Evaluation of Pre Versus Post Merger of Indian Banks
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Proceedings of the International Conference on Industrial Engineering and Operations Management Dubai, UAE, March 10-12, 2020 Evaluation of Pre versus Post Merger of Indian Banks Prabhavathi Kalshetty Research Scholar Department of Management Ballari Institute of Technology and Management Visveswaraya Technological University Karnataka, India [email protected] Dr. Shekar Babu PhD Professor & Founding Head Department of Management Amrita Vishwa Vidyapeetham Karnataka, India [email protected] Prof. Gurrum Prasad Dinesh PhD Chairman Department of Management Vijayanagara Sri Krishnadevaraya University Karnataka, India [email protected] Abstract Over the year’s Indian economy has been going through continuous fluctuations due to the recent government reforms. With reforms are various structural levels, banks were also looked into detail. Even though the Indian banking sector are known for maintaining stability at International levels, due to operational issues there has been several concerns at the Indian Banks which has led to issues like Net Performance Assets (NPA). The merger is a combination of two or more companies with an objective of wealth maximization to add more value with a stand of one. The aim of the present paper is to evaluate the pre and post performance and NPA of the merging banks in the Indian banking industry. The financial performance evaluation was based on various financial metrics like profitability and liquidity. In addition to financial performance, NPAs are evaluated using various aspects of bank’s financial parameters like Net profit, Loans, Advances, Net NPA (NNPA), Gross NPA (GNPA), Enterprise value, Book value, Market capitalization, Deposits, Deposits (CAGR%), CASA deposits, Return on Equity (ROE) and Return on Assets (ROA). The study has employed on a sample size data of 12 banks, where all of them are government owned banks and the data has been collected over a period of three years from 2016 to 2018. Through an extensive literature review the researchers explored that through the comparison of financial performance it is evident that the amalgamation of the banks into a single bank is positively affected in the future. The mergers of big banks may fructify over the next 18-24 months. Though the integration is long-drawn it will disrupt lending. There will be issues of book dilution, which will happen due to government infusing capital at low valuations and issues additional shares to investors of amalgamated banks. The researchers through their © IEOM Society International 845 Proceedings of the International Conference on Industrial Engineering and Operations Management Dubai, UAE, March 10-12, 2020 insights show how the “Big-Four” category of banks after the mergers are performing through various metrics. The researchers through their statistical analysis shown key takeaways. The merger of 12 banks into 4 categories or groups show mixed and interesting results. The results show how a strong bank will make the merger strong, trade on similar valuations, less painful to investors, lead dilution in capital. Another result show how a weak anchor bank is equal to that of an added challenge. How an elevated GNPA of combined bank would be elevated and how the merged entity would trade at a premium valuation and further dilution. In another result, the results show how a lead anchor bank which is already under stress will make the merger more complex. On the advances side all banks have a similar mix of loan portfolios. Hence, the loan mix of the combined entity will have a minimal change. For all the 4 categories of banks the cost synergies would come into play if the infrastructure is rationalized. The researchers critically evaluated the NPA of each of the 12 banks seperately and then the each of the 4 groups which were merged. Hence, a pre-merger and a post-merger NPA was evaluated. The researchers did not look into their employees or locations. These factors were not included into the study. Keywords Banks, Merge, Net Performance Asset, Profit, Performance 1. Introduction Banking sector in India has a long journey from a regulated environment with different parameters like branch, location, deposits, loans and advances, profits etc. to highly competitive world by implementation of reforms like mergers and acquisitions since 2012 (Devarajappa 2012). After 1990s, the number and the volume of the bank mergers and the acquisitions increased with the introduction of Monetary Union. In this respect, the studies suggests that the efficiency can improve by bank mergers (Humphrey and Vale 2004). Bank merger is a situation of previous individual banks are consolidated into one bank (Piloff and Santomero 1999). When an independent bank looses its charter and becomes a part of another bank with one headoffice and unified branch network then it is known as merger (Dario Focarelli 2002). A rationale for the merger could be that some efficiency gains may take longer time to accrue (Focarelli and Panetta 2003). Merger and acquisition is one of the major aspect of corporate world in financial services. It is defined as the combination of the one or more companies to form one with an objective of wealth maximization (Altunbas and Ibanez 2004). Companies evaluate in different ways taking the opportunities through a route of merger or acquisition as it is believed that two separate companies together create more value than being individual (Kaur 2015). Through the word merger the banks and financial intermediaries are increasingly consolidating as the reasons behind this may be for managing the risks and obligations to meet the regulatory requirements and taking the advantage of combining (Gaikwad and Bhaduri 2014). 2. Overview of Banking Industry in India From the past years Banking industry is consolidated to gain the benefits through mergers and acquisitions. Bank is a financial institution, authorized by the central and the state government to trade in terms of money by accepting deposits, providing loans and investing in securities. Economic growth, expansion of the economy and providing funds are the major roles of the banks. The banking sector in recent times have undergone lot of changes in regulations and the effects of globalization which affected both strategically and structurally. Out of which one such strategy is merging which is very profitable. There have been several reforms and most successful merger, like New Bank of India (NBI) merging with Punjab National Bank (PNB). This was the first merging between the nationalized banks and then there were a lot of mergers in banking industry which gave the strong decision that the mergers are beneficial in an industry (Kaur 2015). Merger can be defined as unifying of two players into a single entity or a process of combining two business entities under the single management (Devarajappa 2012). © IEOM Society International 846 Proceedings of the International Conference on Industrial Engineering and Operations Management Dubai, UAE, March 10-12, 2020 The largest and the recent merger in the history of banking was of State Bank of India with its five (5) associates namely Bharatiya Mahila Bank , State Bank of Bikaner and Jaipur, State Bank of Patiala, State Bank of Hyderabad, State Bank of Mysore, and State Bank of Travancore (Kaur 2015). Mergers and acquisitions are more valuable than the pre-merger entities specially in the areas of market power, efficiency improvement and diversification (Piloff and Santomero 1999). After the introduction of financial sector reforms starting early nineties, consolidation of banks assumed significance. The process also gained momentum after the Narasimham Committee-1 (1991), which put forward the broad pattern of banking sector (3 or 4 large banks, 8 to 10 national banks, local banks and rural banks). The consolidation process was also reiterated by the S.H.Khan committee(1997), Narasimham committee-II (1998), Raghuram Rajan committee(2009), Committee on Fuller Capital Account Convertibility(2006)and Committee on Financial Sector Assessment(2009). All these committees viewed that restructuring of Indian banking system is required and this restructuring should be market driven based on viability and profitability considerations brought about through a process of M&A (Devarajappa 2012) Bank Mergers: 1995-2000. A very important merger of the early 1990s was the merger of two (2) nationalised bank viz. Punjab National Bank with New Bank of India. The New Bank of India had incurred losses during the last four proceeding years. With the introduction of prudential accounting standards and new NPA norms, the financial position of the New Bank of India further worsened. The cumulative losses and the erosion of deposits weakened the liquidity position of New Bank of India and threatened its existence. Thus for the interest of the depositors the RBI took a decision in September 1993 for merging the New Bank of India with PNB. In January 1996, the Kashinath Seth bank ltd. was also merged with SBI. The Punjab Cooperative bank ltd. and Doab Bank ltd. were also merged with Oriental Bank of Commerce ltd. on April 8, 1997. In June 1999, Bareily Corporation Bank ltd. merged with Bank of Baroda. Bank Mergers: 2000-2005. The year 2001 witnessed the merger of the 57 years old Tamil Nadu based private sector commercial bank “Bank of Madura Ltd.” with a new generation private bank ICICI Bank as per the approval of RBI since March10, 2001. On 26th April 2002, the RBI also accorded approval for merger of ICICI Ltd. with ICICI Bank. The Benares State Bank ltd. was also merged with Bank of Baroda on July 19, 2002.The Nedungadi Bank which was incurring huge losses was also placed under moratorium for a period of 3 months from November 2, 2002 and the scheme of amalgamation of Nedungadi Bank Ltd. with Punjab National Bank came into effect on February 1, 2003. The Global Trust Bank (GTB), which was granted license in 1994, began showing adverse growth in 2002. The RBI instructed the bank to adopt prudential norms for reducing its adverse futures.