History of Banking in India

Without a sound and effective banking system in India it cannot have a healthy
economy. The banking system of India should not only be hassle free but it should be
able to meet new challenges posed by the technology and any other external and
internal factors.

For the past three decades India's banking system has several outstanding
achievements to its credit. The most striking is its extensive reach. It is no longer
confined to only metropolitans or cosmopolitans in India. In fact, Indian banking
system has reached even to the remote corners of the country. This is one of the main
reason of India's growth process.

The government's regular policy for Indian bank since 1969 has paid rich dividends
with the nationalisation of 14 major private banks of India.

Not long ago, an account holder had to wait for hours at the bank counters for getting
a draft or for withdrawing his own money. Today, he has a choice. Gone are days
when the most efficient bank transferred money from one branch to other in two
days. Now it is simple as instant messaging or dial a pizza. Money have become the
order of the day.

The first bank in India, though conservative, was established in 1786. From 1786 till
today, the journey of Indian Banking System can be segregated into three distinct
phases. They are as mentioned below:

• Early phase from 1786 to 1969 of Indian Banks

• Nationalisation of Indian Banks and up to 1991 prior to Indian banking sector
Reforms.
• New phase of Indian Banking System with the advent of Indian Financial &
Banking Sector Reforms after 1991.
What is merger and acquisition?

These words are different in meaning and purport for reason of the
implication of their eventual actualization. Merger is defined by Black’s Law
Dictionary as “fusion or absorption of one thing or right into another,
generally spoken of a case where one of the subject is of less dignity or
importance than the other. Here the less important ceases to have an
independent existence”. Acquisition on the other hand is defined as “the act
of becoming the owner of certain property; the act by which one acquires or
procures the property in anything”. From the foregoing it is very clear that
these two terms are different and distinct in meaning The resultant effect or
the right of parties to the transaction in the emerging scenario is different.

The rights of directors and shareholders under merger would still be

preserved to the extent of the quantum of the equity participation in the
‘partnership’. Some rights may have to be subsumed in deference to the
right of a superior equity. Under an acquisition arrangement there is no
contending interest since all the ownership of earlier concern had been
acquired thereby extinguishing all incidental rights that existed in the pre-
acquisition era.

Why Do Banks Merge?

The banking industry is consolidating at an accelerating pace, yet no
conclusive results have emerged on the benefits of mergers and
acquisitions. We analyze the Italian market, which is similar to other
main European countries. By considering both acquisitions (i.e. the
purchase of the majority of voting shares) and mergers we evidence
the motives and results of each type of deal. Mergers are more likely
between a more and a less services-oriented bank; they seek to
improve income from services, but the resulting increase is offset by
higher staff costs; return on equity improves because of changes in
the capital structure. Acquisitions are more targeted towards banks
with a poor credit management record; they aim to restructure the
loan portfolio of the acquired bank; improved lending policies result
in higher profits.
In the globalization era it has become imperative for the
policy makers to retain competitiveness
within the banking sphere so as to ensure the acceleration
of market driven economy. Financial
liberalization as an essential part of reforms has encouraged
setting up of privately owned banks
on the platform of advanced technology and best practices
of prudential norms for governance.
Regulating authority’s role has been limited to the macro
level supervision of ensuring the
smooth flow of the system and manage the risks against
potential blocks.

Amalgamation
Section 45(4) of the Banking Regulation Act, 1949
“During the period of moratorium, if the Reserve Bank of
India is satisfied that :
(a) in the public interest; or
(b) in the interests of depositors; or
(c) in order to secure the proper management of the
banking company; or
(d) in the interest of the banking system of the country as a
whole,
it is necessary to do, the Reserve bank may prepare a
scheme –
(i) for the reconstruction of the banking company, or
(ii) for the amalgamation of the banking company with any
other banking
institution”.
Egs. Of some of the Mergers(PRIVATE
SCHEDULED BANKS)
2002, Nedungadi Bank merged with Punjab National Bank (PNB).
2000, Benares State Bank merged with Bank of Baroda.
1990, Karur Central Bank merged with Bank of India.
1990, Lakshmi Commercial Bank merged with Canara Bank.
1988, Hindustan Commercial Bank merged with PNB.
1980, Bank of Thanjavur merged with Indian Bank.
1980, Bank of Cochin merged with State Bank of India.

ECONOMIC CONSEQUENCES OF BANK MERGERS

The consolidation trend within the financial services industry generated an
enormous impact on bank stock prices during 1995. Regional and money
center banking stock indexes within the S&P 500 stock index rose by 51.7
percent and 57.7 percent, respectively, compared to a return of just over 34
percent for the S&P 500 during 1995. In spite of the boom in bank earnings
and stock prices, the industry focus has been to improve efficiency.
Consequently, in the past few years there have been large job losses,
especially among banks active in mergers and acquisitions. In addition to
the wealth-creating and unemployment effects, there likely are to be
additional economic and business impacts on both consumers and small
businesses, particularly in markets where competition has been diminished
by banking and thrift mergers and acquisitions. In these markets, rates on
deposits likely are to be lower than in more competitive markets, while
lending rates to small businesses will be higher. Consumer credit card
lending rates, however, are likely to decline further because of increased
competition from national credit card issuers both within and outside the
banking industry.

NBFC merger with bank needs RBI

nod .

Currently any merger of a NBFC with a bank needed only the approval of the
high court and the RBI was not involved in it.

The Reserve Bank of India (RBI) has said that any bank wanting to merge a non
banking finance company (NBFC) with itself would need to comply with its
regulations to prove that the NBFC has not violated any norms.

Issuing fresh guidelines for mergers and amalgamation of private sector banks, RBI
said it has discretionary powers to approve the voluntary amalgamation of two banks.

Currently any voluntary amalgamation of a bank with a NBFC just needs the
approval of the high court.

It is learnt that the recent merger of Ashok Leyland Finance with IndusInd Bank was
effected through the approval of the high courts and the RBI did not come into the
picture.

RBI has said that while amalgamations between a bank and a NBFC are normally
decided on business considerations like the need to increase the market shares,
synergies in the operations of businesses etc but it is also essential to evaluate the
benefits of such amalgamation would accrue to the concerned entities.

According to RBI, if any NBFC is proposed to be amalgamated with a bank, the bank
should obtain its approval first before the scheme is submitted to the High Court for
approval.

The concerned bank should consider matters like whether the NBFC has complied
with the “know your customer” norms for all the accounts, which will become
accounts of the bank after amalgamation.

RBI has said the merger proposal has to be approved by two-third majority of the
board of directors irrespective of whether any director was present or not.

Case studies :

CASE 1:
About ICICI Bank:

ICICI Bank is India’s largest bank by market capitalisation and the second-largest in
terms of total assets. At December 31, 2006, ICICI Bank had total assets of Rs.
295,832 crore. In the nine months ended December 31, 2006, it made a profit after
tax of Rs. 2,285 crore. It has over 750 branches and extension counters and over
3,270 ATMs. ICICI Bank offers a wide range of financial products and services
directly and through subsidiaries in the areas of life and general insurance, asset
management and investment banking. Its shares are listed on the Bombay Stock
Exchange Limited and the National Stock Exchange of India Limited and its
American Depositary Shares are listed on the New York Stock Exchange.
About Sangli Bank:

Sangli Bank is an unlisted private sector bank headquartered at Sangli in the state of
Maharashtra, India. At March 31, 2006, Sangli Bank had deposits of Rs. 2,004 crore,
advances of Rs. 888 crore, net NPA ratio of 2.3% and capital adequacy of 1.6%. In
the year ended March 31, 2006, it incurred a loss of Rs. 29 crore. Sangli Bank has
198 branches and extension counters, including 158 branches in Maharashtra and 31
branches in Karnataka. Approximately 50% of the total branches are located in rural
and semi-urban areas and 50% in metropolitan and urban centres.

ICICI shareholders approve Sangli Bank merger scheme

The shareholders of ICICI Bank has unanimously approved the scheme of
amalgamation of the Sangli Bank with ICICI Bank.
This took place at ICICI Bank's extra-ordinary general meeting on January
20.
The amalgamation will now be subject to the approval of Reserve Bank of
India (RBI) and such other statutory and regulatory authorities as may be
required. The share exchange ratio has been set at 100 equity shares of the
bank for every 925 equity shares of Sangli Bank.
ICICI Bank will be seeking approval of the Reserve Bank of India shortly.
The scheme will be effective from the date the RBI approves the scheme or
such other date, as may be specified by the apex banks by an order in
writing.
After the RBI accords its sanction to the scheme of amalgamation, the
board of directors of ICICI Bank or a related committee will be setting a
record date for determining the shareholders of Sangli Bank, who will be
eligible for the shares of ICICI Bank in exchange of the shares of Sangli
Bank.
Subject to the approval of the RBI, ICICI Bank is expected to issue 3.46
million equity shares of a face value of Rs 10 each against Sangli Bank’s
31.96 million equity shares of Rs 10 each. The new shares to be issued will
be listed with the Bombay Stock Exchange and the National Stock
Exchange.

RBI approves amalgamation of Sangli Bank with ICICI Bank

The Reserve Bank of India has approved the amalgamation of Sangli Bank
Limited with ICICI Bank Limited (NYSE: IBN). The effective date of the
amalgamation is April 19, 2007. The amalgamation has already been
approved by the Boards of Directors and shareholders of both banks. The
amalgamation is expected to be beneficial to the shareholders of both
entities. ICICI Bank will seek to leverage Sangli Bank’s network of over
190 branches and existing customer and employee base across urban and
rural centres in the rollout of its rural and small enterprise banking
operations, which are key focus areas for the Bank.
The amalgamation would also supplement ICICI Bank’s urban distribution
network. The amalgamation would enable shareholders of Sangli Bank to
participate in the growth of ICICI Bank’s strong domestic and international
franchise. The amalgamation will also provide new opportunities to Sangli
Bank’s employees, and give its customers access to ICICI Bank’s multi-
channel network and wide range of products and services.
CASE 2:
ABOUT HDFC BANK : The Housing Development Finance Corporation Limited
(HDFC) was amongst the first to receive an 'in principle' approval from the Reserve
Bank of India (RBI) to set up a bank in the private sector, as part of the RBI's
liberalisation of the Indian Banking Industry in 1994. The bank was incorporated in
August 1994 in the name of 'HDFC Bank Limited', with its registered office in
Mumbai, India. HDFC Bank commenced operations as a Scheduled Commercial
Bank in January 1995.

ABOUT CENTURION BANK OF PUNJAB : Centurion Bank of Punjab Ltd has a

nationwide network of 240 branches and extension counters and 388 ATMs. The
bank offers a wide spectrum of retail, SME and corporate banking products and
services. It has been among the earliest banks to offer a technology-enabled customer
interface that provides easy access and superior customer service.

MERGER:
On May 23, 2008, the amalgamation of Centurion Bank of Punjab with
HDFC Bank was formally approved by Reserve Bank of India to complete
the statutory and regulatory approval process. As per the scheme of
amalgamation, shareholders of CBoP received 1 share of HDFC Bank for
every 29 shares of CBoP.
The amalgamation added significant value to HDFC Bank in terms of
increased branch network, geographic reach, and customer base, and a
bigger pool of skilled manpower.
Case 3 :
The GTB-UTI Bank Merger Story
.

INTRODUCTION

On January 24, 2001, employees of the Hyderabad based Global Trust Bank
(GTB) received an email from Ramesh Gelli (Gelli), Chairman and
Managing Director (CMD), GTB. It read, “I am taking the opportunity of
sharing some important and exciting news with you. We have now
considered growing large through a process of merger. I am happy to
inform you that we have now worked out a scheme of amalgamation with
UTI Bank and Global Trust Bank. The merged bank will be called UTI-
Global Bank with a registered office at Secunderabad. With this
contemplated merger, UTI-Global would become the largest bank in private
sector and would derive lot of synergy and complement each other
strengths…. UTI Global Bank is expected to effectively combine the
strengths and complementary features of the two banks. It will be strongly
capitalized with a net worth likely to exceed Rs. 10 billion by the end of
March 2001…. I am very confident that …we all can look to the future with
greater amount of confidence and grow to be a dominant player in the
financial sector.”

The boards of UTI Bank and GTB were to meet on January 27, 2001, to
consider the scheme of amalgamation. SBI Capital Markets Limited (SBI
Caps) would facilitate the merger, do the valuation, and also act as advisor
to both the banks. On January 27, 2001, the board of directors of GTB
approved the amalgamation of GTB with UTI Bank. Soon after, the boards
of UTI Bank and GTB approved the share-swap ratio. Said SBI Caps, “The
boards agree to recommend to shareholders a swap ratio of nine shares of
UTI Bank to four shares of Global Trust Bank” i.e., 2.25:1. Analysts felt
that the swap ratio was in line with their expectations. Said one, “I had
expected this as most of the financials of the bank pointed to the ratio being
in favor of the GTB shareholder.”
However, the proposed merger soon ran into
problems. Before the merger was officially
announced, the counters of UTI Bank and GTB at the
Bombay Stock Exchange (BSE) witnessed huge
volumes and a sizeable rise in prices. The sudden
spurt in volumes raised eyebrows and sources
watching the developments felt that this was an
apparent case of informed buying and required a
probe by the market regulator, Securities and
Exchange Board of India (SEBI)[1].
With the merger dogged by controversy, the promoters had to go for a second valuation of the share swap ratio by
Delloite, Haskins and Sells. UTI Bank threatened to pull out of the proposed merger, over sharp differences on the
issue of going for a fresh valuation. UTI Bank was of the view that the earlier valuation did not take into account
the quality of GTB’s assets and, more particularly, its capital market exposure. However, GTB was unwilling to
accede to UTI Bank’s demand on the grounds that the share swap ratio, which was based on valuation by SBI
Caps, had already been accepted by the boards and shareholders of both the banks. UTI Bank was however, firm
in its demand. But, the GTB side was non-committal to the issue saying that the two sides should await the SEBI
report on the alleged price rigging in the GTB scrip prior to the merger, before taking a decision.

In March 2001, Delliote, Haskins and Sells suggested a swap ratio 2:1, slightly lower than the 2.25:1 swap ratio
proposed earlier by SBI Caps. On 23 March, UTI Bank submitted the second valuation report to the RBI. Before
taking a decision, the RBI waited for the SEBI report on the alleged price manipulation in the GTB scrip ahead of
the merger. The allegation of price rigging in the GTB stock seemed to be true. A preliminary investigation by
SEBI concluded that stock broker Ketan Parekh (Parekh), his associates, and two corporate groups were involved
in ramping up the stock ahead of the merger. In Parekh/associates, GTB had one of the largest capital markets
related loan exposures.

In early April, in a dramatic move, UTI decided to call off the merger. In a similar move, GTB announced their
withdrawal from the merger following allegations that the share price of GTB was manipulated prior to the
merger announcement. In a press release GTB said, “The bank would be uncomfortable to enter into a merger
process with a finger pointed out for price prop and living with this memory will be onerous”. In April 2001, a
 [2]
leading business daily wrote, “The merger was to create the biggest private sector bank in the country. The
new entity would, it was hoped, be able to take on HDFC Bank and ICICI Bank. But UTI Global-which would
have been the culmination of the UTI Bank and Global Trust Bank merger-remains a non-starter. But it was
certainly an eventful non-event.”

The Merger is Called Off

In mid March 2001, it became clear that the proposed merger of UTI Bank
with GTB might not come through, as the SEBI preliminary investigation
report found manipulation and rigging in the share price of GTB prior to the
merger announcement.
L. K. Singhvi, senior executive director, SEBI, said, "The
investigation, prima facie, indicates that there was manipulation in
GTB shares during October-December 2000.

Since the merger proposal was pending with the Reserve Bank of
India, we have sent our report to the RBI." "he final report will be
submitted shortly", he added. Another SEBI official hinted that the
investigation revealed that the manipulation in the GTB scrip "was
motivated and done with the help of the bank's senior management
team". SEBI's findings had not only questioned the merger proposal
but also opened a Pandora's box that may put the management in a
major jam...

Need for Change in Name

On April 30, 2007, UTI Bank announced that the bank's board of directors
had approved a proposal to change its name to Axis Bank. Nayak explained,
"The name has been chosen because it is simple and crisp, transcends
geographical boundaries as we seek to become a multinational bank, and
connotes stability and solidity...
Rebranding to Axis Bank
On July 30, 2007, UTI Bank rebranded itself as Axis Bank after obtaining
the approval from its board, shareholders and the Reserve Bank of India. It
also obtained a new certificate of incorporation from The Registrar of
Companies.

The management of the bank said that the new name Axis meant 'a line of
reference around which all else is measured, or as a line of stability around
which the planets and spheres rotate'...

News articles >

ABN Amro eyes acquisition in India

ABN Amro, which will be soon rechristened as Royal Bank of Scotland

(RBS) is actively considering an acquisition in India in a bid to expand its
footprint in the country.

Meera Sanyal, country executive, ABN Amro India said, “We have decided
to acquire a bank in India only after March 2009 and are waiting for the
regulatory regime to become more conducive to do so. Although we have
not yet identified a potential bank for the proposed takeover, such a buyout
is very much on our agenda.” In the past, India based country heads of
foreign banks like HSBC, Citibank and Standard Chartered too have hinted
a possibility of an acquisition in the Indian banking space after the year
2009 when Reserve Bank of India is expected to revamp the existing norms
which may allow foreign banks to pick up higher stakes in domestic banks.

Currently RBI regulations donot allow any foreign banks to pick up more
than 5% in any domestic banks without its specifc approval.

As on date; HSBC, ABN Amro, Standard Chartered and Citibank have 47,
28, 90 and 40 branches in the India. The branch network of these foreign
banks is mostly spread across metro or tier 1 cities of the countryand thus
lacks presence in the country’s tier 2 or feeder cities that generate maximum
retail or small to medium enterprise segment business.

As reported by FE earlier, YES Bank CEO Rana Kapoor and IndusInd Bank
CEO Romesh Sobti had said that they are not averse to offload a substantial
stake of their respective banks in favour of a foreign player in future if
allowed by the regulator. On getting re-branded as RBS in India post the
acquisition of ABN Amro in the year 2007, Sanyal said she is in constant
touch with the RBI on this issue.

“Such an exercise is inevitable to present ABN Amro as a global player

among the corporate customers in India. The entire re-branding process may
take up to mid-next year,” she said.
Banks raise credit card finance charges to up to 50%

NEW DELHI: When it comes to exorbitant interest rates, even the loan
sharks -- the neighbourhood moneylenders -- can learn a few tricks from the
banks which have raised the charges to as high as nearly 50 per cent per
annum for their credit card customers in the past few days.

Over the past few days, nearly all the banks - starting from PSU giant SBI
to private sector leaders like ICICI Bank and HDFC Bank and foreign
players such as Deutsche Bank and HSBC - have either raised or are in the
process of raising the "finance charges".

These rates, between 35 and 50 per cent at present, are charged on credit
card users for payments made after credit- free period, which ranges from
15 days to two months. These are over three times the current benchmark
prime lending rates of less than 15 per cent at most of the banks.
India’s central bank to increase rates to curtail inflation
India’s central bank, the Reserve Bank of India (RBI), will announce a
0.25 percent increase in the Cash Reserve Ratio (CRR), effective from
September 1, to check the spiraling inflation rate, banking pundits said here
yesterday.

The fourth rise (from 8.75 to 9 percent) in interest rates since June in Asia’s
third largest economy is expected to curb the inflation rate which at 12.84 is
the highest in 16 years.

The high liquidity in the system has propelled the inflation in India. Experts
had forecast that the inflation rate would reach the 13 percent and it will peak
at between 13 and 14 percent in the coming two to three months on the back
of high oil, steel, cement and food prices.

Inflation has got a cyclic trend and any developing economy will have to pass
through this trend.
Bank Merger Analysis
Over the last decade, bank mergers and acquisitions have been occurring at
an unprecedented rate. The purpose of this study is to determine the
underlying and driving forces or causation based upon examination of
resent banking merger activity. There are four main paths identified that
explain the reasons behind the mergers/acquisitions activity. These four
paths are related to (1) creating economies of scales, (2) expanding
geographically, (3) increasing the combined capital base (size) and product
offerings, and (4) gaining market power.

CONCLUSION
The trend for increased acquisition activity should continue, driven by
earnings pressures and the need to improve shareholder value. The winners
in the consolidation game will be those banks that can leverage their
distribution networks and provide the greatest number of products and
services across the widest customer base in an efficient manner. In addition,
consolidation offers critical mass in many key lines of business. Also, many
of the smaller regional banks do not have the capacity or capability to
succeed in a more competitive banking environment. It is likely that the
economic value of their franchises will erode steadily because of a lack of
critical mass, inadequate technological resources, more limited product
offerings, and overwhelming regulatory burdens.