CONSOLIDATION IN

BANKING.
- Consolidation in the
Banking sector appears
inevitable .
Presented By-
Sadiq S.M
Under the able guidance of: Ramesh K
Dr G.V.Joshi Sowmya
shetty
Melita
Kiran.
 “Consolidation or Amalgamation
is the act of merging many things
into one.”

üGlobal phenomenon.
üCompetitive and deregulated Industry.
üStarted in United states during 1980’s.
üFollowed in India during 1990’s.
üThere is diversity of the governing statutes
applicable to different entities in the Indian
Banking system.
Table 1
Consolidation of Banks in different countries of the
world.
Number of Consolidation Value ($Mn)
Country
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

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.
• ü 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 a
sustained 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.

 Table 2
Banks Consolidation since nationalisation of Banks in India.
SI .No Name of transferor bank Name of transferee
Date of
bank. consolidatio
1 Bank of Bihar Ltd SBI Nov
n.
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 Canara Bank Aug 24,
Ltd 1985
------- --------------- -------------- -------
31 Sangli Bank Ltd ICICI Bank Ltd April 19,
2007
32 Lord Krishna Bank Ltd Centurion Bank of Aug 29,
Punjab 2007
33 Centurion Bank of Punjab HDFC Bank Ltd May 23,
Ltd 2008
34 State Bank of Saurastra SBI *
Source : www.rbi.org – Report on trends and progress
Types of Consolidation
 Need for Consolidation in Indian Banking

• 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
 How would consolidation help Indian Banks?

• 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.
 Cont..
• To increase the confidence of
international investors .
 Merger in the co-operative Banking sector

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
 Cont..
• 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.
•
 Who can merge?

• Bank situated in the same state

• cooperative bank registered under Multi State
Cooperative Societies Act.
 Procedure for merger.
• Application of merger.
• Copy of the scheme.
• Convey its decision to the concerned
State Registrar of Co-operative
Societies.
• Administering the Acts.

 Saraswat Co-op Bank
• 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.

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 Analysis
Strength Weakness




 

 

Opportunities Threat
Strength
Economies of Scale
Profitability
Growth diversification
Improvement in technology
Fall in the cost
Protection to the depositors of weak bank
Large number of depositors & borrowers
Increased spread to the customers
Weakness
Reduction in lending to small investors
Less competition in providing services
Protection to weak and inefficient banks
Chance of rise in prices of services
Problem of cultural integration
Problem of excessive staff
Possibility of loss of talent due to retrenchment
Opportunities
High competitive strength
Rise in percentage of credit to GDP
Large scale operation
Automation of banking operations
Innovative & more services to the customers
Easy market penetration and entry in foreign
market
Increased capital base & high capacity to
manage risk
Threats
Less importance to agriculture & small sector
Concentration in urban & semi urban areas
Chances of monopoly
Less employment opportunity
Collapse of small banks
Dilution in management power of banks
High rate of interest on loans & low rate of
interest on deposits
Reduces 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.