ING Vysya bank.
2) ICICI bank and Bank of Rajasthan.
3) HDFC bank and Centurion bank of Punjab.
By analysing the reasons behind the merger/acquisition and also the post immediate effect of
these mergers of the above mentioned banks, the objectives of the study can be achieved.

29
4.1 Corporate restructuring in Public Sector Banks
The table 4.1.1 shows the number of mergers happened in public sector banks and the year of the
merger.
4.1.1 Mergers in public sector banks
TARGET BANK ACQUIRER BANK YEAR OF ACQUISITION
Bank of Bihar Ltd. State bank of India 1969
National bank of Lahore Ltd. State bank of India 1970
Bank of Cochin Ltd. State bank of India 1985
Lakshmi commercial bank Ltd. Canara bank 1985
Miraj state bank Ltd. Union bank of India 1985
Hindustan commercial bank Ltd. Punjab National Bank 1986
United Industrial Bank Ltd. Allahabad Bank 1989
Parur Central Bank Ltd. Bank of India 1990
Purbanchal Bank Ltd. Central bank of India 1990
Bank of Thanjavur Ltd. Indian bank 1990
Bank of Tamilnadu Ltd. Indian Overseas bank 1990
Bank of Karad Ltd Bank of India 1993
New bank of India Punjab National Bank 1993
Kashi Nath Seth Bank Ltd. State bank of India 1996
Bari Doab Bank Ltd. Oriental bank of Commerce 1997
Punjab Co-operative Bank Ltd. Oriental bank of commerce 1997
Bareilly Corporation Bank Ltd. Bank of Baroda 1999
Sikkim Bank Ltd. Bank of India 1999
Benares State Bank Ltd. Bank of Baroda 2002
Nedungadi Bank Ltd. Punjab National Bank 2003
South Gujarat Local Area Bank Ltd. Bank of Baroda 2004
Global Trust Bank Ltd. Oriental Bank of Commerce 2004
IDBI Bank Ltd. IDBI Ltd 2005
United Western Bank Ltd. IDBI Ltd 2006
Bharat Overseas Bank Ltd. Indian Overseas Bank 2007

30
There were no recent mergers or takeovers in case of public sector banks unlike private sector
banks. Banks have different reasons to undergo the process of M&A and that stands as the point
of difference among public and private sector banks. Consolidation will not only improve the
ability of banks in recovering their rising bad loans but also increase capital efficiency.
Consolidation in public sector banks are at stake and government is in talks to merge all the
public sector banks due to their poor performance year on year.
For the study, mergers between Oriental Bank of Commerce and Global Trust bank, Punjab
National bank and Nedungadi bank, Bank of Baroda and Banares state bank were considered.
Though the mergers happened way back, there were no recent mergers between banks in public
sector and hence the above mentioned bank mergers were considered to analyse and evaluate the
reasons behind the merger and by that the post effect of merger is understood.

Oriental bank of Commerce and Global Trust bank

Global Trust bank is a private sector bank which opened its first branch in Secunderabad, Andhra
Pradesh in October, 1994. The net worth of GTB is wiped off and it accumulated a loss of 2.65
billion in 2003. This was the impact of the GTB involvement in the stock market scam in 2001.
Due to the heavy lending of GTB to individuals speculating in stock market, it went into losses
when the stock market crashed. After examining the GTBs accounts of this particular period by
RBI, it was found that GTBs net worth was negative. Even though GTB continued its operations
and has expanded its branches from 87 in 2002-2003 to 103 branches. In 2004 Newbridge
Capital wanted to invest and restructure GTB. But RBI didnt approve because it didnt wanted
private investors to restrict re organize GTB.
In August, 2004 Oriental Bank of Commerce which was founded on 1943 took over GTB. OBC
has already acquired Bari Doab bank and Punjab Cooperative bank in 1997 and established a
huge network nationwide. However GTBs depositors and shareholders suffered no loss and also
didnt get anything for their shares.
Reasons for the takeover:
GTB used public money for the purpose of investments in financial products which
invited heavy risk and stood as one of the reasons for the crisis of the bank.
OBC also wanted to gain Southern market where its presence is very limited but GTBs
is extensive.

31
 OBC has perceived synergies between two banks as GTB has been carrying its operations
with good number of shareholders, market presence and reputation but was financially
distressed and wanted to acquire it for mutual benefits.

Post effect:
The total assets of GTB before merger are 75860.8 million. The total assets of OBC
before merger are 339988.8 million.
Combined assets post-merger of OBC is 410065.60 million.
Capital adequacy ratio was 12.24 from 14.47 of OBCs alone as GTB is left with nothing
before merger. The profitability went to 16 billion as of June, 2004.
Number of branches of OBC has increased to 1092 from 989.

80
69.6
70 66.9

60

50

40 35.6 2003

30
2004
23.7
20 17.1
11.9
10

0
Total Income Net Profit EPS

Chart 4.1.1 Ratios of Oriental Bnak of Commerce (India Infoline)

Punjab National Bank and Nedungadi bank

PNB is a multinational banking and financial services company founded in 1894 and has
subsidiaries worldwide. PNB in its history has acquired many other banks such as Dass bank,
Bharat bank, Universal bank of India, Indo Commercial bank, New bank of India, Hindustan
Commercial bank and Nedungadi bank.
Nedungadi bank was established in 1899 as a private sector commercial bank in South India. It
acquired Cochin National bank in 1964 and later took over the Coimbatore National bank and
over time it established 174 branches nationwide.

32
It was involved in the stock scam and had dissimilarities in conducting business. Later on in
2003, PNB took over Nedungadi bank with the shareholders of the bank receiving nothing for
their exchange of shares.

Reasons for the takeover:

RBI recommended government to make it a compulsory amalgamation as PNB
approached RBI for taking Nedungadi bank with a view to enlarge its network.
NB which has 175 branches, reported a net loss of $ 678 million in the year 2001. Later
Nedungadi bank was placed under a moratorium on the charges that the bank allegedly
had violated the Central Bank norms in lending its stockbrokers.
As Nedungadi bank went into deep financial crisis, PNB wanted to acquire it for mutual
benefit of expanding its operations in South and also to recover Nedungadi bank from its
bad debts.

Post effect:
As Punjab National Bank has a history of seven mergers, all together has increased
PNBs performance and profitability. PNB has an extensive reach and acquiring a weak
bank like Nedungadi would only be a supplement to PNB in increasing few more
branches in South. Post-merger the recent records of PNB shows its presence of 4000
branches nationwide and 10.3 year on year growth from 2011 till 2016. In 2016 PNB
reported a negative profit of 3974 even though its advances, deposits and net profit had
increased year on year. The reason PNB is operating under losses at present is due to the
increased provisioning requirement of Non-Performing Assets.

33
 120

97.6
100
87.3
76.2 78.4
80
2002
60
49.75 47.4 2003
37.6 2004
40 31.64 30.26
27.18 26.65
21.05
20

0
Total Income Net Profit EPS reserves and Surplus

Chart 4.1.2 Ratios of Punjab National Bank (A comparative study of growth analysis of Punjab
National Bank of India and HDFC ltd, 2013)

Bank of Baroda and Banares state bank

Bank of Baroda is 107 year old banking and financial services company headquartered in
Gujarat. The bank was founded in 1908 and one among the 13 other nationalized banks in India
in 1969 as has been a PSU. Bank of Baroda has acquired Hind bank Ltd., New citizen bank of
India, Surat banking corporation, Umbergaon peoples bank, Tamilnadu central bank, Bareilly
Corporation bank, Nainital bank, Traders bank, Memon cooperative bank Ltd., Punjab
cooperative bank, Banares state bank The acquisition of Banares bank has brought Lucknow
bank for BOB. It also acquired Gujarat local area bank.
Banares bank is a scheduled commercial bank founded in 1946 and headquartered in Varanasi. In
2002 Bank of Baroda took over Banares state bank.

Reasons for the takeover:

Post liberalisation Banares state bank has been facing financial pressures due to which
the bank has sold its majority stake to business man in South India. This had brought a
short term relief to the bank but later on the bank couldnt withstand the financial crisis
and reported huge lossess.

34
 In order to restructure the bank, RBI approached Bank of Baroda to takeover the
distressed bank in order to protect the interest of shareholders and depositors.

Post effect:
Post the acquisition, Bank of Baroda was able to recover the debts of Banares state bank
and together with all the merged entities it has been achieving greater profits year on
year.
According to data available in 2016, Bank of Baroda is operating under lossess and its
profit growth turned to be negative. The losses reported by the bank are due to the default
of loans and Non-Performing Assets.

90

80 77.2
73.5
69.4
70 64.6
60

50 2001
40.9
40 2002
30.6
30 27.4 26.11 2003

20
9.26
10

0
Total Income Net Profit EPS reserves and Surplus

Chart 4.1.3 Ratios of Bank of Baroda (Report Junction)

In the above three cases, it was forced merger where RBI has forced the acquirer bank to take
over the distressed and weak bank in order to protect the interest of the target banks shareholders
and depositors.

35
4.2 Corporate restructuring in Private Sector Banks
Currently banking in India is dominated by private sector banks in competition with public sector
banks. Since nationalization of banks by Indian government in 1969, private sector banks existed
as old private sector banks and new private sector banks. They have re-emerged and has been
growing bigger and faster with updated technologies, contemporary monetary tools and
techniques and innovations.
The merged private sector banks considered for the research are Kotak Mahindra Bank Limited
and ING Vysya Bank Limited, ICICI bank and Bank of Rajasthan, HDFC bank and Centurion
bank of Punjab. The reasons behind the takeovers in private sector banks and their results after
the consolidation are understood.

Kotak Mahindra Bank and ING Vysya Bank

Kotak Mahindra bank Ltd. was established in 1985 as Kotak Mahindra Finance Capital
Management limited which is the flagship company of Kotak group to carry the banking
business. It is headquartered in Mumbai and offers wide range of financial and banking products
and services to corporate, retail customers. It is known as third largest private sector bank in
terms of market capitalization. It also carries a network of 2051 ATMs, 1348 branches across
675 locations as of 2017. Kotak Mahindra acquired ING Vysya bank in 2014 with effect from
2015 and has got a huge customer base and also increased its reach nationwide.
ING Vysya is also a private sector bank founded in 2002 with the purchase of equity stake in
Vysya bank by Dutch ING group. It is the first merger ever happened between an Indian bank
and a foreign bank.Vysya bank had a strategic alliance with Banque Bruxeles Lambert, a Belgian
bank acquired by Vysya bank in 1998. It was the sevent largest private bank in India in 2013
before cutting a deal with Kotak Mahindra bank and had a pan India presence with 527 branches.

Reasons for the merger:

In a view to be the countrys largest private sector bank as ING and Kotak are already top
in the list of private sector banks. ING was in growth phase and would need employees
for its branch expansion. This can be achieved by combined employee strength of both
the banks.

36
 Also with a view to support and service the global clients within India and Indian clients
outside India with the combined platform and increase their customer base, expertise and
geographical spread.

Post effect:
As it was a deal betwwen two banks with share swap, the consolidation will reap benefits
to both the banks as a combined entity. The merger gave Kotak access to 573 branches of
ING Vysya which is 90 per cent of Kotaks branch network. Kotak doesnt have access to
65 per cent of INGs branch locations.
Number of branches and ATMs doubled.
Market capitalization of Kotak Mahindra has crossed ICICI which is three times bigger
than Kotak Mahindra post-merger.
There was a steady loan growth and also growth in current and savings account.19.19

30

24.2
25

19.19 19.62
20 18.31
16.9117.13
13.7 2013
15
11.7 11.8
10.1 2014
9.2 9
10 2015

0
Total Income Net profits EPS Reserves and
Surplus

Chart 4.1.4 Ratios of Kotak Mahindra Bank (money control)

37
ICICI bank and Bank of Rajasthan
ICICI bank ranks second amongst the private banks in India with a network of 4450 branches
across India, presence in 19 countries with 14404 ATMs in India. Industrial Credit and
Investment Corporation of India is a wholly own subsidiary. The parent company formed as a
joint venture in 1955 with the World Bank. The bank was founded as Industrial Credit and
Investment Corporation of India bank which is the parent company and transformed to ICICI
bank and later the parent company merged with ICICI bank.
It has a history of acquisitions starting from 1996. In 2001 it acquired Bank of Madurai,
Grindlays banks branches, Investitsionno-Kreditny bank(Russian bank), Sangli bank and Bank
of Rajasthan.
Bank of Rajasthan was established as a joint stock bank in 1943. It served the Rajasthan
government as a scheduled bank and an industrialist started the bank with an initial investment of
10 lakhs. It also established a rural bank named as Mewar Anchlik Gramin bank in Gujarat. The
bank has 463 branches out of which 294 branches are in Rajasthan and with the presence in 24
states. In ICICI bank has acquired bank of Rajasthan in the year 2010

Reasons for the merger:

Bank of Rajasthan incurred losses and constantly remained with a negative return. It is
also in fights with SEBI and RBI and the founders were under pressure to sell the bank.
Later RBI has imposed penalty on the BOR for violations such as irregular property
deals, lapses in the corporate accounts, deletion of records in the IT systems of bank.
The Tayals who are the founders of the bank held 55% stake in the bank initially. At the
end of 2009 they had 28.6 % stake and nearly 100 entities of Tayals were banned from
dealing in securities.
By that time it was already facing many challenges such as regulatory concerns, Asset
Quality Management, violation of company law and legal issues related to EGM.
Above all this ICICI said that it is willing to pay Bank of Rajasthan more than its current
market valuation. Then they agreed the deal of consolidation.

Post effect:
The liquidity position of both the banks has increased and so the net profit.
Post-merger Bank of Rajasthan gained about 77% in price.
38
 ICICIs branch network became more stronger and it has strengthened its presence in
Northern and Western India

60
53.9
51.5 50.5
48.4
50 45.2
38.6 40.2
40 37.5 36.1
33.1 32.6 33.8
2009
30
2010

20 2011

10

0
Total Income Net Profit EPS reserves and Surplus

Chart 4.1.5 Ratios of ICICI Bank (Money Control)

\
HDFC bank and Centurion bank

HDFC was incorporated in 1994 by Housing Development Finance Corporation which is the
most reputed mortgage finance company. It is the second largest lender among private sector
banks in terms of assets and is the largest by market capitalization. HDFC has merged with
Times bank in 2000 and made a record of being the first among mergers in private sector banks.
In 2008 HDFC acquired Centurion bank of Punjab and was one of the largest mergers in banking
sector in India.
Centurion bank of Punjab was also incorporated in 1994. It was a joint venture between 20th
century Finance Corporation and Keppel Group (Singapore) through Kephinance Investment.
Centurion bank of Punjab was a merged entity between Centurion bank and Bank of Punjab in
2005. In 2006, Centurion bank of Punjab acquired Lord Krishna bank in Kochi. The bank has a
network of 394 branches in 180 locations.

39
Reasons for the merger:
To achieve economies of scale and also wide range of product and process line.
To withstand the competition from foreign banks
As both the banks have a strong presence in SME and retail segment, vehicle financing,
deposit franchise etc. the merger would reap benefits in all the domains of its operations.

Post effect:
Regional strength for HDFC
Merged entity is having assets of 1.5 trillion and also 1.2 trillion deposit base.
Increase in net profit by 44.6%
Advances and deposits grew by 60.4%
The NPAs has decreased from 1.13% of Centurion bank of Punjab to 0.4% for the
combined entity.

140 130
124
120

100 95.2
79
80
67 63.5 2007
60 2008

40 2009

20 15.616.5
7.2 10.411.5
4.81
0
Total Income Net profits EPS Reserves and
Surplus

Chart 4.1.6 Ratios of HDFC Bank (www.hdfcbank.com)

40
 CHAPTER V
FINDINGS, SUGGESTIONS AND
CONCLUSION

41
5.1 FINDINGS
From the analysis, it is known that most of the public sector bank mergers are forced
mergers as RBI approaches strong banks to take over the financially weak and distressed
banks. But in the case of private sector banks, the mergers are of mutual consent from
both the banks to achieve mutual benefits.
Most of the mergers in private sector banks are with the view of increasing the customer
base expand its geographical reach and achieve economies of scale in order to withstand
the competition from the foreign players as well as Indian competitors. Mergers in public
sector banks are with the view of protecting the interest of shareholders and depositors of
the banks which were in constant financial crisis by getting acquired by strong public
sector banks.
Only when the government initiates the merger or acquisition, M&As happen in public
sector banks otherwise banks operate individually with the resources they have.
As M&As are not effective in public sector banks, the banks are piling up with huge
non-performing assets because of the lack of assessing and monitoring the banks
operations. It is known that public sector banks are still backward in terms of
technological advancements unlike private sector banks and also in terms of giving out
loans and advances and getting payments in the form of income.
If PSBs do not consider M&As seriously, then they may have to suffer the prolonged
losses and also cannot recover from bad loans in near future. This is a great challenge for
PSBs in order to overcome the challenges posed by private and foreign banks.

42
5.2 SUGGESTIONS

The table below shows the profitability of public sector and private sector banks as per March,
2017. (www.moneycontrol.com, 2017)

Table 5.2.1 Profitability of public and private sector banks

PUBLIC SECTOR PROFITABILITY PRIVATE SECTOR PROFITABILITY
BANK BANK
SBI 9,950.65 HDFC bank 12,296.21
Union bank 1,351.60 ICICI bank 9,726.29
Indian bank 711.38 Axis bank 8,223.66
Andhra bank 539.84 Yes bank 2,539.45
Vijaya bank 381.80 Induslnd bank 2,286.45
Punjab & Sind bank 335.97 Kotak Mahindra 2,089.78
Oriental bank 156.08 Standard Chartered 1,006.50
Bank of Maharashtra 100.69 Karur Vysya 567.63
United bank -281.96 Federal bank 475.65
Corporation bank -506.48 IDFC bank 466.85
Allahabad bank -743.31 City Union bank 444.69
Dena bank -935.32 JK bank 416.03
Central bank -1,117.67 Karnataka bank 415.29
Syndicate bank -1,643.49 South Indian bank 333.27
UCO bank -2,799.26 DCB bank 194.52
Canara bank -2,812.82 Lakshmi Vilas bank 180.24
IOB -2,897.33 Geetanjali Credit bank 0.06
IDBI bank -3,664.80 Dhanalaxmi bank -209.45
PNB -3,974.40
Bank of Baroda -5,395.54
Bank of India -6,089.21

43
The profitability of public sector banks is much lower and even negative is solely due to the
Non-Performing Assets that are huge in these banks. The NPAs will decrease the profitability of
the firm if not managed. Only SBI is maintaining its ideal per cent of NPAs due to the
performance of its subsidiaries in different locations and stood top in the list of public sector
banks. The profitability pattern can be represented by a graph (5.2.1, 5.2.2)

Profitability of public sector bank's

12,000.00
10,000.00
8,000.00
6,000.00
4,000.00
2,000.00 Profitability
0.00
-2,000.00
-4,000.00
-6,000.00
-8,000.00

Chart 5.2.1 Profitability of public sector banks

Profitability of private sector bank's

14,000.00
12,000.00
10,000.00
8,000.00
6,000.00
4,000.00 Profitability
2,000.00
0.00
-2,000.00

Chart 5.2.2 Profitability of private sector banks

44
In order to gain the market, public sector banks should focus on their NPAs and try to reduce
them as much as they can, so that profits go up. Reducing NPAs is not an easy job because the
customer base of each bank is huge and recovering from these bad loans is possible only if
stringent policies are adopted by banks to get the instalments and interests as per the due date as
this is the only source of income for the bank.
The asset of bank which is classified as NPAs ceases generating income to the banks. In
addition to this, banks are required to make provisions for NPA. Thats why NPA is a double
edged sword. It damages profit, weakens the capital structure and also reduces the rating for the
bank.
As long as the advances and loans remain in the books of bank, certain portion of the loans will
remain as prolonged NPAs for various reasons. Even though NPAs cannot be reduced
completely or avoided, bank can follow certain strategies to reduce them till certain extent. They
can be reduced by continuous monitoring the accounts and adopting certain precautions at the
time of new sanction of any loan.
Bad loans or NPAs is the non payment of the loan installments. Factors such as banking
operations, lending practices, incremental component (banks internal management,terms of
credit and credit policies), competition among banks leading banks to sell more and more of
unsecured loans stands as reasons for the occurance of Non Performing Assets. This will impact
the depositors, shareholders and liquidity.
In order to reduce NPAs banks can follow the below steps
Lok Adalats used for recovering small loans. They can cover NPA upto rupees 5 lakhs
Compromise Settlement which is a scheme that provides recovery of NPA and applied to
advances below rupees 10 Crore.
Credit Information Bureau helps banks by providing data of individual defaulter and the
information is provided to all the banks so that banks may avoid lending to that
individual.
Debt recovery tribunals help banks by facilitating them with speedy recovery of dues if
loan amount is rupees 10 lakh and above.

One of the best practice that PSBs can take is restructuring the entire system. Banks with same
product and process line can look upon synergies and their ability to recover from NPAs and

45
take a step ahead by merging or acquiring as M&As always resulted in benefiting both the
entities and even making them bigger and stronger.
As state bank of India is going to merge with five of its associates, this paved way for other
public sector banks to propose a merger between their associates. Banks like Punjab National
Bank, Canara Bank, Union Bank of India, Bank of India and Bank of Baroda have submitted
their proposals of merging with other small public sector banks to the government. If this
happens the banks not only possess higher asset strength but also huge capital base which would
allow banks to give bigger loans and manage NPAs.
Below is the list of banks and their asset and staff strengths they will have after the merger (Z
Business, 2017)

Table 5.2.2 List of banks that proposed mergers between its associates.

Sr. No. Bank Name Asset Strength Staff Strength Associate banks

State Bank of Hyderabad

State Bank of Patiala
1 State Bank of 2,60,665 Cr 282915 State Bank of Travencore
India State Bank of Bikaner & Jaipur
State Bank of Mysore
Oriental Bank of Commerce
2 Punjab 14,79,773 Cr 152749 Allahabad Bank
National Bank Corporation Bank
Indian Bank
Syndicate Bank
3 Canara Bank 13,82,690 Cr 140290 Indian Overseas Bank
UCO Bank
IDBI
4 Union Bank of 11,79,508 Cr 104740 Central Bank of India

46
 India Dena Bank
Andhra Bank
5 Bank of India 10,92,530 Cr 94301 Vijaya Bank
Bank of Maharashtra
Union Bank of India
6 Bank of 937612 Cr 76849 Punjab & Sind Bank
Baroda Mahila Bank

47
5.3 CONCLUSION

Restructuring has reaped fruitful results for all private sector banks and few public sector banks.
Most of the public sector banks acquired small banks which did not have any impact on the
Acquirers profitability but increased the geographical reach.
Sustained worsening of asset quality in public sector banks is the main threat to Indias credit
profile and has been a case for the government of India to bear some cost in cleaning up the
balance sheets of banks.
The total amount of NPAs in public and private sector banks as of June 2016 is around 6 lakh
crore out of which the top twenty Non-performing Assets accounts are of public sector banks.
Also nearly 11 public sector banks have reported loss due to NPAs.
The Indian Overseas bank is the worst having highest ratio of NPA i.e. 20.26% and later comes
UCO bank with 18.66%, Bank of India 16.01%.
In this scenario, State bank of India has the highest gross NPA value and later comes Punjab
National Bank and Bank of India.
Public sector banks which are burdened with huge proportion of Non-performing assets could be
better off only through restructuring the system. As government is in talks of merging 27 public
sector banks into 6 huge institutions, this move can transform and overcome the threats and
challenges posed by private sector banks and give a new direction to banking reforms in India.
This restructuring or amalgamation would improve the service delivery and efficiency of public
sector banks

48
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