ZENITH

International Journal of Multidisciplinary Research

Vol.1 Issue 4, August 2011, ISSN 2231 5780

MERGERS OF BANKS: SOME ISSUES AND CHALLENGES

DR. SANJAY TIWARI*

* Asst. Professor, Department of Management,

Central University of Haryana, Mahendergarh.,
Temp. Camp Office, New Govt. B.Ed. College Building, Narnaul (Haryana).

ABSTRACT

Consolidation through mergers, takeover and acquisitions has drawn attention of financial world
in the recent post. Narasingham Committee recommendations and BASEL conventions have also
propagated the need of mergers and consolidations of banking industry to bring synergic
consequences. Mergers are not very new phenomenon world wide but in India the speed with
which it has taken entry into the Indian banking is sufficient to raise doubts about need,
implications, issues and synergy in the financial system. Should Indian banking take experience
from the past? Should there be different models of consolidation of banking in Indian context?
What will happen to beautiful small banks when big fishes gut their shares? This paper is a small
attempt to peep into some important dimensions and issues in the post merger regime of banking
system in India. These issues may vary from financial restructuring to human resource to IT
consolidation etc. Will human face of banking disappear after merger with an objective of
synergy in operations and bringing financial strength? There are some issues, questions and
challenges which need to be addressed in an inevitable environment of imminent reality of
banking mergers in India.

KEYWORDS: Merger, Consolidation, Financial Depth, Loan to GDP ratio.

INTRODUCTION
BACKGROUND
In a market driven competitive world, the integration of financial system is quite inevitable. India
can not stay aloof from these trends where consolidation, globalization of operations,
universalisation of banking and innovation in technology has ushered. To face the competition www.zenithresearch.org.in
effectively, government is also in favour of the consolidation of banking through mergers and
acquisitions so that more vibrant and standardized practices may be brought forth. Consolidation
infact is a wider term which include technological progress, excess retention capacity, emerging
opportunities and deregulation of various functional and product restrictions. The proponents of
mergers have definitely these issues in mind.

RATIONALE OF BANK MERGERS

Long term productivity and strengthening the competitive edge are core objectives of mergers.
Reduction in cost, efficiency gains, economy of scale, enhancement of consumer base and
innovations and other objectives.
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International Journal of Multidisciplinary Research
Vol.1 Issue 4, August 2011, ISSN 2231 5780

DOES SIZE MATER?

The world wide phenomenon of mergers which is even larger than all the listed banks of India
can be understood from the following table 1.1
TABLE 1.1 SHOWING COMPARATIVE SIZE OF BANKS IN MARKET
CAPITALIZATION (IN $BILLIONS)

Global Banks Indian Banks

Citigroup 249 ICICI Bank 16.60

Bank of America 246 SBI 13.35

HSBC 217 HDFC Bank 7.35

JP Morgan Chase 166 PNB 3.65

ICBC 158 UTI Bank 2.80

Canara Bank 2.66

Kotak Mahindra Bank 2.65

(Source: Prowess Database CMIE)

TABLE 1.2 SHOWING COMPARATIVE PRICE TO BOOK VALUE (NO. OF TIMES)

Global Banks Indian Banks

China Construction 2.5 Kotak Mahindra Bank 14.11

Bank

Bank of China 2.3 Development Credit 9.55

Bank

HSBC 2.2 HDFC Bank 6.39 www.zenithresearch.org.in

Citi Bank 2.1 Yes Bank 5.43

Bank of America 1.8 Centurion Bank of 4.99

Punjab

ABN Amro 1.8 UTI Bank 4.71

Credit Agricole 1.5 ICICI Bank 3.46

(Source: Prowess Database CMIE) Note: The Book Value as on March 31, 2006
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International Journal of Multidisciplinary Research
Vol.1 Issue 4, August 2011, ISSN 2231 5780

To the utmost surprise its clear from table 1.1 and 1.2 above, the market capitalization of China’s
ICBC which is approximately $158 billions is far more than the collective market capitalization
of 37 listed Indian banks the market cap of which stood at $69.50 billions as on Nov 10, 2006.
This amount is eight times than more than India’s most valuable bank, ICICI Bank. Though
ICICI Bank may be giant among vis-a-vis all Indian banks collectively in terms of market
capitalization yet it has miles to go to touch a foreign biggy.
ICICI Bank tops the market capitalization with $16.60 billion followed by SBI’s $ 13.35 billion
and HDFC Bank’s $7.35 billion. None of the Indian banks have even touched $5.00 billion
mark. As far as price to book value is concerned, the Indian banks have performed better (refer
table 1.2) Kotak Mahindra’s Bank’s P/B value is almost seven times than China Construction
Bank. ICBC’s P/B value is about 2.2 times. Most US banks in range of 1.2-3.5 times and in case
of European Banks, the range is 2-3 times P/B value.
The reason of undervaluation of Indian banks lies in the fact that interest rake risk is
comparatively higher and interference in the functioning of banks by the government.
TABLE 1.3 SHOWING ASSET BASE OF INDIAN AND FOREIGN BANKS (IN $
BILLIONS)

Global Banks Indian Banks

Barclays Bank 1591.52 SBI Bank 155.72

UBS 1567.56 ICICI Bank 61.90

Mitsubishi UFJ 1508.54 PNB 33.16

Financial Group

HSBC 1501.97 Canara Bank 29.92

Citigroup 1493.99 Bank of Baroda 26.07

BNP Paribas 1484.11 Bank of India 25.12

Credit Agricole 1380.62 IDBI 20.18

(Source: Prowess Database CMIE) www.zenithresearch.org.in

TABLE 1.4 SHOWING TIER I CAPIAL OF INDIAN AND FOREIGN BANKS (IN $
BILLIONS)

Global Banks Indian Banks

Citigroup 79.41 SBI Bank 5.94

HSBC Holding 74.40 ICICI Bank 4.29

Bank of America 74.03 PNB 1.99

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International Journal of Multidisciplinary Research
Vol.1 Issue 4, August 2011, ISSN 2231 5780

JP Morgan 72.47 Canara Bank 1.49

Mitsubishi UFJ 63.90 Bank of Baroda 1.65

financial Group

Credit Agricole 60.60 HDFC Bank 1.49

Royal Bank of 48.59 IDBI 1.41

Scotland

(Source: Prowess database CMIE)

Scale wise Indian banks are very poor as compared to foreign giants. In May 2006, Earnst and
young bank estimated that China’s bad bank loans were about $911 billions which included $358
billion for the 4 largest banks alone. ICBC had total asset worth $812 billion which is closed to
India’s GDP. The largest bank of India SBI which covers almost 1/5th of the total banking assets
over the past 3 to 4 years had only $84 billion. On the basis of Tier I capital SBI has a size of
1/10th to Citigroup ($79 billion).Hence in this regard SBI is at no. 72nd in world. It’s not even
among the first 10 big banks in Asia which is occupied by Chinese Bank with each of them
having a capital base of over $30 billions. Indian banks features among the top 25 Asian Banks
in contrast to China which has 6 representations. Now the question of merging few banks and
creating big size banks is yet to be answered. On the other hand, the strength of Indian banks is
still better in comparison to China’ banking system. (Refer table 1.5)

TABLE 1.5 SHOWING COMPARATIVE BANKING SYSTEM OF CHINA AND INDIA

China India

Year 2003 2010 2003 2010

Share of global 5.1 13.7 0.9 1.9

financial stock
(in $ trillions)

Financial Depth 323% 137%

(financial stock
as %age of GDP) www.zenithresearch.org.in

Growth of 14.5% 11.9%

Financial Stock
CAGR(1993-
2000)

(Source: Global Financial Stock Database)

The need of merger can be judged from the fact that our banking system still not provided loans
to company and farmers as an estimate India’s Bank loan to GDP ratio (around 37%) is far lower
than that of China where according to IMF it has 136% loans to GDP ratios. According a recent
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International Journal of Multidisciplinary Research
Vol.1 Issue 4, August 2011, ISSN 2231 5780

study by Mckinsey Global Institute (MGI), India’s financial depth (financial stock as a % of
GDP) is 137% where as in china it is 323%. Also China’s saving rate is twice to that of India’s.
Now India’s saving rate is also on an increase.
Also a huge increase in the capital expenditure by Indian Corporate Sector and potential for
further Investment Plans by the companies are responsible factor for mergers of banks into big
banking corporations. In 2002 the corporate capital expenditure was Rs. 38,000 crore while it
short up to Rs. 1.1 lakh crore in 2005 and the listed companies of India are planning to invest Rs.
9.5 lakh crore in next five years. To fulfill the huge amount of funds a small size of assets is no
more required. Banks have to consolidate themselves to fulfill the needs of corporate India.

NEED TO INFUSE CREDIT FLOW IN THE SYSTEM

The credit GDP ratio is first 45% in India where as in Korea is 107%, in Taiwan 126% and much
more in China. The incremental C-D ratio was 95% with a surplus liquidity of about Rs 2,
07,000 crore in 2005 and in 2006 it came down to Rs 1, 23,000 crores.
This data is sufficient to justify the mergers of banks to raise credit off take. Also about 600
million people in India are unbanked and do not have access to banks. Also there is a potential to
attract about $200 billions which is stuck in gold by the Indian masses. The infrastructure
requires a lot about $180 billion funding in next 3 years and the current asset base of banking
industry is just $350 billions the biggest challenge.

EMERGING ISSUES OF MERGERS OF BANKS

The following issues need to be focused and addressed while merging the banks:

INTEREST OF THE CONSUMERS

Will the consumers be harmed by concentration of power in few banks in post merger regime of
banking? The following table 1.6 shows the concentration of power in banking sector in India
and world.
TABLE 1.6 SHOWING SHARE (CONCENTRATION OF BANKING POWER) OF 5
LARGEST BANKS OF DIFFERENT COUNTRIES OF WORLD

Countries Deposits (%) Assets (%) www.zenithresearch.org.in

Brazil 63 54

Chile 62 61

France 70 60

Germany 21 20

India 41 44
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International Journal of Multidisciplinary Research
Vol.1 Issue 4, August 2011, ISSN 2231 5780

Japan 46 46

Malaysia 57 56

Mexico 80 80

Philippines 46 43

UK 24 23

US 29 30

( Source: world Bank database on regulation and supervision 2003)

Its is quite apprehend from table 1.6 that the country where a few banks control a bigger part of
banking sector have a very fragile banking systems (e.g. Brazil, Chile, France, Mexico etc.) How
India can afford the credibility of banking strength after consolidation? In US and UK there
exists a very sound banking system because of competition and dispersed banking power.
Another question is related to objectives of mergers either to create more value to the
shareholders or to merge small weaker and regional banks. The merger of Bank of Punjab and
Centurion Bank is the finest example.

ENTRY OF FOREIGN BANKS

Next issue which is very important to address is the foreign player’s entry into the system. RBI
has already checked out entry of foreign banks. In the first stage, from 2005 to 2009 foreign
banks will be allowed to establish wholly owned subsidiary as well as greater freedom to set up
new branches. Foreign banks will be allowed 74% stake in a private Bank that has been
identified by the RBI as a candidate for restructuring (a weak bank in other words.) After 2009
the local subsidiary of foreign banks will be treated at domestic banks though they will have to
sell at least 26% of there equity to the Indian public. Thus by this policy stance the foreign banks
have given freedom to acquire private Sector banks in India. Now provided these facts, the
domestic banks will definitely enhance their capital base, improve operational efficiency, and
target new business opportunities like retail banking, treasury, working capital and risk
management. ICICI has built a retail portfolio of over 1 lakh crore Rs. In percentage terms, the
retail assets now account for 69% of the banks total assets, of which 51% is mortgages. With 20
million customer base it is the leader in all retail segments – mortgages, auto-finance and credit www.zenithresearch.org.in
cards.

CAPITAL CONSIDERATIONS
How to raise capital base is another issue. There may be three options: firstly the government
should bring down its holding to 33% in PSU Banks by going public, secondly, raise money
from outside strategic investors and third to get full fledged privatization which is not feasible
politically.
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International Journal of Multidisciplinary Research
Vol.1 Issue 4, August 2011, ISSN 2231 5780

CHALLENGES OF BANK MERGERS

The biggest challenge of much talked about mergers of banks is the implication of consolidation
on employment, profitability, market share, human motivation and technology. Since the merger
exercise is in its infancy stage in India, the past experience of post merger implications on
economy can be taken into considerations to devise and monitor of merger. Employees or most
affected party of mergers. The UNI Europe Report estimated that 1, 30,000 jobs have been lost
in the last 10 years as a result of mergers and acquisitions. The following table response of
employees on VRS (refer table 1.8):
TABLE 1.8 SHOWING BANK EMPLOYEES INTERESTED IN VRS OFFER:

BANK EMPLOYEE’S RESPONSE TO VRS OFFER

Name of the Bank Total Strength VRS Optees Percentage

SBI 237,000 35,000 13.89

Allahabad Bank 22,355 1,571 7.03

Andhra Bank 14,603 1,758 12.04

Bank of Baroda 47,054 3,200 6.80

Bank of Maharashtra 16,098 2,700 16.77

Bank of India 51,962 7,700 14.82

Canara Bank 55,363 8,600 15.53

Dena Bank 14,412 3,710 25.74

Indian Bank 25,935 3,988 15.38

Indian Overseas Bank 28,008 3,944 14.08

Oriental Bank of 14,398 800 5.56

Commerce www.zenithresearch.org.in
PNB 65,705 5,800 8.83

Punjab and Sindh 12,192 2,000 16.40

Bank

Syndicate Bank 33,223 5,459 17.55

UCO Bank 31,223 5,479 17.55

Union Bank of India 30,834 4,303 13.96

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Vol.1 Issue 4, August 2011, ISSN 2231 5780

United Bank of India 21,316 3,000 14.07

Vijay Bank 13,646 2,400 17.59

(Source: The Week Magazine, April 1, 2001)

According to this report in India about 11% of over eight lakh strong bank employees opted for
first ever voluntary retirement scheme. Now other challenges and problems of mergers may be as
follows:
Highly innovative product portfolio may create among the customers and only a few smart
customers can take the benefits of product offered by merged banking entities.
The branch closers can create job losses and back room operations may reduce face to face
interaction of the service providers with the customers.
The work load of employees will be highly specific and some time even complicated due to
financial conversions. Therefore a burdened employee may not be able to respond to customer
effectively.
Highly techno savvy nature of banking operations may create problems to simple and non techno
public.
The focus of banks would be highly professionalized and the efforts of big banks will be directed
towards making more and more profits and less concentration on consumer’s grievances.

CONCLUSION
Credit, Capital and Consolidation are three dimensions in the new banking regime which is
imminent in India. With the introduction of financial service convergence and competitions from
outside and within, it is quite justifiable that to bring a sound transparent, efficient, and effective
and culture friendly banking practices should be on the anvil of the government as well as policy
makers. The post merger implications of bank on customers, society, culture, stakeholders,
employees, productivity, profitability and technology in Indian context are still debatable and
researchable issue. The legal implications combined with the ethical and governance issues need
to be redefined very soon so that the positive impact of mergers may be ensured. Mergers
strategies should be designed to improve the financial and operational soundness of existing
small and capital needy banks and these should not be focused merely to gut the beautiful
www.zenithresearch.org.in

entities.

REFERENCES
Swain, B.K., Consolidation in the Banking Industry: Some view points, IBA Bulletin, a Journal
of Indian Banks Association, Jan 2005 pp 86-88.
Lobana, Shalu Singh, Consolidation in Banking Industry through Mergers and Acquisitions:
Corporate Restructuring Widens, ibid pp 89-92.
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International Journal of Multidisciplinary Research
Vol.1 Issue 4, August 2011, ISSN 2231 5780

Abdul Kalam A.P.J, Multidimensions of Banking, inaugural address in banker’s conference

2004( Bancon 2004) hosted by PNB with the organizational support of Indian Banks’ on 10 -11
Nov 2004 New Delhi
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2006
Bubna, Shriya, Innovate and flourish, ibid pp 28-30
Lele, Abhijit, Marriage Season, ibid pp 30-34
Rajadhyasha, Niranjan, The Hare and the Tortoise, pp 26-28 Business World, 4 July, 2005
The Road to 2009 ( a cover story ) Business World, 4 July, 2005
Bandyopadhayay, Tamal, A Unique Union, Business Standard, 30th may, 2006
Arnold, Anne, Anti-Takeover Behaviour: Specificities of Financial Institutions, may 17, 2004
Talwar, S.P., Competition, consolidation and systematic stability in the Indian banking industry
pp 75-79, BIS paper no 4.
Udeshi, Kishori J, Bank Supervision – Challenges Ahead, NA Palkhivala Memorial Oration
Lecture by Deputy Governor of the RBI, Jaipur, 28 August 2004
Banu, Hasan S, The impact of Mergers and Acquisitions on the Stakeholders of Banking Sectors,
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www.rbi.org.in
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