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I
A major perspective of the Reserve Bank of India’s n the Reserve Bank of India’s (RBI) First Bi-monthly
banking policy is to encourage competition, consolidate Monetary Policy Statement, 2014–15, Raghuram Rajan
(2014) reviewed the progress on various developmental
and restructure the system for financial stability. Mergers
programmes and also set out new regulatory measures. On
and acquisitions have emerged as one of the common strengthening the banking structure, the second of “five
methods of consolidation, restructuring and pillars,” he mentioned the High Level Advisory Committee,
strengthening of banks. There are several theoretical chaired by Bimal Jalan. The committee submitted its recom-
mendations in February 2014 to RBI on the licensing of new
justifications to analyse the M&A activities, like change in
banks. RBI has started working on the framework for on-tap
management, change in control, substantial acquisition, licensing as well as differentiated bank licences. “The intent is
consolidation of the firms, merger or buyout of to expand the variety and efficiency of players in the banking
subsidiaries for size and efficiency, etc. The objective system while maintaining financial stability. The Reserve
Bank will also be open to banking mergers, provided competi-
here is to examine the performance of banks after
tion and stability are not compromised” (Rajan 2014).
mergers. The hypothesis that there is no significant Mergers and acquisitions (M&A) have been one of the
improvement after mergers is accepted in majority of measures of consolidation, restructuring and strengthening of
cases—there are a few exceptions though. Therefore, banks. M&A in the banking sector seeks to enlarge the size of
banks to tap economies of scale, or prevent bank failure. Motives
the strategy of M&A to consolidate banks for purposes of
of bank mergers and amalgamations vary from change of
efficiency seems flawed. Future banking policy must ownership to enhancing size for efficiency gains. Thus, M&A in
take note of this empirical reality and long-drawn Indian banking needs to be examined in the context of the
experience of the past two decades. changing banking scenario and global economic environment.
This study examines RBI’s policy of M&A of banks from the
perspective of efficient banking structure. In Section 1, we
discuss, in brief, theory of M&A. In Section 2, we describe the
regulatory framework of M&A in India. Section 3 carries a
review of literature, followed by a Section 4 on trends in M&A.
In Section 5, we analyse M&A. The next section concludes with
a short summary.
divestment and management buyouts. Viewed from the per- This section notes banks that are weak, unsound, or not properly
spective of markets, mergers can be classified into three cate- managed can be merged with those that are on a sound footing.
gories: horizontal mergers, vertical mergers and conglomerate RBI’s policy is to encourage amalgamation to protect the
mergers. A horizontal merger is between two or more compa- interest of depositors in particular and strengthen the banking
nies that compete in the same business and geographical mar- structure in the area in general. RBI also encourages banking
ket. A vertical merger is a combination of two or more firms integration through the transfer of assets and liabilities of small
involved in different stages of production or distribution of and unsound, weak and small units into fewer and strong
the same product, and can be either forward or backward banking units. Section 36AE of the BRA gives central govern-
merger. A conglomerate merger is a combination of firms en- ment power—it requires a consent report from RBI—to acquire
gaged in unrelated lines of business activity. The type of M&A any banking unit in the interest of the depositors, in the inter-
also dictates the acquisition logic, the framework for the est of banking policy, or for the better provision of credit to any
evaluation of targets, the acquisition target profile and the particular section of the community (nationalisation of banks).
post-acquisition integration. Thus, 14 big banks were nationalised in 1969 to strengthen
The objectives of the firms that opt for mergers may be public sector undertaking (PSU) dominance. It is assumed that all
attributed to: (i) change in management, (ii) change in control, these processes contribute towards an efficient and optimal bank-
(iii) substantial acquisition, (iv) consolidation of the firms, ing structure. Thus, the restructuring and consolidation through
(v) merger or buyout of subsidiaries for size and efficiency, etc. strategy of M&A is a continuous process to improve the working
The present study analyses the performance of banks that of Indian banking and steer it towards optimal structure in terms
went in for mergers during and after the financial sector of size distribution, ownership and organisational diversity.
reforms. The main emphasis is to see whether M&As in bank
sector have contributed to overall growth, and economies of 3 Literature Survey
scale and efficiency of the banks. Various studies on the effect of bank mergers on performance
have been conducted in many countries. Cost–benefit analyses
2 Regulatory Framework in India showed bank M&A produced mixed results. Different tools and
The Banking Regulation Act (BRA), 1949 provides the regulatory banking parameters were used by analysts for measuring bank
framework for M&A in India’s banking sector. The act provides performance. Some studies found that mergers can potentially
for two types of amalgamations: (i) voluntary, and (ii) com- lower costs and increase profit efficiency (Shaffer 1993;
pulsory. RBI has the discretionary power to approve the volun- Akhavein et al 1997), while others concluded that mergers
tary amalgamation of two banking companies under Section have not resulted in any significant improvement in efficiency
44(A) of the BRA. Compulsory amalgamations are induced or (Berger and Humphrey 1994; Rhoades 1993). A study by
forced by RBI under Section 45 of the BRA, in public interest or Rhoades (1993) found that horizontal (in-market) mergers dur-
in the interest of the depositors of a distressed bank, or to ing 1980–86 did not improve total cost efficiency.
secure proper management of a banking company, or in the In an earlier study, Alhadeff and Alhadeff (1955) examined
interest of the banking system. In this regard, the amalgamation bank mergers of 208 United States (US)-based banks between
will become effective on the date indicated in the notification January 1953 and mid-1954. They analysed the causes of the
issued by the government. The act does not require obtaining mergers and attempted to determine their significance for the
RBI approval in case of voluntary mergers or acquisitions of fi- ongoing merger movement. Bank-by-bank basis data shows
nancial businesses by banking institutions. Guidelines regard- that management issues and matters pertaining to cost and
ing the process of merger proposal, determination of swap profit ratios, branch banking, growth rates, legislation, anti-
ratios, disclosures, buying/selling norms of shares before and trust laws, and market structures were behind the mergers.
during the process of merger are laid down by RBI for volun- The study shows that large- and middle-size banks acquired
tary mergers involving banking companies, as well as between considerably small banks during the period.
non-banking and banking companies. Rhoades and Yeats (1974) analysed a stratified random sam-
Till 1960, amalgamations of banks took place on voluntary ple of 600 US commercial banks over 1960–71. Theirs was an
basis under Section 44A of the BRA as there was no other provision attempt to update the findings of Alhadeff and Alhadeff (1955).
for the purpose. Though there was urgent need to strengthen They wanted to see if Alhadeff and Alhadeff’s major conclu-
the banking system by eliminating the small and weak banks, sion still holds, and also to determine the impact of mergers on
the result of voluntary bank amalgamation was very poor and dis- growth. The findings supported the hypothesis that large
couraging. In view of this, RBI acquired statutory powers banks grow less than the system as a whole. The regressions
through an amendment in the BRA in 1960 for reconstruction fitted for bank consolidation yielded unambiguous results and
or compulsory amalgamation of banks. Since then, amalgama- concluded that deconsolidation occurred in the banking
tions were on voluntary basis with RBI approval (Section 44A of industry over 1960–71.
BRA) wherever possible, and compulsion whenever necessary Peristiani (1997) investigated the effect of bank mergers on
(Section 45 of BRA). Section 45 of the act lays down conditions the efficiency and financial performance of merger survivors.
under which a bank can be reconstructed or amalgamated This study utilised translog flexible functional form to esti-
compulsorily by RBI, in consultation with the central government. mate the cost structure of banks and derive measures of
Economic & Political Weekly EPW SEPTEMBER 12, 2015 vol L no 37 51
SPECIAL ARTICLE
efficiency. Empirical findings indicated that X-efficiency was integrations. In the post-1960 period, there were large numbers
fairly constant across all other sizes, except for large banks. In of compulsory mergers (particularly 30 in 1961) and integrations
contrast, scale efficiency was more variable across the different (transfer of assets/liabilities; 62 in 1964). The elimination of
size groups. Therefore, it appeared that during the 1980s, weak banks helped boost economic efficiency and financial
mergers were not beneficial to banks in terms of X-efficiency. integrity, leading to an improved banking structure. It is to be
Focarelli et al (2002) analysed all the M&A—as separate noted that RBI policy is quite objective in that it allows the
events—among Italian banks during 1985–96. Profitability for development of small and large banks simultaneously, as
mergers increased because of the efficient use of capital, al- small and large banks are equally efficient. The M&A activities
though the increase in income from services is offset by the in Indian banking are directed towards consolidating the system
higher staff costs. For acquisitions, the increase in profitability to attain optimal structure for the banking units: rationalise,
for the acquired banks was linked to the improvement in the decentralise, reallocate and reorganise.
quality of their loan portfolio. Their findings are consistent Table 1 shows the list of banks merged after the bank nationali-
with the hypothesis that expanding revenues from financial sation in 1969, till the financial sector reforms in the early 1990s.
services is a strategic objective for the mergers. Twelve cases of mergers were found during the period. From
Kalhöfer and Badreldin (2010) analysed the performance of Table 1, it can be observed that consolidation of banks was car-
Egyptian banks that had undergone M&A during 2002–07. The ried out by RBI before the reforms period to amalgamate unvi-
study concluded that M&A did not show a clear effect on the prof- able units. All the merging banks are public sector banks. The
itability of banks in the Egyptian banking sector. However, main motive is to strengthen the banking sector through com-
there were minor positive effects on the credit risk position. pulsory amalgamation in order to weed out unviable banks by
So studies have reached varied conclusions. While some are liquidation, or by the taking of assets of the non-functioning
of the view that mergers add value to the performance of the banks by other banks.
banks and firms, others Table 1: Banks Amalgamated since Nationalisation of Banks in India, 1969–90
show that mergers retard Sr No Date of Merger Merging Bank Merged With Motive of Merger Type of Merger
1 08/11/1969 Bank of Bihar State Bank of India Restructuring of Weak Bank Compulsory
growth, reduce profitability,
2 20/02/1970 National Bank of Lahore State Bank of India Restructuring of Weak Bank Compulsory
and affect the credit risk 3 29/07/1985 Miraj State Bank Union Bank of India Restructuring of Weak Bank Compulsory
position of the merger 4 24/08/1985 Lakshmi Commercial Bank Canara Bank Restructuring of Weak Bank Compulsory
banks. The current study 5 26/08/1985 Bank of Cochin State Bank of India Restructuring of Weak Bank Compulsory
is an attempt to analyse the 6 19/12/1986 Hindustan Commercial Bank Punjab National Bank Restructuring of Weak Bank Compulsory
mergers of banks in India 7 13/05/1988 Traders Bank Bank of Baroda Restructuring of Weak Bank Compulsory
from the early 1990s, when 8 31/10/1989 United Industrial Bank Allahabad Bank Restructuring of Weak Bank Compulsory
the financial sector reforms 9 20/02/1990 Bank of Tamilnadu Indian Overseas Bank Restructuring of Weak Bank Compulsory
began, till 2010. There are 10 20/02/1990 Bank of Thanjavur Indian Bank Restructuring of Weak Bank Compulsory
11 20/02/1990 Parur Central Bank Bank of India Restructuring of Weak Bank Compulsory
very few studies on bank
12 29/08/1990 Purbanchal Bank Central Bank of India Restructuring of Weak Bank Compulsory
mergers in India. Further, Source: Report on Trend and Progress of Banking in India, Reserve Bank of India, various issues.
the study covers all the Table 2: Mergers, Amalgamations in Indian Commercial Banks from 1991 to 2010
public sector banks that Sr No Date of Merger Merging Bank Merged With Motive of Merger Type of Merger
went in for mergers since 1 04/09/1993 New Bank of India Punjab National Bank Restructuring of Weak Bank Compulsory
1991, and each merger 2 01/01/1996 Kashi Nath Seth Bank State Bank of India Restructuring of Weak Bank Compulsory
3 08/04/1997 Bari Doab Bank Oriental Bank of Commerce Restructuring of Weak Bank Compulsory
case has been studied.
4 08/04/1997 Punjab Co-operative Bank Oriental Bank of Commerce Restructuring of Weak Bank Compulsory
5 03/06/1999 Bareilly Corporation Bank Bank of Baroda For Economies of Scale & Scope Voluntary
4 Trends in India
6 22/12/1999 Sikkim Bank Union Bank of India Restructuring of Weak Bank Compulsory
From 1960 to June 1982, 20 7 26/02/2000 Times Bank HDFC Bank For Economies of Scale & Scope Voluntary
voluntary amalgamations, 8 10/03/2001 Bank of Madura ICICI Bank For Economies of Scale & Scope Voluntary
49 compulsory mergers, 18 9 30/03/2002 ICICI ICICI Bank Universal Banking Voluntary
mergers with State Bank of 10 20/06/2002 Benares State Bank Bank of Baroda Restructuring of Weak Bank Compulsory
11 01/02/2003 Nedungadi Bank Punjab National Bank Restructuring of Weak Bank Compulsory
India (SBI) and its associ-
12 25/06/2004 South Gujarat Local Area Bank Bank of Baroda Restructuring of Weak Bank Compulsory
ates, and 130 transfers of 13 14/08/2004 Global Trust Bank Oriental Bank of Commerce Restructuring of Weak Bank Compulsory
assets and liabilities were 14 02/04/2005 IDBI IDBI Bank For Economies of Scale & Scope Voluntary
completed. Prior to 1969, 15 01/10/2005 Bank of Punjab Centurion Bank For Economies of Scale & Scope Voluntary
the Indian banking system 16 02/09/2006 Ganesh Bank of Kurundwad Federal Bank Restructuring of Weak Bank Compulsory
was very weak and domi- 17 03/10/2006 United Western Bank IDBI Bank Restructuring of Weak Bank Compulsory
nated by small unviable 18 31/03/2007 Bharat Overseas Bank Indian Overseas Bank For Economies of Scale & Scope Voluntary
19 19/04/2007 Sangli Bank ICICI Bank For Economies of Scale & Scope Voluntary
banks owned by business
20 29/08/2007 Lord Krishna Bank Centurion Bank of Punjab For Economies of Scale & Scope Voluntary
houses. So, in 1960, RBI 21 23/05/2008 Centurion Bank of Punjab HDFC Bank For Economies of Scale & Scope Voluntary
was empowered to bring 22 12/08/2010 The Bank of Rajasthan ICICI Bank For Economies of Scale & Scope Voluntary
compulsory mergers and Source: Report on Trend and Progress of Banking in India, Reserve Bank of India, various issues.
Table 2 (p 52) shows the list of banks that went in for merg- single merger case study. These banks are Indian Overseas
ers during 1991–2010. Twenty-two banks underwent mergers, Bank, SBI and Union Bank of India. HDFC Bank, IDBI Bank,
of which the number of compulsory mergers was 11 and the Oriental Bank of Commerce and Punjab National Bank were
remaining 11 mergers were voluntary. A special case of a studied for two merger cases. Bank of Baroda was studied for
voluntary merger is that of ICICI Bank, where the motive was three mergers, and ICICI Bank for four mergers. Detailed in-
reverse merger, a case of universal banking. In other words, formation of each bank’s M&A is provided in Table 2.
since the financial reforms, banks in India used M&A as a The financial indicators used are profitability, solvency,
long-term strategy in their restructuring processes. and efficiency. The average values of the selected financial
parameters for the periods T-3, T-2, and T-1 are compared
Hypotheses with its average values at T+1, T+2 and T+3 for each bank. In
The main objective is to examine whether the performance of the next step, a paired Student’s t-test is performed to check
banks has increased after mergers. Accordingly, the following the statistical significance of the two means of pre- and post-
hypotheses are formulated for the current study: merger periods.
H0: There is no significant change in the performance of banks The formula of the paired sample t-test is given by:
after mergers. ∑Ni=1 (xo – x1)
H1: There are significant changes in the performance of banks N ...(1)
t=
after mergers. σ√N
where,
Methodology X0= pre-merger performance of the bank(s)
The performance of the banks is analysed in terms of financial X1= post-merger performance of the bank(s)
ratios such as profitability ratios, solvency ratios, efficiency N= number of parameters used in the sample
and earning capacity of banks, and growth rate of total assets. σ = the standard deviation (SD) of the distribution of the
These factors as well as the specific measures used to repre- change in performance of the merging banks.
sent them are defined in Table 3. These indicators are used to By using Formula (1), pre-merger and post-merger perfor-
identify whether mergers have any improvement or bearing mance of the individual merging bank is measured for each of
on the performance of the banks. the performance indicators.
Table 3: Definitions of Performance Ratios Used in Analysis of Merged Banks
Ratio Definition Performance of Banks
Profitability indicators Measure overall performance
The results of the descriptive t-test for all the merging banks are
(i) Return on assets (ROA) Ratio of profit after tax to total assets
(ii) Return on equity (ROE) Ratio of net profit to average shareholders’ equity
shown individually in the Appendix (Tables A1 to A9, p 56–58).
Solvency indicator Measure the bank’s ability to meet its obligations The tables are sequenced in alphabetical order rather than in
relative to its exposure to risk chronological order of the year of merger.
(i) Capital adequacy Ratio of tier I & tier II capital to capital
ratio (CAR) weighted assets
Bank of Baroda
Efficiency indicators Measure the bank’s ability to generate income, pay
expenses and measure the productivity of employees Table A1 reports the results of the paired t-test during pre- and
(i) Spread Net interest income as a percentage of total assets post-merger period for the Bank of Baroda. There are three
(ii) Operating cost/total Total operating expenses as a percentage cases of mergers pertaining to Bank of Baroda. Of these three
assets (OC/TA) of total assets
cases, two are compulsory mergers and one voluntary. The
(iii) Profit per employee Ratio of net profit to the number of employees
Growth indicator Measure the bank’s changes in assets
sole case of voluntary merger pertaining to the Bank of Baroda is
(i) Asset growth rate Change in book value of total asset as a percentage that of Bareilly Corporation Bank Ltd merging with it 1999. The
of book value of total assets in the previous year result of the paired t-test for each merger case is depicted in
Table A1. The results of the paired sample t-test in the first case
5 Analytical Framework indicated that only one performance indicator, namely, Spread
A comparison of the post-merger and pre-merger performance is found to be significant at the 5% level. All other performance
allows measuring of the impact of the mergers. The financial indicators do not produce significant t-values.
data for each bank are collected for six years, three years before The second merger case is that of a compulsory merger
the merger and three years after the merger. The financial data pertaining to the Bank of Baroda and Benares State Bank
for the year in which the merger occurred is omitted under the merging with it in 2002. Results of the paired t-test show that
study. Only seven public sector banks and two new private sector only three performance indicators, namely, return on assets
banks have been identified for this study. The public sector (ROA), return on equity (ROE), and profit per employee are
banks are Bank of Baroda, IDBI Bank, Indian Overseas Bank, statistically significant at the 5% level. No significance is found
Oriental Bank of Commerce, Punjab National Bank, SBI and in the other performance indicators.
Union Bank of India. ICICI Bank and HDFC Bank are the two The third case of merger with Bank of Baroda occurred in 2004,
private sector banks. The analysis is carried out based on the when South Gujarat Local Area Bank was compulsorily
frequency of occurrence of mergers over the period under merged with it. The t-test result revealed that none of the per-
study. Merger analysis of three banks was carried out for a formance indicators, except the ROE, was found statistically
Economic & Political Weekly EPW SEPTEMBER 12, 2015 vol L no 37 53
SPECIAL ARTICLE
significant, even though the mean values are somewhat im- are poor in the post-merger period. And, regarding the t-test
proved in the post-merger period for certain indicators. result, none of the indicators are significant.
In short, in all of the three cases some of the performance To sum up, in both the merger cases, the performance of
indicators are statistically significant, whereas others do not the bank is poor even though OC/TA ratio and profit per
show statistical significance. Ratios like ROA, ROE, Spread and employee improved for the bank in the voluntary merger.
profit per employee are the indicators that show statistical
significance, while capital adequacy ratio (CAR), operating Indian Overseas Bank
cost/total assets (OC/TA), and asset growth show no signifi- The sole voluntary merger with Oriental Bank of Commerce
cance in any of the cases. occurred when Bharat Overseas Bank merged with it (Table A5).
Even though it was a voluntary merger, most performance
HDFC Bank indicators show the merger had poor results. The sample
Two cases of mergers are analysed for HDFC. Both are paired t-test indicated that, except Spread, none of the
voluntary mergers. The first case is that of Times Bank merg- performance indicators were statistically significant.
ing with it in 2000. Table A2 shows the results of the paired
t-test for both the merger cases. In the first case, the result of Oriental Bank of Commerce
the paired sample t-test shows that none of the indicators are Two merger cases were analysed for Oriental Bank of
statistically significant. Commerce; both are compulsory mergers (Table A6). Results
The second case is that of Centurion Bank of Punjab merg- of the sample paired t-test for all the performance indicators in
ing with it in 2008. Even though most of the indicators show the first case reported that only two performance indicator
improvement in the post-merger period, none of them was variables, namely, Spread and OC/TA were significant at the
found to be statistically significant. 5% level. No statistical significance is found in the remaining
To sum up, in both the merger cases some improvement is five performance measuring variables.
observed in the mean values of some performance indicators. For the second merger case, the performance of the indica-
But none of them are statistically significant. tors gives similar results as the first merger case. The paired
t-test result indicated that none of the indicators is statisti-
ICICI Bank cally significant.
The four merger cases pertaining to ICICI Bank were voluntary
mergers (Table A3). The first case was that of Bank of Madura Punjab National Bank
in 2001. The paired sample t-test shows that none of the indi- Two merger cases were studied for Punjab National Bank.
cators is statistically significant. Both the cases are compulsory mergers (Table A7). No statisti-
The second case was in 2002 when ICICI merged with ICICI cal significance is found in any of the indicators in the
Bank. Since this merger took place within a year, no radical first case.
changes were found in the comparison of mean values for the two The performance of the bank in the second merger case is
periods. The sample paired t-test shows that the performance somewhat different. In the second merger case, two parame-
indicators ROA and ROE are statistically significant at the 5% level. ters, namely, OC/TA and profit per employee are found to be
No significance was found in any of the other indicators. significant at the 5% level. And, the rest of the parameters did
The third case was in 2007 when Sangli Bank merged with ICICI not have any significant t-values.
Bank. Contradictory results were found in this case as against the
results of earlier merger. None of the indicators, except CAR and State Bank of India
Spread, was found statistically significant at the 5% level. One merger case was analysed for the SBI. In 1996 Kashi
The fourth case was the merger of Bank of Rajasthan with ICICI Nath Seth Bank was compulsorily merged with SBI (Table A8).
Bank in 2010. Since data is limited to 2012, analysis was carried The paired sample t-test for all the performance parameters
out only for two years in each period. Except the ROA, none of the was found not significant in either of the parameters used for
performance indicators were found statistically significant. the performance analysis.
In all the four merger cases, the results are different.
Union Bank of India
IDBI Bank One merger case was analysed for Union Bank of India, the
Two cases of mergers were studied for IDBI Bank, one in 2005 compulsory merger of Sikkim Bank (Table A9) with it in 1999.
and another in 2006 (Table A4). The merger in 2005 was a None of the parameters was found significant for any of the
voluntary merger of IDBI with the bank. The merger in 2006 performance indicator variables.
was a compulsory merger of United Western Bank with IDBI.
Results of the paired t-test show that only ROA is statistically Reasons for Statistically Insignificant Ratios
significant. No significance is found in the rest of the perfor-
mance indicators. Profitability Ratios: From the individual table for each
Similar results are observed in the second merger. The merged bank, it can be observed that the profitability
mean values of all the performance indicators, except CAR, measures, ROA and ROE, did improve after some of the
54 SEPTEMBER 12, 2015 vol L no 37 EPW Economic & Political Weekly
SPECIAL ARTICLE
mergers. However, mean values of these ratios did not improve merging banks. The first indicator, ROA, is found statistically
for all banks. The squeeze on profitability has been driven significant in one merger with the Bank of Baroda and two
from the expenditure side, like the increase in interest costs of mergers with ICICI Bank. The second indicator, ROE, was found
deposits, growing functional diversification of banks, rapid to be statistically significant in two cases pertaining to Bank of
growth in the wages and salary of staff, and accelerated Baroda and one case pertaining to ICICI Bank. Among the CAR,
promotions, etc. An increase in profitability ratios of some profit per employee and asset growth indicators, statistical
banks is substantial enough to offset the fall in ROA and ROE of significance was recorded for three cases: ICICI Bank, Bank of
other banks. Baroda and Punjab National Bank. In case of the indicator
Spread, statistical significance ratios were observed for Bank
Solvency Ratio: All the merged banks fulfilled the regulatory of Baroda, ICICI Bank, Indian Overseas Bank and Oriental
CAR requirement of the 9% level. This signified that the Bank of Commerce. Only two banks, Oriental Bank of
merged banks successfully managed to meet the increased re- Commerce and Punjab National Bank, show statistical signifi-
quirement under the new regulatory framework. In other cance with respect to OC/TA ratio.
words, banks could absorb the unexpected losses easily and As is evident from Table 4, each indicator has different sta-
manage their reduced cost of funding, which ultimately im- tistical significance for each of the merging banks. Spread
proved their profitability. However, the average CAR for some shows the maximum number of statistical significance
banks declined in the post-merger period and these banks covering four out of the nine merging banks. Other indicators
needed recapitalisation with fresh funds in order to cope with have a limited significance. The other statistically significant
the new environment of mergers. indicators are ROA and ROE, in case of Bank of Baroda and
The insignificant coefficients of the profitability parameters ICICI Bank, respectively. Although M&A may be theoretically
and solvency ratios had an impact on the growth performance important, but impact on profitability, capital, and growth
in terms of the asset growth rates of the firms. For example, rate is not significant. Generally the strategies focus on
the growth rate of the total assets declined after mergers for long-term gains, and not short-term objectives. Hence, the null
one of the merging banks (Punjab National Bank). hypothesis (H0) that there is no significant improvement after
mergers is accepted in majority of the merger cases, with few
Other Ratios: Non-performing assets (NPA) have been exceptions as reported in Table 4.
the major track in varying importance for each bank’s Further when results are classified for compulsory merger
performance. Besides, slow adoption of technology across cases and voluntary merger cases separately, there is no
banking functions and branches has delayed the approval of difference as more or less equal number of significant
bigger benefits. Business restructuring and manpower re- ratios are seen for both categories. This indicates that in the
structuring imposed the additional cost in some of the banks Indian banking sector merging banks seem to be of very
covered here. small size relative to the size of the bank merged with so as
to make the impact insignificant, irrespective of the type of
6 Summary and Conclusions merger, compulsory or voluntary. Even when we look at
Table 4 provides bank-wise statistically significant ratio performance of a bank in the control period (normal years
of each performance indicator, pre- and post-merger from without M&A transactions), results of this study remain
1991 to 2010. unchanged.1
In all the nine merging banks, with a total of 18 cases of In conclusion the strategy of M&A to consolidate the banks
mergers, each of the indicators shows different statistical citing efficiency as the reason is doubtful. Future banking
significance in different merger cases. Table 4 shows the policy must take note of this empirical reality and the long-
summary statistics of statistically significant ratios for the drawn experience of the years since the financial reforms.
note Grossman, S J and O D Hart (1981): “The Alloca- Manne, H G (1965): “Mergers and the Market for
tional Role of Takeover Bids in Situations of Corporate Control,” Journal of Political Econo-
1 Estimates of the control period are available
Asymmetric Information,” The Journal of my, Vol 73, No 2, pp 110–20.
with the authors.
Finance, Vol 36, No 2, pp 253–70. Marris, R (1964): The Economic Theory of Manage-
Hay, D A and D J Morris (1991): Industrial Econom- rial Capitalism, London: Macmillan.
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Table A1: Descriptive Statistics of Paired t-Test for Bank of Baroda Table A2: Descriptive Statistics of Paired t-Test for HDFC Bank
Financial Ratios Period Mean Standard t-Value Probability Remark Financial Ratios Period Mean Standard t-Value Probability Remark
Deviation Deviation
Merger Case 1: Bareilly Corporation Bank with Bank of Baroda in 1999
Merger Case 1: Times Bank with HDFC Bank in 2000
ROA Pre-merger 0.85 0.139 0.478 0.680 Not Significant
Post-merger 0.77 0.302 ROA Pre-merger 1.99 0.212 4.076 0.055 Not Significant
ROE Pre-merger 15.51 1.827 0.518 0.656 Not Significant
Post-merger 1.48 0.035
Post-merger 14.11 5.324
CAR Pre-merger 12.38 0.804 0.225 0.843 Not Significant ROE Pre-merger 21.35 1.938 0.833 0.492 Not Significant
Post-merger 12.26 0.815
Post-merger 19.97 1.291
Spread Pre-merger 3.04 0.153 6.091* 0.026 Significant
Post-merger 2.82 0.214 CAR Pre-merger 12.66 1.106 1.880 0.200 Not Significant
OC/TA Pre-merger 2.34 0.03 0.381 0.740 Not Significant
Post-merger 2.30 0.209 Post-merger 12.24 1.491
Profit per Pre-merger 0.84 0.204 -1.550 0.261 Not Significant Spread Pre-merger 3.21 0.545 0.785 0.514 Not Significant
employee Post-merger 1.30 0.670
Growth rate Pre-merger 17.87 5.551 4.397 0.142 Not Significant Post-merger 2.84 0.281
of assets Post-merger 9.88 2.981 OC/TA Pre-merger 1.91 0.397 0.188 0.868 Not Significant
Merger Case 2: Benares State Bank with Bank of Baroda in 2002
ROA Pre-merger 0.70 0.220 -9.330* 0.011 Significant Post-merger 1.86 0.084
Post-merger 1.00 0.229 Profit per Pre-merger 9.71 0.217 - 0.272 0.811 Not Significant
ROE Pre-merger 13.29 4.344 -23.099* 0.002 Significant employee
Post-merger 17.24 4.103 Post-merger 9.74 0.350
CAR Pre-merger 12.73 0.603 -0.428 0.710 Not Significant Growth rate Pre-merger 110.84 80.787 1.501 0.374 Not Significant
Post-merger 13.06 0.739 of assets
Spread Pre-merger 2.97 0.110 0.000 1.000 Not Significant Post-merger 33.48 7.891
Post-merger 2.97 0.204 Merger Case 2: Centurion Bank of Punjab with HDFC Bank in 2008
OC/TA Pre-merger 2.36 0.165 2.135 0.166 Not Significant
ROA Pre-merger 1.34 0.032 - 3.213 0.085 Not Significant
Post-merger 2.12 0.035
Profit per Pre-merger 0.86 0.244 -11.26* 0.008 Significant Post-merger 1.63 0.127
employee Post-merger 2.02 0.370
ROE Pre-merger 18.31 0.993 0.994 0.425 Not Significant
Growth rate Pre-merger 10.13 2.936 -0.586 0.663 Not Significant
of assets Post-merger 11.30 0.099 Post-merger 17.24 1.272
Merger Case 3: South Gujarat Local Area Bank with Bank of Baroda in 2004
CAR Pre-merger 12.70 1.144 - 4.022 0.057 Not Significant
ROA Pre-merger 1.02 0.197 2.196 0.159 Not Significant
Post-merger 0.8 0.085 Post-merger 16.73 0.636
ROE Pre-merger 18.11 2.631 4.730* 0.042 Significant
Spread Pre-merger 3.73 0.243 - 2.222 0.156 Not Significant
Post-merger 13.10 1.282
CAR Pre-merger 12.63 1.295 -0.157 0.889 Not Significant Post-merger 4.12 0.111
Post-merger 12.80 0.933
OC/TA Pre-merger 2.60 0.265 0.017 0.988 Not Significant
Spread Pre-merger 2.81 0.191 1.090 0.390 Not Significant
Post-merger 2.49 0.310 Post-merger 2.60 0.067
OC/TA Pre-merger 2.16 0.04 2.785 0.108 Not Significant
Profit per Pre-merger 6.16 1.210 - 0.749 0.532 Not Significant
Post-merger 1.84 0.240 employee
Profit per Pre-merger 1.77 0.326 -2.969 0.097 Not Significant Post-merger 7.15 1.077
employee Post-merger 2.93 0.922 Growth rate Pre-merger 35.05 15.45 0.955 0.515 Not Significant
Growth rate Pre-merger 9.57 2.549 -7.436 0.085 Not Significant of assets
of assets Post-merger 25.85 0.547 Post-merger 23.26 2.02
*Significant at the 5% level.
OC/TA Pre-merger 1.97 0.835 3.296 0.081 Not Significant Table A5: Descriptive Statistics of Paired t-Test for Indian Overseas Bank
Post-merger 1.70 0.139 Financial Ratios Period Mean Standard t-Value Probability Remark
Profit per Pre-merger 10.00 1.00 0 1 Not Significant Deviation
employee Post-merger 10.00 1.00 Merger Case 1: Bharat Overseas Bank with Indian Overseas Bank in 2007
Growth rate Pre-merger 43.52 9.078 2.757 0.221 Not Significant
ROA Pre-merger 1.32 0.04 2.492 0.130 Not Significant
of assets Post-merger 3.80 11.299
Merger Case 4: Bank of Rajasthan with ICICI Bank in 2010 Post-merger 0.80 0.330
ROA Pre-merger 1.06 0.106 -21.8* 0.029 Significant ROE Pre-merger 27.78 0.486 3.616 0.069 Not Significant
Post-merger 1.60 1.141
Post-merger 14.81 6.476
ROE Pre-merger 7.87 0.134 -5.012 0.063 Not Significant
Post-merger 12.15 1.344 CAR Pre-merger 13.50 0.614 - 0.795 0.510 Not Significant
CAR Pre-merger 17.47 2.744 -0.634 0.640 Not Significant Post-merger 14.18 0.854
Post-merger 18.63 0.156 Spread Pre-merger 3.72 0.085 10.275* 0.009 Significant
Spread Pre-merger 2.20 0.007 -0.95 0.516 Not Significant
Post-merger 2.39 0.276 Post-merger 2.60 0.108
OC/TA Pre-merger 1.74 0.177 0.563 0.674 Not Significant OC/TA Pre-merger 2.03 0.307 2.744 0.111 Not Significant
Post-merger 1.65 0.049 Post-merger 1.64 0.223
Profit per Pre-merger 10.00 1.414 -1.087 0.473 Not Significant
employee Post-merger 11.25 0.212 Profit per Pre-merger 3.31 0.694 - 0.720 0.546 Not Significant
employee
Growth rate Pre-merger - 4.66 – – – – Post-merger 3.99 1.292
of assets Post-merger 9.76 – Growth rate Pre-merger 27.70 15.39 1.693 0.340 Not Significant
*Significant at the 5% level. of assets
No calculation for growth of total assets since data is not available for 2013–14, only mean Post-merger 22.33 19.87
is worked out. *Significant at the 5% level.