Professional Documents
Culture Documents
On
An Analytical Study on
Consolidation of Banking
Sector in India
By
Submitted By
Name : Himanshi Jain
Enrollment No. : 52102486
Address for : C-242/Yamuna
Correspondence Vihar, Delhi-
110053
Mobile No. : 9891772894
Resume of : Yes
Project Guide
Attached
Consent Letter : Yes
from Guide
Attached
Specialization : Finance
Ares
Date of : 30/03/2008
Submission
Guide’s Resume
G-599, Second-A, Nehru Nagar, Ghaziabad
(Amit Bhargava)
Contents
Acknowledgements
Preface
Page
Chapter 1 Introduction
Bibliography
To,
Ghaziabad,
Sir,
Thanking You,
(Amit Bhargava)
Contents
Consolidation Mergers & Administrations is gaining its strength
from competition that emanates not only almost the banks. But also
from other segments of financial sector. Consolidation Mergers &
Acquisitions in the financial sector is an open challenge across the
global world.
Chapter-IV Describe the Main Driver for the Consolidation, Mergers &
Acquisitions-factors each aspect.
Main banking is changing its shape and color. Fit has to retain its
human face such that the current offers bear fruit for a large number of
people.
The phase witnessed the liberal entry of private and foreign banks,
operational freedom to the banks, deregulation of the interest rates,
reduction in the statutory reserve requirements of statutory liquidity
ration and cash reserve ratio, introduction of international norms of
accounting in terms of capital adequacy, income recognition asset
classification and provisioning etc. These changes brought
competitiveness in the Indian banking industry and profitability became
the core business objective of the banking sector.
It is clear that the banking sector has need and continues to need
to execute almost magical transformation to be successful. Each and
every aspect of life is touch by banking sector now a day.
Table-1
Classification of Concepts:-
Scheduled Scheduled
Urban Co. State Co.
Banks (57) Banks (16)
Chapter – 2
Profile of Indian Banks
Today in the world’s top 1000 banks, there are many domestic
banks from the developed countries than from the emerging
economies, out of the top 1000 banks globally; over 200 are located in
USA, just above 100 in Japan, over 80 in Germany over 40 in Spain and
around 40 in the UK. Even China has as many as 16 banks within the
top 1000, out of which as 14 are in the top 500.
India on the other hand had 20 banks with in the top 1000 out of
which only 6 within the top 500 banks with the great Talent available in
India which sees Indians in many important positions in global banking
as also the well established technology services sector of India, which
is the main frame work on which modern banking is based it is
imperative that we restructure our financial and banking sector to
make it more globally competitive with domestic as also global
consolidation.
Table-1
Rs. Crore
2002-04 2004-05 2005-06
Actual Actual Estimate
Total deposit 6,88,081 7,93,947 9,00,000
Total Advances 3,60,140 4,12,224 5,00,000
Total Income 79,598 85,787 95,000
Net Profit 7784 11,003 14,000
Table-2
Rs. Crore
Now assume that the state bank subsidiaries are merged with
state bank of India and other nationalized banks are merged with each
other and the number is reduced from exiting 19 to 8. The figure will be
as shown under:
Table-3
The 2nd Narasimham committee report was the first to make the
proposal for the process of consolidation in the PSUS suggesting that
they should be brought down to 3-4 global entities and 5-6 national
entities. India is a hugely over banked and under serviced country.
There are close to 100 scheduled commercial banks 4 non schedule
commercial banks and 196 regional rural banks.
The SBI and its seven associates have about 14465 branches; the
19 nationalized banks have 36927 branches; The RRBS have 14773
branches and foreign banks around 276 branches. So the scheduled
bank.
SBI 14465
National 36927
RBS 14773
- Large size allows wide penetration and hence boosts revenue of the
bank.
M – Mixing
E – Entities
R – Resource for
G – Growth
E – Environment
R – Renovation
Consolidation is inevitable and Need of the Hour:-
In India top banks by size are also top by size of profit though
lagging behind in performance indicator. All over the world, the effect
of size of the bank has been widely discussed and in fact India is
relatively slow entrant into the subject. The topic attained heat in
recent times with the failure of many banks due to low risk absorbing
Capacity and lack of protecting the shareholders’ interest. Added to
this, the market power of the banking sector is increasing owing to
globalization. Banking is one among the largest and most profitable
industries in both domestic and global markets. This is hardly surprising
since the banking business has become global before globalization
becomes a buzz word. Now is has become imperative for banking
industry to get consolidated to with-stand storms and shocks what-So-
ever be so that they will not shiver and wither from being shaken by
the global market forces.
Refocusing the bank to grow the “good bank” and make enough
profits is the new mantra of banking sector. In a quest to achieve there,
banks are expanding their branch network, increasing their technology
investment and enlarging their business operations.
“Banking Industry: Vision 2010” document prepared by 1 BA in
Nov. 2003 clearly felt that consolidation in the Indian sector was
imminent. If the consolidation process has to take place smoothly it will
be necessary to look at the legal, regulatory, accounting, HR and
technology related issues proactively.
There are a lot of small players in the Indian banking sector. The
industry structure is fragmented in India. Also even as India is among
the top countries in the world in respect to GDP its strength is not
reflect in the banking space. The average market capitalization on the
top there players in India is at $9 billion which is third from bottom.
Though China is the lowest now at $ 5 billion, things will change fast
after the new issuance from China. Now consolidation is the trend
which will take place sooner or later in India as well.
Operating Expenses
(In crores)
(In crores)
(In crores)
If a large bank fails, the entire sector will face enormous strain
care must be taken to prevent such failures. So if the finance ministry
has decided to merge public sector banks, it should ensure that the
merging banks go through identical corporate governance through
various training programs at all levels to introduce comparable
competence and culture of work. The management, post merger, will
have to treat at human resource equitably.
Historical Perspective:
The banking system in India went through various stages before it
emerged into modern banking systems with increase in trading and
administration of East India Company. The early banking system of
banias, chetty, sahukaras, podars and shroffs was replaced by banks
established by English agency houses during the end of eighteenth
century. But almost of all them failed due to failure of parent agency
houses during the trading crisis of 1829-33 as they mixed bank with
trading.
The next set back 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 Civil war was
over and the boom collapsed. The three presidency banks set up by
respective Govt., also failed due to handicap of inexperience and their
inability to conduct foreign exchange business.
Probably till that time no proper attention was paid to rescue these
banks besides proper controlling and monitoring, to check the failures.
Table-2
Consolidation process:
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 undertaking) Act 1980.
Besides these banks, from 1960 to June 1993 there were 21
voluntary amalgamations, 18 merges with the SBI or its associates and
132 transfers of assets and liabilities.
Table-3
- The remaining local banks and regional rural banks being the niche
players. As traditional competitive advantages vanish, the paced
with which banks accept the new paradigms of globalization would
determine winners and losers.
- To revive a loss making bank as it may not able to restore the non-
performing assets (NPA) on its own.
Dominant Factors:
b. Efficiencies in operations
The one area where consolidation seems most likely to reduce firm
risk is the potential for diversification gains, although even here the
possibilities are complex, such gains are most likely to arise due to
assets, Diversification across geographies; some gains may also derive
from geographic diversification on the liabilities side of the balance
sheet. In addition, diversification gains may result from consolidation
cross financial products and services. On the other hand after
consolidation some firm’s shift towards riskier asset for folios and
consolidation may increase operating risks and managerial
complexities.
The exit route for such banks will be to get absorbed by banks with
strong asset quality.
Asset size
25000-8000 -- -- 2.68%
>8000 -- 3.33%
Table – 2
Average PAT (%) Across Asset Size
Suggestions:-
Table –3
⇒ The productivity of the merged entity will improve and most of the
other problem will be solved automatically.
Chapter – 5
1. First Structure:
It is perfect fit for the new private sector bank taking over an old
smaller banks or a group of smaller banks.
HDFC Bank.com
Table–1
HDFC Bank.com
It could be seen that though the ROA is almost same for ICICI Bank
and HDFC Bank, the NIM is much higher in the case of HDFC Bank and
this could be due to how cost of resources. It is also interesting to note
that the PAT (Profit after Tax) for ICICI Bank is 33% against HDFC Bank
at 28%. How could be a scenario, when NIM is lower and where as the
PAT is higher for ICICI Bank? This could be due to larger proportion of
other income or due to large asset size. The asset size is critical for the
profitability of the business and hence the asset size is below a
threshold limit, it could destroy share holders value.
There are 18 banks whose market share is less than 1% and for
these banks to sustain the pressure in the medium to long term in the
changing scenario is going to be difficult. For e.g. Technology
advancement for providing service meeting Basel-II requirements for
risk management would require additional infusion of funds. The fixed
could be spread over when the asset size is large and otherwise, this
will not be economical.
The scenario that could emerge will be that each of new private
sector bank such as ICICI Bank, HDFC Bank merged entity of IDBI Bank
absorbing 4 or 5 old private sector Banks.
II Second Structure:
The consolidation within the SBI group is always on the cards. The
group is will be integrating risk management practices SBI group
as one entity in the future will become a largest bank in the
country.
Source: RBI.org.in
Special-Jan-05
2). Whether plans for foreign banks as joint venture partners or what is
the desired pattern of share holding.
RBI 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 govt. 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, redeployment of manpower, affect on seniority/promotion to
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.
International experience:-
Table-1
Numbers Value ($
billions)
Table-2
Stage of Bank consolidation in different European
countries
S. No Country Stage
1. Germany Starting
2. France Starting consolidation, political constrained
3. Italy Consolidation rapidly getting underway
4. Spain/Portugal Another round required to complete bank
consolidation
5. UK Still expect serval defining transactions to
complete bank consolidation
6. Austria Completing bank consolidation
7. Nordic Region High degree of domestic retail bank
consolidation-now cross border and
Bancassurance
8. Benelux Netherlands-substantially complete now
cross border in Belgium
9. Switzerland Substantially completed
Merger in Asia:-
Merger and acquisitions activities in Asian countries are not as
frequent as witnessed in America and Europe. Mergers and acquisitions
has already been started in countries like Philippines, Korea, Singapore,
Japan, Saudi Arabia and soon it will pick up the pace like other
countries of the world.
Merger:-An overview of performance would include an analysis of
important aspects of mergers among top 200 banks. A review of post-
merger performance and significance of size of banks that merger and
their performance discussed below.
− 48% of the target banks were having ranging from 5 to 50% of
capital of the acquiring bank 52% of target banks were having
capital ranging from 51 to 98% of the capital of the acquiring
bank.
− Assets of approx. 46% cases of the target banks was of the range
up to 50% of acquiring banks, while approx. 54% cases of the
target banks were having assets more than 50% of assets of
acquiring bank.
i) Dysynergy Effects:-
v) Whatever the motives driving M & As, many fear that the
quest for size is leading to the unhealthy creation of super
banks. Sectoral consolidation and reduction in competition
suggestion no immediate benefits for customers or staff who
find them-selves in the front line of rationalization and having
to bear the burn of its casts. Consistent with the findings of
many others a study by the bank of international settlements
(BIS) reports the experience of the majority of mergers as
“disappointing” with organizational problems almost inevitably
under estimated and most acquisitions overpriced, nothing the
creation of banks “Too Big to Fail”
More so, because for many old, private, public sector banks
could be the only takes: first it would quicken consolidation in
the banking sector; second these banks would have more
options and certainly fetch a better price as the merger would
happen before the capitals eroded; and third this would not be
opposed even by the most hardboiled trade unionist.
Reserve banks lay down mergers and acquisitions norms for the first
time.
It can be said that bank merger must now pass through Mint-Street.
Norms as under:
− Take the example of the pioneering work being done by Yes Bank
a new generation private sector bank in the area of agriculture
and rural banking.
• Ensure RBI and govt. speaks in the same voice on FDI policy in
banks.
The Govt. has been planning for the consolidation of public sector
banks, regional rural banks and private sector banks. The present govt.
wants merger and acquisitions of the PSBs, RRBs and private sector
banks but it does not want to impose the same and enforce it as
imperative but wants it to happen willingly. Now idea has been picking
up very fast and the govt. has started working on catalyzing the first
merger between two or three strong PSBs which may come very soon
and then the process will continue.
The decision of merger has been left to the Board of the banks
and the govt. would play a supportive role. After the merger and
amalgamation of all the banks it will be possible to have 2-3 banks of
international standards and 6-8 banks of National standards and 10-12
banks of regional levels
It is the present context that the world bank funding arm, IFC has
planned to fund the upcoming consolidation in the Indian banking
Industry in case of need. This could involve financing the tier (ii) capital
of banks by providing long term dept. this is also a step towards
improving the capital adequacy of the banks.
i) Banks:-
ii) Customers:-
v) Foreign institutions/investors/depositors/NRIs:-
The mergers cult in India has yet to each fire with merchant
bankers and financial consultants acquiring skills in grinding the banks
to absorb weak /unviable banks and but then again on successful
operations. The small and medium sized banks are working under
threats from economic environment which is full of problem for them,
VIZ. Inadequacies of resources, out dated technology/non systematized
management pattern, faltering marketing efforts and weak financial
structure.
⇒ The major gains perceived from bank consolidation are the ability to
withstand the pressures of emerging global competition to
strengthen the performance of the banks, to effectively absorb the
new technologies and demand for sophisticated products and
services to arrange funding for major development products in the
realm of infrastructure, telecommunication, outlays and to
streamline human resources and skills in tune with the emerging
competitive environment.
Indian banking is changing its shape its shape and color. It has to
retain its human face such that the current effort gear fruit for a large
number of people.
BIBLIOGRAPHY
Reference:
12) Keshari, P.K. and M.T. Paul, “Relative efficiency of foreign domestic
banks (1994).
14) Berger, A.N. Hunter, W.C. and S.G. Timme, “ The efficiency of
financial institutions (1993).
Newspapers
3) Business Sandard
5) Time of India
Reports
Web Sites
1) IBA.org.in
2) RBI.org.in
3) HDFCBank.com
4) ICICIBank.com
Books