CONSOLIDATION IN BANKING.

Presented By- Sadiq S.M Ramesh K

Sowmya shetty Melita Kiran.

- Consolidation in the Banking sector appears inevitable.

Under the able guidance of:

Dr G.V.Joshi

“Consolidation or Amalgamation is the act of merging many things into one.”

Global phenomenon.Competitive and deregulated Industry. Started in United states during 1980’s. Followed in India during 1990’s.There is diversity of the governing statutes applicable to different entities in the Indian Banking system.

Country Number of Consolidation Value ($Mn)

1995- 96 2000-04 1995-96 2000-04

UK 7 52 1,137 20,376

Germany 22 84 13,100 34023

Italy 36 121 12953 1,53,346

Japan 18 58 8,892 41,069

Korea 11 7 14,360 27,410

Thailand 5 2 57,700 28,000

Mexico 8 5 81,900 1,70,600

Table 1

Consolidation of Banks in different countries of the world.

Source: www.rbi.org

Indian Banking sector.

• Dominated by public sector Banks.

-72.6% of total advances.• Peculiar characteristic

-High share of house hold savings in deposits (57.4%).

• Adequate capitalisation.• Stricter regulations.• Lower leverage.

Potentials……• Improving efficiency• productivity• Competition in the industry.• Better technology and infrastructure.

Total loans to GDP ratio of the Indian banking industry.

Source: Weekender – Investment management

Focusing India… The idea gathered momentum after the Narasimham

committee II during 1997on financial sector reforms.

According to Union Finance minister Pranab Mukherjee, “Consolidation is necessary to improve the competitiveness of Indian banks globally and also to ensure financial stability”.

India needs atleast 4 banks of the size of SBI, and 2 banks that will have global scale .

- O.P Bhatt.

Illusion………• Opposition to banks merger is not confined to Trade Unions.• Whether the presumed benefits would really accrue.• The biggest among Indian banks are small by global standards.• Highly complex task.• Legal hurdles, Parliamentary approvals, preparatory work, Long time horizon.• Beyond a point, size does not increase efficiency.• Several layers to bureaucratic structure.• Redundancy, demotivate staff, less inclusive. • Cultural issues and regional strengths.• No guarantee for improved profitability on asustained basis.

Trends in consolidation of Indian banking.

• The total number stands at 73, where in 40 were pre-nationalisation instances .

• The first consolidation of banks in banks in India took place between Bank of Bihar Ltd and SBI on November 8, 1969.

• There were 33 consolidations in banks in a span of 40 years.

SI .No Name of transferor bank Name of transferee bank. Date of consolidation.

1 Bank of Bihar Ltd SBI Nov 08,1969

2 National Bank of Lahore SBI Feb 20, 1970

3 Miraj state Bank Ltd Union bank of India July 29, 1985

4 Laxmi Commercial Bank Ltd Canara Bank Aug 24, 1985

------- --------------- -------------- -------

31 Sangli Bank Ltd ICICI Bank Ltd April 19, 2007

32 Lord Krishna Bank Ltd Centurion Bank of Punjab Aug 29, 2007

33 Centurion Bank of Punjab Ltd HDFC Bank Ltd May 23, 2008

34 State Bank of Saurastra SBI *

Table 2

Banks Consolidation since nationalisation of Banks in India.

Source : www.rbi.org – Report on trends and progress

Types Of Consolidation

International Domestic

Horizontal Vertical Conglom

erateConcent

ric

Types of Consolidation

• To achieve cost efficiency through increased capacity utilisation.

• It facilitates both product and geographic diversification

• Bigger entities have an inherent advantage- Too big to fail

• The avoidance of cost duplication• To achieve cost savings through the pooling of

physical infrastructure such as office

Need for Consolidation in Indian Banking

• To increase the market share• To meet the global standards• Prepare the banks for Basel II implementation• To improve the risk management capabilities of

the banks• To invest in requisite technology and play

globally to take advantage of global opportunities.

How would consolidation help Indian Banks?

• To increase the confidence of international investors .

Cont..

Reserve Bank of India will consider proposal for merger and amalgamation in the urban Banking sector in the following circumstances:

• When the net worth of the acquired bank is positive

• When the net worth of the acquired bank is negative

Merger in the co-operative Banking sector

• The financial parameters of the acquirer bank post merger will have to conform to the prescribed minimum prudential and regulatory requirement for urban co-operative banks.

Cont..

• Bank situated in the same state • cooperative bank registered under Multi State

Cooperative Societies Act.

Who can merge?

• Application of merger.• Copy of the scheme.• Convey its decision to the concerned State

Registrar of Co-operative Societies.• Administering the Acts.

Procedure for merger.

• Country's largest co-operative bank .• Presence in 5 states.• The Bank's total business jumped to 23.43 per

cent for the reporting year 2008-09 to Rs 18,879.13 crores.

Saraswat Co-op Bank

Source: High beam research

Challenges in Consolidation of Indian Banking

Small banks with big

banks or weak banks with strong banks?

Challenges…

• Capital of Bank• NPA• Quality of Customer Service• HR Policies• Management Control • Financial Exclusion

Does Consolidation Suit PSBs of India?

SWOT analysis of consolidation of

banks

Narasimham committee II IBA ( Indian Banker Association ) constituted

a committee under the chairmanship of Mr.Leeladhar

Home Minister Mr.P.Chidambaram

SWOT AnalysisStrength

Opportunities

Weakness

Threat

Strength Economies of ScaleProfitabilityGrowth diversificationImprovement in technologyFall in the costProtection to the depositors of weak bankLarge number of depositors & borrowersIncreased spread to the customers

WeaknessReduction in lending to small investorsLess competition in providing servicesProtection to weak and inefficient banksChance of rise in prices of servicesProblem of cultural integrationProblem of excessive staffPossibility of loss of talent due to

retrenchment

OpportunitiesHigh competitive strengthRise in percentage of credit to GDPLarge scale operationAutomation of banking operationsInnovative & more services to the customersEasy market penetration and entry in foreign

marketIncreased capital base & high capacity to

manage risk

ThreatsLess importance to agriculture & small sectorConcentration in urban & semi urban areasChances of monopolyLess employment opportunityCollapse of small banksDilution in management power of banksHigh rate of interest on loans & low rate of

interest on depositsReduces employees choice

Effects of consolidation in Indian Banking

Operational risk could increase. Decision taken at the top. Structure, systems ,procedures may differ. Shareholders of existing entities has to be

given new shares. Opposition by employees union. Problem of brand projection. Risk taking behaviour would increase. Diseconomies of scale. Loss of local feel and character. Stable macro environment.

Continued….

Creating a few big banks through M/A among 27 public sector Banks.Process of consolidation has to come from a need rather than imposition from outside.Consolidation does not mean that small or medium sizes banks have no future.Consolidation among state owned and private sector banks.Consolidation to compete with foreign banks.Large no of small banks to small no of large banks.Countering the strength of large foreign banks.Benefits to RBI.

Conclusion

There is a need to convert large number of small banks to small number of large banks to make them more competitive in the open regime.

India require big banks but it should be noted that small banks co-exist

It is essential to conduct a due diligence before embarking upon consolidation.