Consolidation in Indian Banking


Dr. Manoj Dash
Asst. Professor
Galgotia College of Engineering and Technology
Knowledge Park-2, Greater Noida


The trends towards globalisation of all national & regional economies has increased the intensity of mergers, in a bid to create more focused, competitive, viable, larger players in banking industry. The recent liberalization of the earlier state controlled, sluggish Indian economy has made mergers more necessary and acceptable.

The Narsimha committee on banking sector reforms suggested that merger should not be viewed as a means of bailing out weak banks. They could be a solution to problem of weak banks but only after cleaning up their balancesheets. The government has tried to find a solution on similar lines and passed an ordinance on September 4,1993 and took the initiative to merge New Bank of India (NBI) wih Punjab National Bank (PNB). Unfortunately, this turned out to be an unhappy event. Following this, there was a long silence in the market till HDFC Bank successfully took over Times Bank.Market gained confidence and subsequently witnessed two more mega mergers, merger of bank of Madura with ICICI Bank and Global Trust Bank with UTI Bank. After merger, the latter emerged as UTI-Global bank.

Consolidation is the new buzzword in the public banking sector, accounting for more than 80% of the banking sectors net income and net profit. Consolidation has dramatically altered the structure of banking .The number of banks has plummeted and larger banks spanning ever wider geographic areas have become more prevalent. Given the epic dimensions of this structural change, it is surprising that research finds little evidence that bank consolidation results in systematic improvements in cost efficiency.

Consolidation is needed for customers also. Intermediation costs in India remain high because there is relative inefficiency in the system. Whether it is the small and medium enterprise segment or the mass-market retail segment or even the agricultural segment – all are under-served. We have sub-scale banks that cannot invest and serve their customers.

Finance minister P Chidambaram recently reiterated that India's mantra for banking reforms would be consolidation, competition &convergence to enable Public sector Banks to become stronger, bigger and globally competitive. The logic behind is to create a few solid banks capable of operating and competing internationally.

The Indian banking sector is crowded with nearly 100 public, private and foreign banks and 200 regional rural banks. Consolidation in PSU banking sector will ensure the existence of 5 to 6 public sector banks. Countries like Argentina and Brazil too have gone for consolidation and reduced the number of their banks from 118 to 80 and 253 to 180 respectively.

In India so far there has been merger and acquisition activity between private and public sector banks with strong PSU banks. Since the advent of the era of new generation private banks, Times bank merged with HDFC bank in February 2000, ICICI bank acquired Chennai based Bank of Madura in December 2000 and Benares State bank merged with BOB in June 2002.

Continuing the above trend RBI merged Kozhikode-based Nedungadi bank, an old generation private bank with Delhi based PNB in Feb. 2003.Lately, Global trust bank, a private sector bank merged with OBC.

In October 2004, the IDBI act was revised and term lending institution Industrial   Development Bank Of India (IDBI), with a 57 % government holding became a commercial bank .It will soon be merged with private bank IDBI bank to create the seventh largest bank in India with an asset base of 80,000 crore and liabilities of 15000 crore. Dena bank is also considering an alliance with BOB. The later has 2706 branches all over India of which 1800 are in semi urban and rural areas.


Growth: One of the fundamental motives that entice mergers is impulsive growth. Organizations that intend to expand need to choose between organic growth or acquisition driven growth. Since the former is very slow, steady and relatively time consuming, firms that are dynamic and ready to capitalize on opportunities prefer the latter.

Synergy: Synergy is a phenomenon where 2+2 =>5;It implies group efforts are always greater than sum total of individual efforts. This translates into the ability of business combination to be more profitable than the sum of profits of the individual firms that were combined. It may be in the form of revenue enhancement or cost reduction.

Managerial efficiency: Some acquisitions are motivated by the belief that acquirer can better manage the target resources and subsequently the value of target firm will rise.

Strategic: The strategic reasons could vary from one deal to another. At times, if two firms have complimentary business interests, mergers may result in strengthening their position in market.

Market entry: Firms that are cash rich use acquisition as a strategy to enter into new market or new territory on which they can build their platform.

Tax shields: This plays a significant role in acquisition if the distressed firm has accumulated losses and unclaimed depreciation benefits in their books. Such acquisitions can eliminate the acquiring firms liability, hence benefiting from a merger with these firms.


It is the commercial success of Indian public sector banks, the access of few to this enormous wealth and greedy intention being paid by foreign financial institutions to rich prizes in India that have come together to prompt the central government to urge the mergers of various sets of public sector banks. In order to understand the 'incentive' driving the ministry of finance and various interests pushing it, it is useful to distinguish between activities of banks as seeding cum cultivating agents and banks as harvesters on the one hand, and the activities of modern banks as over-time seekers of interest from customer activities, and their activities as point –of-time earners of fees. Bank mergers, like many other types of liberalization, directed at increasing the wealth of rich shareholders, has been a tsunami originating in the activities of US financial corporations. Their role has been that of harvester of fruits of other institutions seeding and nurturing activities, and of looking for product lines involving fees for point-of-time services rather than that of customer servicing activities. They generally provide usual banking service only to elite band of up-market customers with whom they have sought to build close relationships.

Many on grounds of economies of scale and of scope advocate bank mergers. Before we look into empirical evidence bearing on that, it should be made clear that there are no obvious economies of scale in banking. Banking is not like petroleum refining so that a three-tenth law of relation between volume and surface area will automatically generate productivity gains as size increases. Banking is also not like ordinary production activities, so that an increase in the size of market leads always to better division of labour and hence reduction in cost. Banking is highly differentiated by activities the customers engage in;  the different types and degrees of risk they face and strategies open to them to tide over unanticipated shocks. In India and in most other countries, banks come in all shapes and sizes, with different bases of depositors and customers for different types of banks. If US mega banks have succeeded in raising their profitability and hence their shareholder value, which is the altar at which all liberalizers worship, they have done so by excluding 20 %of the population of that rich country from banking services. Moreover, the gains of US banks have been build on the immensely higher burden of consumer debt in that country- a debt that has so far been financed by the loans to that country by the rest of the world: in 2004, the US current account deficit has climbed to 630 billion dollars in 2004(RBI, 2004). There is no other country that can possibly emulate the US banks climb to mega size, even if it were politically desirable to do so.

When advocates of bank mergers, as a general policy move and not as a measure to consolidate the gains of two banks or cure the troubles of one bank by bringing in a different and better management style of another bank, use the argument of economies of scale, they really mean economies of exclusion-gains made by denying credit to more venturesome customers or customers who need more attention. Even if profitability of banks may increase by such exercises, the real economy may suffer. Innovations are discouraged, production may decline because of shortage of working and fixed capital, and economic growth declines in context in which jobless growth has been haunting responsible policy planners all over the world.


1 a) Any two or more banks doing business in this state may, with the approval of the department in the case of resulting state bank, consolidate or merge into one bank, on terms and conditions lawfully agreed upon by a majority of the board of directors of each proposing to consolidate or merge.

b) This section does not permit a bank or a bank holding company located in another state to acquire by consolidation or merger any bank or branch bank in this state.

c) A bank organized under the laws of this state may, with the approval of the department in the case of a resulting bank, consolidate or merge with a savings association located in this state and may, upon the consolidation or merger, maintain the branch and savings association.

2) Upon consolidation or merger, the corporate franchise, the corporate life, being and existence, and the corporate rights, powers, duties, privileges, franchises, and obligations, including the rights, powers, duties, privileges, obligations as trustee, executor, administrator, and guardian and every right, power, duty, privilege, and obligation as fiduciary, together with title to every species of property, real, personal, and mixed of consolidating or merging banks, are, without necessity of any instrument of transfer, consolidated or merged and continued in and held , enjoyed ,and assumed by the consolidated or merged bank. The merged bank has the right equal with any other applicant to appointment by the courts to the offices of executor, administrator, guardian, or trustee under any will or other instrument made prior to the consolidation or merger and by which will or instrument the consolidating or merging bank was nominated by the maker to the office.

3) Upon consolidation or merger, the consolidated or merged bank shall designate and operate one of the prior main banking houses of consolidating or merging banks as its main banking house and the bank may maintain and continue to operate the main banking houses of each of other consolidating or merging banks as a branch bank.

4) Upon consolidation or merger, the resulting bank, including all depository institutions that are affiliates of the resulting bank, may directly or indirectly control more than 22% of the total amount of deposits of insured depository institutions and credit unions located in this state.






Bank of Bihar

State Bank Of India


National Bank of Lahore

State Bank Of India


Miraj State bank

Union Bank of India


Lakshmi commercial bank

Canara Bank


Bank of Cochin

State Bank Of India


Hindustan Commercial bank

Punjab National bank


Traders bank

Bank of Baroda


United Industrial bank

Allahabad Bank


Bank of Tamil Nadu

Indian Overseas Bank


Bank of Thanjavur

Indian Bank


Karur Central bank

Bank of India


Purvanchal Bank

Central bank of India


New bank of India

Punjab National bank


Kashi nath Seth bank

State Bank Of India


Bari Doab bank

Oriental Bank of Commerce


Punjab Cooperative

Oriental Bank of Commerce


Bareilly Corporation

Bank Of Baroda


Sikkim bank

Union bank of India


Times Bank



Bank of Madura



Benares state bank

Bank of Baroda


Nedungadi bank

Punjab national Bank


South Gujarat local Area

Bank of Baroda


Global Trust Bank

Oriental Bank of Commerce

CAR (Capital adequacy ratio) is a measure of the amount of a bank's capital expressed as a percentage of its risk weighted credit exposures. One of the significant reason for merger and acquisition is to increase CAR so that these banks become adequately capitalized by December 2006, when the Base –II norms will get implemented. This rise in treasury income and the passing of Securisation act in 2002 enabled banks, specially the new age private banks to shore up their CAR levels to well about the mandated 9%. However, going by the Base-II norms of 12.5% Car, 18 private and public banks are yet to prop up their CAR. For e.g. Mumbai-headquatered –Dena bank, which is considering merger with Gujarat –based Bank of Baroda had high provisioning for gross non- performing assets (GNPA) of Rs. 1928.26 crore in FY 2001 and Rs.1996.02 crore in FY 2002.It eroded the bank's capital, which declined from 7.73% in FY 2001 to 7.64% in FY 2002. But constant efforts of the bank dipped its gross NPAs to Rs.1484.01 crore and its CAR increased to 9.48% in FY 2004.

Dena bank realized that its stated Rs. 200 crore public issue will reduce government stake to 51%, the minimum government need to hold in PSU banks. Since the bank can raise no further capital from primary market, a merger with another bank seems to be a logical option for growth of capital and to become adequately capitalized as per Base-II norms. The merger of Dena bank (asset worth Rs. 21951.55 crore) and Bank of Baroda (Assets Rs. 85108.67 crore) will create India's third largest bank with a combined asset base of Rs.107060.22 crore, next to Punjab National Bank with assets worth Rs. 102373.14 crore. Compared to Dena bank whose GNPAs stand at 1484.01 crore BOB has huge GNPAs of Rs. 3979.86 crore. However, Dena bank CAR stands at a low of 9.4% but BOB is adequately capitalized with a CAR at 13.91% in FY 2004.

BOB is not only one sector that Dena Bank is looking at with a current Car of 9.48%. It is also contemplating a merger with OBC, which is adequately capitalized with a CAR at 14.47%.

Rising NPAs is another reason for acquisition of banks by stronger banks. Dena Bank can go for any kind of merger only when it succeeds in reducing its NPAs from 7.8% to 5% as NPAs affect the net worth of acquiring bank.

Tax concessions also act as a catalyst for a strong bank to acquire a weak bank and ailing bank. OBC acquired GTB in Aug'04 and got a tax benefit of Rs.375 crore on the Rs. 1200 crore  net NPAs as there was 40% rebate on Income tax on every 1000 crore write off.

Geographically synergies too play an important role. Some banks, which have traditionally focused on consolidating their position of strength in their geographical base, now want to expand their reach. Large PSU banks like Punjab National Bank, Bank Of Baroda, Oriental Bank Of Commerce, corporation Bank and Canara Bank are planning to acquire regional banks to become geographically more strong. Smaller PSU banks with regional presence in western states like Maharashtra and Gujarat and Southern States like Karnataka, Tamil Nadu and Andhra Pradesh will be prime targets for acquisitions by large north-based PSU banks.

Besides CAR, geographical synergy with Delhi based Oriental Bank Of Commerce, which had taken over the Hyderabad –based GTB in August2004 and is now going public with a Rs.1200 crore IPO, is another reason for Dena bank to consider a merger with the north-based bank. OBC's 1000 odd branches are particularly strong in north Indian states of Punjab, Uttar Pradesh and Haryana while the southern regions remain largely untapped.

OBC acquired crisis- striker GTB in August 2004 and now it is keeping its option open to buy another small banks, preferably one with presence in south India, particularly in Kerala, where it has a miniscule presence.

BOB too is also looking to merge with a bank with a strong geographical presence in north eastern and southeastern parts of India.

To attain geographical synergy, Banglore-based Vijaya bank is eyeing a northern bank while PNB, head-quartered in Delhi is looking southwards. UBI is strong in east, north and central India and is looking for synergies in the west and south for which it is contemplating to merge with bank of Maharashtra in Mumbai or Indian Overseas Bank in Chennai, Kolkatta based UCO bank is looking for bank with strong presence in south as 1730 branches are primarily in east, north and in the west.

Chennai-based Indian bank are targeting banks with major presence in west and north India to consolidate their position in these regions.

There is another proposed merger between Mumbai-based bank of India and Union bank of India for reasons of branch rationalization. Both banks are headquartered in Mumbai and have extensive branch networks in northern regions and major metros .The merger is likely to entail a massive branch rationalization and shrinkage of branches leading to geographical synergies.


Indian banks have a long way to go before that reach the size of there international counterparts. Even the biggest Indian bank, State Bank of India, is nowhere on the international scale, with assets in the range of $50 billion. Absence of significant scale benefits and higher implicit costs of several services are perpetuating the poor ranking of Indian banks in the international league tables.

Shareholding structure, government regulations and sheer size of the country ensure that the existence of Indian banks is not at stake at this stage, What is at stake is the banking support that is available for Indian economic activity, and thereby the international competitiveness of various sectors. What is also at stake is the scope for the banking industry to earn superior returns through differentiated wider services.

Further, it is quite conceivable that with passage of time government holding in banks is progressively divested, regulatory authorities will be unable to hold back the international giants from buying out Indian banks. Even economies with a "domestic mindset", such as France and Germany, have been forced to bow before the international capital market forces.

In the globalization era, PSU banks are not content to spread their reaches in India. They are eyeing overseas banks, too. SBI is keen to acquire a US based bank and is conducting due diligence in five banks. Banks of India is eyeing two Indonesian Bank for a tie-up Mumbai based Union Bank, with an International presence is believed to be toying with the idea of forging an alliance with Bank of India, with an international presence in 12 countries and 22 branches.

Consolidation in the banking area seems to be an idea whose time has come. Besides attaining growth consolidation will help PSU banks become robust and attract capital from within and outside country.

The impact of consolidation banks structure has been obvious, while its impact on banks performance has been harder   to discern, However, recent studies accounting for combined effects of adjustments affecting costs and revenues suggest that mergers have had a positive effect on bank performance.

The government favour consolidation to come from mergers between state-owned banks or between a state-owned bank and a private bank top create globally competitive strong entities. Economies of scale, a bigger asset base enabling a bank to take larger, exposure, geographical reach, ability to take advantage of technology and the ease in expanding into related areas such as investment banking are some benefits of mergers.


Broadly, there is a consensus that consolidation is inevitable and next step for evolution. The government must create an enabling situation where the leaders are encouraged to take the lead. Eight to ten big banks will dominate the industry over the next five years   or so.  Foreign banks are already allowed to play a role in this consolidation game and the regulator must set rules for them in transparent manner without delay. Thus, consolidation is a means of making Indian banking competitive. India with a population of 102 crores cannot be content with just one large bank. At least four or five other public sector banks have to grow in size and reach the level of SBI to become globally competitive. 


Damodaran, (2004) "Corporate Finance"
P.K.Ghosh,(2003) "Strategic Planning and Management"
The Banking Regulation Act, 1949
Khan and Jain,(2003) "Financial Management"
The ICFAI Journal of Banking Law , Vol.II No.4
The Hindu , Saturday, September 17,2005

Dr. Manoj Dash
Asst. Professor
Galgotia College of Engineering and Technology
Knowledge Park-2, Greater Noida

Source: E-mail February 14, 2006


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