Practice:M&A

=MEGERS AND ACQUISITIONS IN INDIAN BANKING SECTOR= In this chapter, we present a brief history of commercial banking in India, the need for mergers and acquisitions in the banking industry, an analytical and empirical review of merger experiences in Indian banking. Then we shall study a brief overview of the select cases of bank mergers and examine the impact on shareholder’s wealth with the help of event study analysis of stock prices of the respective bank mergers. We will also consider the relevance of consolidation trends in the banking sector of the Indian economy. =HISTORY OF COMMERCIAL BANKING IN INDIA= The banking industry during the pre-independence period can be traced as far back as 1806 with the establishment of Bank of Bengal. At that time the industry was in a state of turmoil. Under the British influence, Calcutta witnessed a surge in trading activities. This gave rise to a number of banking establishments during the period. However, several banks, set up in order to finance trading, went out of business. For instance, Union bank, formed by Indian merchants, failed due to economic recession during 1848-49 resulting in depositors losing money. Such events resulted in shifting the reigns of the industry into the hands of Europeans till the early twentieth century.

During the period from 1906 to1911, several banks were set up based on the principles of the Swadesi movement. The movement inspired Indian businessmen and politicians to set up banks for the Indian community and many new banks were launched to promote trade and finance in various societal groups. Some of the prominent ones among these are Bank of India, Corporation Bank, Bank of Baroda, Indian bank, Canara Bank, and Central bank of India. The Bank of Bengal, along with its sister banks, Bank of Bombay and Bank of Madras, set up by British East India Company, merged in 1921 to and the Imperial bank of India came in to existence.

The organised banking in India is more than two centuries old. Till 1935 all the banks were in private sector and were set up by individuals and/or industrial houses which collected deposits from individuals and used them for their own purposes. In the absence of any regulatory framework, these private owners of banks were at liberty to use the funds in any manner, they deemed appropriate and resultantly, the bank failures were frequent.

After establishment of the Reserve Bank of India in 1935 during the British rule, to function as Central Bank of the country Indian banking system, over the years has gone through various phases. Earlier to creation of RBI, the central bank functions were being looked after by the Imperial Bank of India. With the 5-year plan having acquired an important place after the independence, the Govt. felt that the private banks may not extend the kind of cooperation in providing credit support, the economy may need. In the middle of the decade of fifties, it was taken over by the RBI and renamed as the State Bank of India. The political and economic ups and downs experienced during 1914-1945 India went through several ups and downs politically and economically and the effects were felt in the banking sector too. The World Wars disrupted banking activities of the nation and almost 94 banks failed during this period. After 1947, however, banking activities flourished.

The organised banking in India is more than two centuries old. Till 1935 all the banks were in private sector and were set up by individuals and/or industrial houses which collected deposits from individuals and used them for their own purposes. In the absence of any regulatory framework, these private owners of banks were at liberty to use the funds in any manner, they deemed appropriate and resultantly, the bank failures were frequent.

The Indian banking industry started taking shape after India’s independence in 1947.After the partition of India, the government took drastic steps to regulate the banking industry. For example, in 1948, additional powers and authority were vested in the Reserve bank of India to monitor the functioning of the entire banking system. The passing the Banking regulation acts in 1949, empowered RBI to further regulate, inspect, and control Indian banks. Thus the move towards State ownership of banks started with the nationalisation of RBI and passing of Banking Companies Act 1949.

In 1954 the All India Rural Credit Survey Committee submitted its report recommending creation of a strong, integrated, State-sponsored, State-partnered commercial banking institution with an effective machinery of branches spread all over the country. The recommendations of this committee led to establishment of first Public Sector Bank in the name of State Bank of India on July 01, 1955 by acquiring the substantial part of share capital by RBI, of the then Imperial Bank of India. Similarly during 1956-59, as a result of re-organisation of princely States, the associate banks came into fold of public sector banking.

Another evaluation of the banking in India was undertaken during 1966 as the private banks were still not extending the required support in the form of credit disbursal, more particularly to the unorganised sector. Each leading industrial house in the country at that time was closely associated with the promotion and control of one or more banking companies. The bulk of the deposits collected, were being deployed in organised sectors of industry and trade, while the farmers, small entrepreneurs, transporters, professionals and self-employed had to depend on money lenders who used to exploit them by charging higher interest rates. In February 1966, a Scheme of Social Control was set-up whose main function was to periodically assess the demand for bank credit from various sectors of the economy to determine the priorities for grant of loans and advances so as to ensure optimum and efficient utilisation of resources. The scheme however, did not provide any remedy. Though a number of branches were opened in rural area but the lending activities of the private banks were not oriented towards meeting the credit requirements of the priority/weaker sectors.

On the recommendations of All India Rural Credit Survey Committee, SBI Act was enacted in 1955 and Imperial Bank of India was transferred to SBI. Similarly, the conversion of 8 State-owned banks (State Bank of Bikaner and State Bank of Jaipur were two separate banks earlier and merged) into subsidiaries (now associates) of SBI during 1959 took place. In 1962 the Deposit Insurance Corporation was established to provide insurance cover to the depositors.

During 1968 the scheme of ‘social control’ was introduced. On July 19, 1969, the Government promulgated The Banking Companies (Acquisition and Transfer of Undertakings) Ordinance 1969 to acquire 14 bigger commercial banks with paid up capital of Rs.28.50 crore deposits of Rs.2629 crore, loans of Rs.1813 crore and with 4134 branches accounting for 80% of advances. Subsequently in 1980, 6 more banks were nationalised which brought 91% of the deposits and 84% of the advances in Public Sector Banking. During December 1969, the RBI introduced the Lead Bank Scheme on the recommendations of F K Nariman Committee. Keeping in view the objectives of nationalisation, PSBs undertook expansion of reach and services. Resultantly the number of branches increased 7 fold (from 8321 to more than 60000 out of which 58% in rural areas) and no. of people served per branch office came down from 65000 in 1969 to 10000. Much of this expansion has taken place in rural and semi-urban areas. The expansion is significant in terms of geographical distribution. States neglected by private banks before 1969 have a vast network of public sector banks. By 1990, the PSBs including RRBs, accounted for 93% of bank offices and 87% of banking system deposits.

In the post-nationalisation period, there was substantial increase in the number of branches opened in rural/semi-urban centers bringing down the population per bank branch to 12000 appx. During 1976, RRBs were established (on the recommendations of M. Narasimham Committee report) under the sponsorship and support of public sector banks as the 3rd component of multi-agency credit system for agriculture and rural development. The 1970s and 1980s saw the high growth rate of branch banking net-work. The Service Area Approach was introduced during 1989.

In these five decades since independence, banking in India has evolved through four distinct phases: Foundation phase can be considered to cover 1950s and 1960s till the nationalisation of banks in 1969. The focus during this period was to lay the foundation for a sound banking system in the country. As a result the phase witnessed the development of neces sary legislative framework for facilitating re-organisation and consolidation of the banking system, for meeting the requirement of Indian economy. A major development was transformation of Imperial Bank of India into State Bank of India in 1955 and nationalisation of 14 major private banks during 1969. Expansion phase had begun in mid-60s but gained momentum after nationalisation of banks and continued till 1984. A determined effort was made to make banking facilities available to the masses. Branch network of the banks was widened at a very fast pace covering the rural and semi-urban population, which had no access to banking hitherto. Most importantly, credit flows were guided towards the priority sectors. However this weakened the lines of supervision and affected the quality of assets of banks and pressurized their profitability and brought competitive efficiency of the system at low ebb.

The consolidation phase started in late 80s and more particularly during early 90s, with the submission of report by the Narasimham Committee on Reforms in Financial Services Sector during 1991.

'Consolidation phase': The phase started in 1985 when a series of policy initiatives were taken by RBI which saw marked slowdown in the branch expansion. Attention was paid to improving house-keeping, customer service, credit management, staff productivity and profitability of banks. Measures were also taken to reduce the structural constraints that obstructed the growth of money market. Reforms phase The macro-economic crisis faced by the country in 1991 paved the way for extensive financial sector reforms which brought deregulation of interest rates, more competition, technological changes, prudential guidelines on asset classification and income recognition, capital adequacy, autonomy packages etc. The thrust of the ongoing banking sector reforms has been to improve productivity and efficiency of the industry on a sustained basis. Consolidation of banks through mergers and acquisitions (M&A) is the next step in the industry’s advancement.