View of MERGERS IN INDIAN BANKING INDUSTRY: EVALUATING PERFORMANCE OF SBI

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Vol.04,Special Issue 05, (ICIR-2019) September 2019, Available Online: www.ajeee.co.in/index.php/AJEEE

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MERGERS IN INDIAN BANKING INDUSTRY: EVALUATING PERFORMANCE OF SBI Sandeep Songara

Assistant Professor,

Faculty of law and governance, Jayoti Vidhyapeeh woman’s University, Jaipur, Rajasthan Abstract: Indian banking sector has undergone a series of changes in recent years intending to enhance its asset expansion to enhance growth in the national economy. To achieve this goal, there is ample evidence that the RBI has relied heavily on bank capital reforms in tackling problems of underperformance in the sector. This study aims to analyze the impact of merger and acquisition on productivity and profitability of SBI. Merger refers to combination of two or more organizations to form one. With an objective of wealth maximization, companies keep evaluating different opportunities through the route of merger or acquisition because it is believed that two separate companies together create more value compared to being on an individual stand. Banking sector occupies a very important place in every economy and is one of the fastest growing sectors in India. The competition is intense and irrespective of the challenge from the multinational players, domestic banks - both public and private are also seen rigorous in their pursuit of gaining competitive edge by acquiring or merging with potential opportunities as present today. As a result, Mergers and Acquisitions are the need of the time. Indian commercial banks are witnessing sweeping changes in the regulatory environment, huge growth in off balance sheet risk management financial instruments, the introduction of e-commerce and online banking, and significant financial industry consolidation. All of these forces have made the Indian banking industry highly competitive. In this context, the study of performance of the banks after the merger is very essential.

Keywords: Banking Sector, Mergers, Public Sector, Financial Institutions 1. INTRODUCTION

Bank in general terminology is referred to as a financial institute or a corporation which is authorized by the state or central government to deal with money by accepting deposits, giving out loan and investing in securities. The main role of Banks is economic growth, expansion of the economy and providing funds for investment. Merger and Acquisition is one of the major aspects of corporate finance world. M&A is defined as consolidation of two or more firms in creation of a new entity or formation of a holding company. From the past few years Banking Industry is being consolidated to reap the benefits of mergers and acquisitions. These trends were seen in the early 50’s in the countries like USA, United Kingdom, Japan, and European countries.

Mergers and acquisition in banks are now very common worldwide. There have been several reforms in the Indian banking sector, as well as quite a few successful mergers and acquisitions, which have helped it, grow manifold. The first and the most successful example of merger is of New Bank of India merging with the Punjab National Bank (PNB).

This was the first merger between nationalized banks. And then, there were a lot of mergers in banking industry which exemplified that mergers are beneficial for an industry. SBI first merged state bank of Saurashtra with itself in 2008. Two years later, State Bank of Indore was merged with it. The Union cabinet on June 15, 2016 approved the merger of the five subsidiaries banks namely State Bank of Mysore, State bank of Travancore, State Bank of Hyderabad, State Bank of Patiala, State Bank of Bikaner and Jaipur along with Bhartiya Mahila Bank Ltd with SBI.

On 1^st April 2017 that "the SBI opened as 'one bank' and this was the largest merger in the history of banking industry. SBI’s merger with subsidiaries will see the combined entity’s balance sheet at a whopping Rs.37 trillion, making it one of the top 50 banks in the world. 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 sort of change in name from SBI associates to SBI will have a good market impression and will generate goodwill. 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

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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 realization of assets.

In this case, some entities liabilities will be set 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. SBI have foreign subsidiaries like SBI International (Mauritius) Ltd, State Bank of India (California), State Bank of India (Canada), INMB Bank Ltd, Lagos, and Bank SBI Indonesia (SBII). SBI, non-banking subsidiaries include SBI Capital Markets Ltd, SBI Fund Management private Ltd, SBI Factors & Commercial Services Private Limited, SBI Card & Payment Services private Ltd, SBI General Insurance Company Limited. SBI- joint ventures are SBI General Insurance Company Limited and SBI Life Insurance Company Ltd.

1.2. Objectives

The objectives of the study are:

1) To analyze the Pre and Post Merger performance of SBI

2) To study various important factors influencing banking sector to undergo merger and acquisition.

3) To identify the challenges encountered by merged entities.

4) To evaluate the performance of SBI in terms of productivity and profitability.

2. LITERATURE SURVEY

Relevant literature was reviewed in order to provide an insight of work related to Merger and Acquisitions (M&as). It is evident from the literature available that most of the studies done have emphasized on the impact of M&as on different aspects of the organizations. An organization grows and expands both internally and externally. Internal growth may be achieved by increasing its operation or by establishing new units, and external growth may be in the form of Merger and Acquisitions (M&as), Takeover, Joint venture, Amalgamation etc. Many studies have investigated various reasons responsible for Merger and Acquisitions (M&as) to take place, in order to analyze the effects of Merger and Acquisitions on Indian financial services sector.

Kotnal Jayashree (2016) compared pre and post-merger financial performance of merged banks studying financial parameters like Gross Profit margin, Net Profit margin, operating Profit margin, Return on Capital Employed, Return on Equity, and Debt Equity Ratio and observed the positive effect of merger on the banks.

Tamragundi & Devarajappa (2016) concluded in his study that Merger is a useful strategy to expand banking operations, serve larger customer base, increases profitability, liquidity and efficiency but the overall growth and financial illness of the bank cannot be solved from mergers.

Singh & Gupta (2015) studied the impact of Mergers and Acquisitions on productivity and profitability of Consolidation Banking Sector in India and found a positive effect.

Sai and Sultana (2013) evaluated the performance two selected banks based on the financial ratios from the perspective of pre and post-merger and concluded that Net Profit Margin, Operating Profit Margin, Return on Capital Employed, Return on Equity and Debt- Equity Ratio there was significant difference but no significant difference with respect to Gross profit margin.

Study of Soni and Jain (2013) compared pre and post-merger of banks using financial ratios-Gross Profit Margin, Net Profit Margin, Operating Profit Margin, Return on Capital Employed, Return on Equity and Debt Equity Ratio and showed that the banks have been positively affected by the event of Merger and Acquisition.

Findings of Dutta and Dawn (2012) indicated that the post-merger periods were successful and saw a significant increase in total assets, profits, revenue, deposits, and in the number of employees of the acquiring firms of the banking industry in India.

Study conducted by Azhagaiah & Kumar (2011) showed that Indian corporate firms involved in M&A have achieved an increase in the liquidity position, operating performance, profitability, and reduce financial and operating risk.

Antony Akhil (2011) also emphasized that there is a significant difference in the profitability ratios, like (growth of total assets ratio, growth of net profit ratio, return on

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assets ratio, return on equity ratio, and net interest margin ratio) of banks in the post- merger scenario.

Sinha & Gupta (2011) compared the pre and post analysis of the firms and their findings also emphasized the positive effects on the basis of some financial parameter like Earnings before Interest and Tax (EBIT), Return on share holder funds, Profit margin, Interest Coverage, Current Ratio and Cost Efficiency etc.

Khan (2011) also compared pre and post-merger financial performance of merged banks using financial parameters like Gross Profit Margin, Net Profit Margin, Operating Profit Margin, Return on Capital Employed, Return on Equity and Debt- Equity Ratio.

Results from his study also confirmed that the banks have been positively affected with a great improvement in the performance of banks after the mergers and acquisitions (M&as).

Goyal & Joshi (2011) presented an overview on Indian banking industry and highlighted the changes occurred in the banking sector after post liberalization and defined the Merger and Acquisitions as per AS-14. The need of Merger and Acquisition in India has been examined under this study. Their study revealed that ICICI Bank has used merger as their expansion strategy in rural market to improve customers base and market share.

Sony & Kumar (2010) analyzed the strategic and financial similarities of merged Banks, and relevant financial variables of respective Banks were considered to assess their relatedness. They found that only private sector banks are in favor of the voluntary merger wave in the Indian Banking Sector and public sector Bank are reluctant toward their type of restructuring.

3. METHODOLOGY

This work was done on the basis of secondary data. The secondary data was collected from various published sources like reports, magazines, newspapers etc. The financial and accounting data was collected from the bank’s published annual reports to examine the impact of mergers and acquisitions on the performance of SBI. Also, Bombay Stock Exchange, National Stock Exchange and other financial services websites were visited.

4. STUDY OUTCOME

4.1 Mergers in Banking Industry of India

Mergers in India in general have experienced an increased number in various sectors especially after the New Economic Policy in the year 1991 which has opened the doors for global markets. Banking Sector in India has witnessed many mergers during the years for various reasons such as Restructuring of Weak Banks; Economies of Scale; Expansion of Market; Business Consolidation etc. Looking into the history of Mergers in Banking Sector in India, initially they have taken place as a measure to protect the interests of the customers of the weak banks but subsequently a few mergers also have taken place voluntarily in the Post Liberalization Period between various banks for several reasons. The Indian economy, which is one of the fastest growing economies in the world, is poised to maintain its leading position, despite the global financial crisis and economic slowdown.

India has managed to beat the global financial turmoil due to sound regulation, prudent financial supervision and proactive policies. India's growth is driven predominantly by domestic consumption and investment and the Indian banking system had no direct exposure to the US sub-prime mortgage assets or to the failed institutions. During this period two mergers have taken place in Indian Banking Sector one between two profit making Public Sector Banks in the lines of consolidation and the other one was between two profit-making Private Sector Banks for the synergies of merger. In this context, the study of performance of the banks that have merged voluntarily assumes importance.

Table 1: Mergers in Banking Sector in India (1^st April 1991-31^st August 2019)

From 2010 to 2019

Name of the Banks (Acquired ) Name of the Banks ( Merged) Year of Merging

Indian Bank Allahabad Bank Aug-2019 (Announced )

Union Bank Andhra Bank and Corporate Bank Aug-2019(Announced )

Canara Bank Syndicate bank Aug-2019(Announced )

Punjab National Bank OBC and United bank of India Aug-2019(Announced )

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Bank of Baroda Vijaya Bank, Dena Bank Apr-2019(Announced )

State Bank of India Bhariya Mahila Bank (BMB) 2017

State Bank of India State Bank of Travancore (SBT) 2017

State Bank of India State Bank of Bikaner and Jaipur (SBBJ) 2017

State Bank of India State Bank of Hyderabad (SBH) 2017

State Bank of India State Bank of Mysore (SBM) 2017

State Bank of India State Bank of Patiala (SBP) 2017

Kotak Mahindra Bank ING Vyasa Bank 2014

ICICI Bank Bank of Rajasthan Ltd. 2010

From 2000 to 2010

Name of the Banks Acquired Name of the Banks got merged Year of Merging

HDFC Bank Centurion Bank of Punja 2008

ICICI Bank Ltd Sangli Ban 2007

Indian Overseas Bank Bharat Oerseas Bank 2007

Centurion Bank of Punjab Lord Krishna Bank 2006

Federal Bank Ganesh Bank of Kurandwad 2006

Nainital Bank Bank of Baroda 2006

IDBI Ltd United Western Bank 2006

IDBI Ltd IDBI Bank 2005

Bank of Punjab(POB) Centurion Bank 2005

Bank of Baroda South Gujarat Local Area Bank 2004

Oriental Bank of Commerce Global Trust Bank 2004

Punjab National Bank Nedungadi Bank Ltd. 2003

ICICI Bank ICICI Ltd. 2002

Bank of Baroda Benares State Bank Ltd. 2002

ICICI Bank Ltd Bank of Madura Ltd 2001

HDFC Bank Ltd. Times Bank Ltd. 2000

From 1990 to 1999

Name of the Banks acquired Name of the Banks got merged Year of Merging

Bank of Baroda Bareilly Corporation Bank Ltd. 1999

Union Bank of India Sikkim Bank Ltd. 1999

Oriental Bank of Commerce Bari Doab Bank Ltd. 1997

Oriental Bank of Commerce Punjab Co-operative Bank Ltd. 1996

State Bank of India Kashinath State Bank Ltd 1995

Bank of India Bank of Karad Ltd. 1994

Punjab National Bank New Bank of India 1993

Bank of India Parur Central Bank Ltd. 1990

Central Bank of India Purbanchal Bank Ltd. 1990

Indian Bank Bank of Thanjavur Ltd. 1990

Indian Overseas Bank Bank of Tamilnadu Ltd. 1990

4.2 Reasons of SBI Merger

 As a result of this merger, SBI holds first position in terms of Market Capitalization.

(Market Capitalization: INR 254,708.41 crore - Total Assets: INR 3,888,467.07 crore)

 Unhealthy competition among Public Sector Banks (PSBs) has been reduced.

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 It is difficult for smaller units to sustain the rate of competition and prudential norms.

 The merger proved an essential step on account of change in banking environment due to the emergence of new areas for compliance like Basel III, risk management etc., which require heavy investment on technology and compliance.

 After merger, SBI is expected to compete with the largest bank in the world, with an asset base of INR 37 lakh crore, or over $555 billion, with 22,500 branches and 58,000 ATMs. It will have over 50 crore customers.

 Bank can focus on defaulters in a better way which ultimately leads to a decline in Non Performing Assets by bringing necessary factors under one roof.

4.3 Benefits of Merger

 Currently, no Indian bank ranks in the top 50 banks of the world. With this merger, visibility at global level is likely to increase.

 Branch rationalization, if executed well, would be one of the key synergy benefits from the merger.

 The merger benefits include getting economies of scale and reduction in the cost of doing business.

 After the amalgamation, it can withstand the strong competition from private sector banks and can accumulate more resources to channelize trained manpower across its branches.

 This merger of SBI and its associate banks will result in the network expansion of SBI and its reach would multiply.

 Cost savings on account of treasury operations, audit, technology, etc, would lower cost-to-income ratio in the long term.

 Any introduction of new technologies and features by SBI will uniformly be available to all customers of SBI, its associates and subsidiaries.

 Shares of SBI and its associates will post tremendous earnings in the stock exchange thereby benefiting stake holders.

 Despite having second largest population country, no Indian bank is in the list of top 50 world's largest bank. With this merger SBI will become 44th largest bank in the world by assets.

 The bigger the bank, the better is the diversification of its assets portfolio and lesser chances that the bank will fail in the system.

 The merged entity will be able to tap into cheaper funds more easily and it will also be able to rationalize the branches all over the country, to cut down the operation costs.

 As of now SBI alone has employee strength of more than 2 lakhs, combining with all these banks it will cross 3 lakh bases and that is huge terms of employment.

 With the merger SBI will be able to finance more and more mammoth projects that will lead to economic development of the country.

 Reach and network of SBI will multiply, efficiency will likely to increase with the rationalization of branches.

 Adoption of development of technologies in associate banks will be faster.

 Gross NPA and Net NPA of the combined entity will come down.

 Capital adequacy will improve requiring less capital infusion by government.

 Strong presence in nook and corner of the country.

 After amalgamation with closure of duplicated branches, chances of relocating branches in underserved areas.

 Redundancy of work force. Very soon we can expect a special VRS.

4.4 Pre and Post financial analysis of SBI Merger

 Q1 FINANCIAL YEAR 2017 OVER Q1 FINANCIAL YEAR 2016: Interest Income on Advances increased from INR 28,582 Cr in Q1 FINANCIAL YEAR 2016 to INR 29,884Cr in Q1 FINANCIAL YEAR 2017 (4.56% growth)

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 Interest Income on Resources Operations increased from INR 10,254 Cr in Q1 FINANCIAL YEAR 2016 to INR 10,887 Cr in Q1 FINANCIAL YEAR 2017 (6.18%

growth).

 Total Interest Income increased from INR 39,643 Cr in Q1 FINANCIAL YEAR 2016 to INR 41,594 Cr in Q1 FINANCIAL YEAR 2017 (4.92% growth).

 Interest Expenses on Deposits increased from INR 24,097 Cr in Q1 FINANCIAL YEAR 2016 to INR 25,20169 Cr in Q1 FINANCIAL YEAR 2017 (4.45% growth).

 Total Interest Expenses increased from INR 25,911 Cr in Q1 FINANCIAL YEAR 2016 to INR 27,281 Cr in Q1 FINANCIAL YEAR 2017 (5.29% growth).

 Net Interest Income increased from INR13, 732 Cr in Q1 FINANCIAL YEAR 2016 to INR14,312 Cr in Q1 FINANCIAL YEAR 2017 (4.23% growth).

 Non Interest Income increased from Rs.5, 088 Cr in Q1 FINANCIAL YEAR 2016 to Rs.7, 335 Cr in Q1 FINANCIAL YEAR 2017, an increase of 44.2016% year over year, driven by increase in Profit on Sale of Investments by 212.15%, increase of 22.30%

in Recovery in Written Off accounts, increase of 21.93% in Forex Income and 6.08%

in Fee Income.

 Operating Income increased by 15.02% from Rs.18, 820 Cr in Q1 FINANCIAL YEAR 2016 to Rs.21, 647 Cr in Q1 FINANCIAL YEAR 2017.

 Staff Expenses increase was contained at 5.93%, from Rs.5,906 Cr in Q1 FINANCIAL YEAR 2016 to Rs.6,257 Cr in Q1 FINANCIAL YEAR 2017

 Operating Expenses increased by 10.14% from Rs.9, 618 Cr in Q1 FINANCIAL YEAR 2016 to Rs.10, 594 Cr in Q1 FINANCIAL YEAR 2017.

 Operating Profit increased by 20.12% from Rs.9, 202 Cr in Q1 FINANCIAL YEAR 2016 to Rs.11, 054 Cr in Q1 FINANCIAL YEAR 2017.

 Net Profit in Q1 FINANCIAL YEAR 2017 was Rs. 2,521 Cr, lower than the Net Profit of Rs.3,692 Cr in Q1 FINANCIAL YEAR 2016 by Rs. 1,20171 Cr(-31.73%) as loan loss provisions increased by Rs.2,981 Cr from Rs 3,359 Cr as on 30th June 2015 to Rs. 6,340 Cr as on 30th June 20 2016.

5. ASSET QUALITY

 Gross NPAs went up by 44 bps at 6.94% in Q1 FINANCIAL YEAR 2017 as against 6.50% in Q4 FINANCIAL YEAR 2016 and by 265 bps from Q1 FINANCIAL YEAR 2016.

 Net NPAs went up by 24 bps at 4.05% in Q1 FINANCIAL YEAR 2017 as against 3.81% in Q4 FINANCIAL YEAR 2016 and by 181 bps from Q1 FINANCIAL YEAR 2016.

6. IMPORTANCE OF THE STUDY

As per the objectives of the government, consolidation has been aimed as a tool of creating world size banks irrespective of the challenges that have been posed. When initially incorporated as a provision in the Banking Regulation Act, 1949; the prime objective was to create a mechanism so that weak banks could be prevented from serious consequences of liquidation and dissolution. Failing of one bank would lead to failure of the banking industry and for this caution; RBI was entrusted with the power to compulsorily merge the weak banks with the healthy ones in order to escape losses and liabilities. But as evident from the case studies, M&A in banking is being sought for some other purposes. No doubt, consolidation is a big tool in maintain liquidity, ensuring transparency in business and effective supervision, but the fact that a single bank would be exposed to uncertain and unpredicted systemic risk.

It is interesting to note that the government aims of few international banks through the consolidation process, whereas banks view some of them to be exposed to international competition. SBI merged with its associate banks in order to have increased balance sheet and economies of scale. With this merger SBI has entered into the league of top 50 global banks.

7. CONCLUSION

SBI does not have branches at many of the places, but its associate banks do have. As a result of merger being implemented, the customer confidence will be enhanced leading to

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production of good report, because SBI is having a better performance and feedback as compared to its associates. The bigger the bank, the better is the diversification of its assets portfolio and lesser chances that the bank will fail in the system.

Gross NPA and Net NPA of the combined entity will come down. Since it will become one big merged Bank, it will have only a single 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.

Despite all the factors taken into consideration and analysis, consolidation through M&A is a boon for the industry in the times of need. However, the journey to “international banks” is still far as there had been a few mergers in the Indian banking space; it had happened due to “exigencies” and was rather “forced consolidation”.

The proposed study is significant in order to answer the following issues:

 To know what matters the big size of SBI (post merger) to Indian Economy.

 To analyze the employees related issues of this merger

 To examine the effect of this merger on the share price of SBI and its associate banks

 To compare the benefits and cost of merger

 To decide whether it should be promoted for other Public sector or not.

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