Kuch Toh Hai.docx

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Mergers

Of

Banks

In

India

What is bank consolidation? Bank consolidation occurs when two or more banks become one bank. Bank consolidation can lead to expansion for the newly merged institution. Banks consolidate for multiple reasons, including mitigating competition, gain capital power both domestically and internationally, to compete with larger banking institutions or to expand the services that the newly merged bank can provide both internally and geographically

by

decreasing

overall

HISTORY

of

Bank

Mergers

operating

in

costs.

India

The three banks were merged in 1921 to form the Imperial Bankof India, which upon India's independence, became the StateBank of India in 1955. ... These nationalised banks are the majority of lenders in the Indian economy. They dominate the banking sector because of their large size and widespread networks.

The idea of bank consolidation was around since 1991. The various committees appointed by the Government of India have advocated consolidation They argue that we need to have three to four large nationalized banks in order to improve the

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operational efficiency and distribution efficiency. The Narsimhan committee ii has specifically emphasized the need to have Indian Banks which are comparable in size with global leading banks. The Narsimhan committee proposed a three-tier banking structure in India with around 3-4 large banks to take a stand in global scenario,8-10 banks to provide national coverage and rest to take care of local coverage.

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Reasons

For

Merger

SBI and the associate banks are being planned to be merged into one single entity, by the initiative taken by the Indian Govt. It is because of the following reasons:-

1.

Govt.

Aid

to

1

Merged

SBI

Group

Firstly the SBI and associates are one of the largest Govt. undertaking of the Central Govt. whom annual allocation of subsidy and contribution towards Bad Debt Recovery and Share Capital has to be made by the Indian Govt. There is practically no sense of giving aid to so many banks separately when it can be given to a single entity. Govt. Aid is for sure to be given to these banks and not just SBI and group but all the banks. So Govt. Aid to a single SBI merged bank will be much easier in terms of accountability. 2.

Bad

performance

of

Banking

Sector:

Because of the current market situation and what will be in future, most of the Bank’s profitability has come done from quite a few previous years. Many Bank’s Share prices have also fallen drastically because of the expectation of under-performance of the Banks. The State Bank group is no exception to the same and the same applies to it also. SBI is the holding company and the other are its subsidiaries. So in order to show better profitability, merger of the Banks is an essential requirement.

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3.

Bad

Loans

&

Inability

to

Recover:

SBI and group is the one of the largest banking sector entities who have crores and crores of Bad Loans which are not recoverable. Some entities Gross NPA has reached up to 20%. Due to huge bad loans an internal corporate restructuring is required for all the associate group entities, otherwise in upcoming few years, few of them may even not survive in the market.

4.

Corporate

Restructuring:

Merger of the group entities of SBI is a way to restructure the Balance Sheet of the entities. Restructuring is required when the entities are facing financial crises or there is a possibility of the entity to not be able to meet out its existing liabilities. In corporate restructuring some liabilities are set off with realisation of assets. In this case, some entities liabilities will be sett off against the higher revalued assets of the other entities in order to make a good and attractive Balance Sheet Size of the merged entity.

5.

Bigger

Bank:

By merging all the associate entities, SBI will become a much bigger and better bank as it will be catering to al large segment of customers as from its current position. It will be able to make many services convenient to the customers through a single bank rather than approaching other associated banks. It will

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have larger customer base, hence chances of earning good profitability over its deposits. It will have the advantage of Synergy with the associated banks. No high integration cost will be paid since the set-up is almost similar. It will have good asset portfolio. Allover, good report will be created amongst its customers.

6.

Better

Management:

Since it will become one big merged Bank, it will have only a management system rather than having different management set-up over the associate banks. Because of single management, efficiency and effectiveness of the business processes will be increased. Single circular will be issued for all the merged Banks for operational and management supervision. Better internal control and system processes will be carries on with all the merged banks.

7.

Better

increased

recognition:

Those areas where SBi is not having branches but its associate banks are having, upon the merger being effected, the customer confidence and good report will be created because SBI is having a good report for all its customers but the other associate banks are not that good as the SBI. Also, they do not enjoy all those benefits as the SBI. Some dort of chang in name from SBI associates to SBI will have

a

good

market

impression

and

will

generate

goodwill.

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Benefits Of Merger 1. It ensures synergies : Single Exam, branches , ATM. 2. After merger, Indian banks can manage their liquidity - short term as well as long term- position comfortably 3. In the global market, the Indian Banks will gain greater recognition and higher rating 4. Fewer number of posts of CMD, ED, GM, and managers 5. Technological Advantages : Verisign, 128 bit encryption, RuPay card. We still depend on foreign payment gateways -VISA, MASTERCARD [ Better negotiation ] 6. One Stop Shop : Customers of Associate banks will get connected to a larger network of SBI branches with diversified products under one roof. 7. Efficiency : Acquisitions also scale your bank more efficiently, not just in terms of your efficiency ratio, but also in terms of your banking operations. Every bank has an infrastructure in place for compliance, risk management, accounting, operations and IT – and now that two banks have become one, you’re able to more efficiently administer it . Financially, a larger bank has a lower aggregated risk profile since a larger number of similar-risk, complimentary loans decrease overall institutional risk.

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8. Business Gaps Filled : Bank mergers and acquisitions empower your business to fill product or technology gaps. Acquiring a smaller bank that offers a unique revenue model or financial product is sometimes easier than building that business unit from scratch. And, from a technology perspective, being acquired by a larger bank might allow your institution to upgrade its technology platform significantly. 9. Talent And Team Upgrade : While not a factor on the balance sheet, every bank benefits from a merger or acquisition because of the increase in talent at leadership’s disposal. An acquisition presents the possibility of bolstering your sales team or strengthening your team of top managers, and this human element should not be ignored or downplayed 10. Scale : A bank merger helps your institution scale up quickly and gain a large number of new customers instantly. Not only does an acquisition give your bank more capital to work with when it comes to lending and investments, but it also provides a broader geographic footprint in which to operate. That way, you achieve your growth goals

quicker.

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DANGERS

1. Poor Culture Fit Plenty of prospective bank mergers and acquisitions only look at the two banks on paper – without taking their people or culture into account. Failure to assess cultural fit (not just financial fit) is one reason why many bank mergers ultimately fail. Throughout the merger and acquisition process, be sure to thoroughly communicate and doublecheck that employees are adapting to the change.

2. Not Enough Commitment Execution risk is another major danger in bank mergers. In some cases, banking executives don’t commit enough time and resources into bringing the two banking platforms together – and the resulting impact on their customers causes the newly merged bank to fail completely. Avoid this mistake by DEDICATING ENOUGH RESOURCES FOR A FULL INTEGRATION of the two financial institutions.

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3. Customer Impact And Perception While undergoing an M&A event at your bank, it’s critical that you pay attention to the impact it has on your customers. ESPECIALLY WITH SMALLER COMMUNITY BANKS,customers often respond very emotionally to a bank acquisition – so it’s essential that you manage customer perception with regular, careful communication. And once the merger or acquisition is fully underway, remember to consider the impact on your customers at every stage: Anything from changing technology platforms to financial products could impact your customers negatively if you don’t pay attention.

4. Compliance And Risk Consistency A final danger to consider during your next merger or acquisition is the risk and compliance

culture

handles BANKING

of

each

bank

involved.

COMPLIANCE

AND

Every

financial

FEDERAL

institution BANKING

REGULATIONS differently, but it’s important that the two merging banks agree on their approach moving forward. When two mismatched risk cultures clash during a bank merger, it negatively affects the profitability of the business down the road if they

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haven’t

come

to

a

working

solution.

Bank mergers and acquisitions are complex procedures with the possibility of extraordinary payoff – or extraordinary peril – so it’s important that you handle your upcoming M&A event with care. Keep these benefits and dangers in mind as you combine the processes of each different bank, and you’ll be on your way to a successful merger

or

Further

acquisition

more

Disadvantages

:

1. Many banks have a regional audience to cater to and merger destroys the idea of decentralisation. 2. Larger banks might be more vulnerable to global economic crises while the smaller ones

can

survive

3. Merger sees the stronger banks coming under pressure because of the weaker banks. 4. Merger could only give a temporary relief but not real remedies to problems like bad loans

and

bad

governance

in

public

sector

banks

5. Coping with staffers' disappointment could be another challenge for the governing board of the new bank. This could lead to employment issues

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Issues

1.

During

Loss

A

Of

Team

Merger

Mentality

In a buyout, it’s generally just the owners who become rich. Despite common misconceptions, most employees don’t receive a life-changing amount of money. So acquisition talks can erase the team mentality almost overnight. You no longer feel that you’re working for something you all have a stake in. Now, you’re working to make

your

founders

rich

2. Staff retention The restructuring aspects of M&A inevitably lead to the down-sizing or reassignment of certain areas within the business. The challenge lies in optimising the new organisational structure to ensure key players stay with the organisation and the best talent remains confident in their job security.

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Employees can often have a negative reaction to M&As, feeling threatened by the changes to leadership, strategy and their own roles. It is important to maintain trust and engagement with staff during a transitional process in order to avoid high levels of turnover. A significant loss of workers can mean a sizable drain on knowledge and internal morale. At the higher levels of an organisation, losing influential executives and board members can severely damage the success of a deal as company culture and perception suffers

3. International relations Due to the widespread growth of business globalisation, many M&A deals now involve companies based in more than one country. This can see organisations being exposed to foreign markets that they have little experience in. Cultural differences and language barriers can have a profound effect on a company's ability to work across borders. A recently merged or acquired business can particularly suffer if the previous key players in those relationships have been lost in transition.

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4.

Inadequate

Legal

Protection

Getting M&A transactions properly documented for maximum protections in the event something goes wrong down the road is not easy. It requires the skills of very experienced

lawyers

5. Other Issues There are evidences in literature that media plays an important role in shaping the social context for mergers and acquisition. Schneider and Dunbar(1992). Schweiger and DeNisi (1991) suggest that it is the uncertainty that creates stress for employees rather than the actual changes associated with the merger. Communication and a transparent change process are important. Leaders need to be competent and trained in the process of transforming organizations to ensure that individuals within the organization accept the

changes

prompted

by

a

merger.

6. Change Management Strategies Kavanagh (2006) conducted longitudinal study that examined mergers between three large multi-site public-sector organizations. Both qualitative and quantitative methods of analysis were used to examine the effect of leadership and change management

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strategies on acceptance of cultural change by individuals occurred due to merger. Findings indicate that in many cases the change that occurs as a result of a merger is imposed on the leaders themselves. In this respect, the success of a merger depends on individual’s perceptions about the manner in which the process is handled and the direction

in

which

the

culture

is

moved.

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About A Recent SBI Merger

Union Cabinet decided to merge all the remaining five associate banks of State Bank Group with State Bank of India in 2017. After the Parliament passed the merger Bill, the subsidiary banks have ceased to exist and the State Bank of India (Subsidiary Banks) Act, 1959 and the State Bank of Hyderabad Act, 1956 have been repealed.

Five associates and the Bharatiya Mahila Bank have become the part of State Bank of India (SBI) beginning April 1, 2017. This has placed State Bank of India among the top 50 banks in the world. The five associate banks that were merged are State Bank of Bikaner and Jaipur (SBBJ), State Bank of Hyderabad (SBH), State Bank of Mysore (SBM), State Bank of Patiala (SBP) and State Bank of Travancore (SBT). The other two Associate Banks namely State Bank of Indore and State Bank of Saurashtra had already been merged with State Bank of India. After the merger, the total customer base of SBI increased to 37 crore with a branch network of around 24,000 and around 60,000

ATMs

across

the

country.

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Background

Of

The

Merger

The quest to create an Indian bank that will be in the league of global giants is an old one and had been continuing since 1990. However, in February 2017 the government had approved the merger of five associate banks with SBI. Later in March, the Cabinet approved merger of BMB also. SBI first merged State Bank of Saurashtra with itself in 2008. Two years later in 2010, State Bank of Indore was merged with it. The board of SBI earlier approved the merger plan under which SBBJ shareholders will get 28 shares of SBI (Re1 each) for every 10 shares (Rs10 each) held. Similarly, SBM and SBT shareholders will get 22 shares of SBI for every 10 shares. Post

merger

the SBI has been in the process to rationalise its branch network by relocating some of the branches to maximise reach. This, according to SBI will help the bank optimise its operations and improve profitability. SBI had approved separate schemes of acquisition for State Bank of Patiala and State Bank of Hyderabad. There was not proposed any share swap or cash outgo as they were wholly-owned by the SBI.

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Advantages of Merger of SBI With Associate Banks 1. SBI will have global presence among top 50 Banks, bringing confidence, investment and greater lending. 2. SBI can become one of the anchor banks to finance large infrastructure projects like dedicated freight corridor, solar energy, Sagarmala etc. 3. It will increase networking of SBI all over India, thus better services of SBI compared to its associate branches will be able to reach remote locations. 4. It will reduce duplication as SBI and its associates target the same clients with similar products. 5. It will consolidate resources and infrastructure, reducing the cost on operations, human resource and technological solutions, overlapping bank branches, reduce inter-bank transaction cost etc.

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Disadvantages of Merger 1. Presently these banks have huge NPAs thus merger should be planned after sufficient capital is injected. 2. Banking competition may be affected, as SBI is likely to be five times larger than its nearest competitor. 3. RBI has declared SBI as Domestic Systemically Important Bank (D-SIBs) and its failure can shock other parts of financial system. 4. Past example of large banks and their failure with financial crisis in Japan, USA, etc. 5. Workers resistance from associations like AIBEA calling for strikes 6. India has poor financial inclusion, thus needs variety of banks and differentiated services.

Suggestions

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1. The government should not rush through the process – all stakeholders must be involved in the process 2. In the event of further divestment, the govt. share shall not fall below 51% in any case 3. Acquiring bank shall not dominate the smaller ones- good practices of both should be combined; conscious and organized efforts to synthesize the differences must be made.

Conclusion Bank consolidation is a tricky issue. While it is said that the long-term benefits of consolidation outweigh the short-term concerns, it must not be made a general policy. It is only to be done with right banks for right purpose with proper safeguards.

SUMMARY

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Banking sector is one of the fastest growing areas in the developing economies like India. M&A is discussed as one of the most useful tool for growth. Indian economy has witnessed fast pace of growth post liberalisation era and banking is one of them. M&A in banking sector has provided evidences that it is the useful tool for survival of weak banks by merging into larger bank. It is found in that small and local banks face difficulty in bearing the impact of global economy therefore, they need support and it is one of the reasons for merger. Some private banks used mergers as a strategic tool for expanding their horizons. There is huge potential in rural markets of India, which is not yet explored by the major banks. Nearly every middle-market bank in the industry is looking to either acquire another bank or be acquired. Many banks see an acquisition or merger as a chance to expand their reach or scale up operations quicker.

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