AEGAEUM JOURNAL ISSN NO: 0776-3808
IMPACT OF MERGERS IN BANKING INDUSTRY : A CASE STUDY OF KOTAK MAHINDRA BANK Dr S. B. Patkar Key words : Mergers, liquidity, profitability, Reforms,
INTRODUCTION Bank plays a vital role in the economic development of the country. Trade, commerce and industry are mostly depend upon the banks for all financial transactions through various Product and services rendered by Banks. The categorisation of banking industry in India can be made in three phases Such as Pre Nationalisation, post Nationalisation and post Liberalisation period. In the pre- nationalisation period there were presence of private sector banks up to 1969 and later on there were nationalisation of the banks took place. The post nationalisation era was started in 1969 with nationalisation 14 commercial banks and later on in 1980 with addition of six more commercial banks .The significance of the nationalised banks were that the entire share holding were belongs to government. The government did not had the control over the disbursement of funds for the priority sector during the pre nationalisation period and in order to have more control over the fund disbursement the then government took decision of nationalisation of 14 commercial banks and they were considered as public sector banks. The government started disbursement fund for the priority sector lending and contributed for economic development of the country. The economic reforms was introduced in 1991 and market was opened for the entire globe. The Indian business units were able to start their business outside the country and vice versa and banking industry was not an exception to that. The Government of India has appointed Narasimhan committee to review the status of the banking industry India and to recommend the changes required so that our banks can face the challenges at global level.. The committee had recommended various measures and mergers and consolidation of the banks was one of the measure. The objective behind was to reduce small banks and making few banks as major banks so that they can compete with the large banks in the world. After introduction of the economic reforms there was significant changes occurred in Banking industry in India . The product and services were diversified by establishing separate
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subsidiaries or through departmentally and concentrated on the fee based based income services rather than fund based services.. The major significant changes were the development of technology or introduction of technology based products and services.
Mergers in the Banking industry Mergers in banks is not recent phenomena . It has started during the pre- nationalised period between private banks and merger process has been continued till today. In 1969 the Prime Minister Indira Gandhi initiated the process of nationalization of banks. Since then a number of mergers have taken place. From 1991 to 1999 there were mergers of 10 banks consisting of public sector with public sector banks and from 2000 to 2009 there were mergers of 16 banks in that maximum mergers were from private Banks with private banks and from 2010 to 2017 there were mergers of State Bank of India banks with their associate banks. One of the merger between private c bank of Kotak Mahindra Bank with ING Vsysa Bank was taken for the study by the researcher. After introducing reforms in 1991 the Government of India has appointed committees such as Narasimham committee , joint parliamentary committee, b=verma commiteee to assess the changes and improvement required in banking industry in India. REVIEW OF LITERATURE V. Mahesh Yadav ( 2019) studied the financial performance of SBI before and after liberalisation with an objectives to analyse the present position of State Bank of India after Merger.Ishwarya (2019) found that the pre- and post merger and acquisition of selected banks in India have no greater changes in profitability ratio and also decline in performance .Ramnath H.R, D.M Subramanyam and Dr U.N Laksham(2019 observed that performance of SBI in terms of number of branches and number of employees has shown consistent growth 1999 to 2018. Jai Bansal And Dr Gurudatt Kakkar(2018) observed that the size of SBI will increase and scope for SBI to be in the top 50 banks for the world and acquisition is a boon for the industry in the times of need. Kantamaneni Hema and others ( 2018) The study concluded that merger is useful strategy, through this bank can expand their base, increases profitability ,liquidity and efficiency but the overall growth .Saurabh Babel( 2017) highlighted the benefits derived from the consolidation. and observed that
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the mergers of Associate Banks of SBI( SBBJ, SBP, SBM,SBT ,SBH d Bhartiya Mahila Bank) into SBI has made SBI to rank in the top 50 banks in the world.K Abirami ( 2017) found that the EVA of Indian Overseas Bank had showed a significant change in the shareholder value after the merger choice taken by bank in 2006-07. Dr ( mrs) Prashanta Athma and Mrs A.Bhavani( 2017) observed that during pre-nationalisation period of 46 mergers was the restructuring of weak banks in order to protect the customers interest and most of these mergers were between private banks Dr Veena K.P and Prof S.N Pathi (2017) examined the pre and post performance with respect to NPA and found Net NPA to Net Advances , Gross NPA to Gross Advances ,Net NPA to total Assets post merger performance was high and improved compared to the pre merger performance of Kotak Mahindra Bank.Dr Sanjeev Dhawan ( 2016 observed that consolidation with global players can give the benefits of global opportunities in funds mobilisation, credit disbursal, investment and rendering financial services. Dr ( smt) A.N .Tamragundi and Devajappa S.( 2016) examines the impact of merger on performance of selected commercial banks in India from three perspective such as physical, financial and share price performance .Manjunath Narasagondar(2016 concluded that the concept of merger and acquisitions can also risky process but overall the mergers is definitely contributing to the economy especially in the banking sector domestically as well as on the global level.Gurbaksh Singh and Sunil Gupta (2015) found that mergers and acquisitions of banking sector has vital role and global phenomenon in the world wide. Parveen Kumari( 2014) observed that all the merged entities after mergers and acquisitions are continuously growing as compared to before mergerDr ( Mrs ) Prasahnta Athma and Mrs A. Bhavani observed in the study that overall growth is observed in the performance of both the banks in key parameter. Suresh kumar (2013) found that financial integration leads to reduced financial cost, increases market competition, better use of technology and reduces the economic dependence Devarajappa S ( 2012) found in the results that after merger the financial performance of the banks have increased. RESEARCH GAP The researcher has made attempt to study the impact of the merger on the performance of the bank during the pre-merger and post merger period on various financial parameters . The researcher has taken the merger of the private bank with the private banks as the case study with 10 years study period .
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The review of literature points out the fact that studies have been made on mergers considering the overview, productivity, performance based etc.. However the detail study on the profitability, liquidity and efficiency of the select transferee bank up to 2019 has not been done . Hence the study is undertaken to fill the gap . Significance of the study The present study will help all stakeholders in the banking industry. The major stakeholders is the customer of bank . customers will get the advantage of the better product and service at the competitive price from transferee bank. The investor will get true financial picture of the bank hence it will help them to take a decision for buying and selling of shares. The study will also help to banker to assess their decision in mergers. Objectives of the study 1) To study the merger and acquisition in Indian Banking Industry during the pre and post liberalization period. 2) To study the impact of the mergers on the profitability , Liquidity and other financial parameters of Kotak Mahindra Bank during pre and post merger period. 3) To suggest measures for effective merger in Banking industry. RESEARCH METHODOLOGY The study is based on secondary data collected from journals, reports and website. The current study choose banks in Private sector which has merged recently. The study is conducted to assess impact of mergers and acquisitions on the financial performance of selected bank considering the five years before the merger and five years after merger. The selected bank is Kotak Mahindra Bank which had merger with ING Vysya in Nov 2014. Impact on financial performance is assessed from 2009-10 to 2018- 19 with five years before merger and fiver years after merger. The financial performance of the Kotak Mahindra is measured before and after merger by using the various ratios. The researcher conducted various financial, profitability and efficiency ratios. It has been presented in the tabular form and justification in the analysis part. The merger of the following two private banks were selected for the study. The total study period has been classified into two section as premerger period from2010 to 2014 ( five years ) and from 2015 to 2019 as post
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merger period. The above ratio has been calculated with pre merger and post merger period to assess the impact of merger on performance, liquidity and efficiency of the banks during the pre merger and post merger period. ANALYSIS AND DISCUSSIONS Table 3 RATIOS OF KOTAK MAHINDRA BANK
Year Profit Return Liquid Operatin Return Liquid Margin on Asset to g Profit on Asset Asset to Ratio equity Deposit ratio total Asset 2010 43.25 12.51 9.60 3.46 1.7 6.14 2011 61.73 12.05 8.44 2.60 1.8 4.85 2012 65.55 13.05 6.83 2.52 1.8 4.01 2013 63.09 14.40 7.22 2.57 1.8 4.40 2014 58.32 7.87 11.24 2.94 1.8 7.58 Aver 58.38 11.97 8.66 2.81 1.78 5.39 age Post Merg er 2015 62.26 8.42 9.22 2.82 2.0 6.51 2016 51.71 6.26 8.36 2.10 1.2 6.03 2017 56.99 8.86 16.25 2.78 1.7 11.92 2018 57.05 8.08 12.66 2.70 1.7 9.20 2019 58.27 8.34 13.84 2.67 1.7 10.01 Aver 57.25 7.99 12.06 2.61 1.66 8.73 age
Source : Compiled from Annual Reports of Kotak Mahindra Bank for the year 2010 to 2019 Profit Margin ratio Profit Margin ratio measures banks ability to control expenses and its ability to produce net income from its operating income( revenue) . It has been observed in the table 3 that the average profit margin ratio during the pre merger period has recorded at 58.38 percent and after merger it was recorded at 57.25 percent which has reduced during the post
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merger period. Thus its ability to produce net income from the operating profit has reduced in post merger period. Return on Equity Return on Equity indicates the profit that business unit is generating for its equity investors. The ratio is widely used by equity investors in their decision making and higher value of ratio is indicative of higher profitability and productivity. It has been observed in the table that the average return of equity ratio during the pre merger period has been recorded at 11.97 percent and post merger period it is recorded at 7.99 percent .Thus it shows that the return on equity has been reduced in post merger period. Operating Profit ratio The operating profit is very important ratio for any organization. It shows the profit earned by the organization during the year .Higher the profit shows the efficient use of the all resources and decision making of the management. The customers of banks trust the bank depending upon the profitability of the bank. The ratio is arrived by dividing operating profit by total Asset. The earning quality for the bank is directly proportional to this ratio. It has been observed in the table that the average operating ration of Kotak Mahindra Bank before merger was 2.81 percent and after the merger it recorded 2.61 percent which is lower than the pre merger period
Return on Asset Return on Asset gives an indication as to how much profit a business unit is able to generate per unit of its assets. Higher value of this ratio is indicative of higher profitability. It has been observed from the table that the Average ROA ratio of bank during the pre merger period has been recorded as 1.78 percent and during the post merger period it was recorded as 1.66 percent .Thus it shows that the return on the total asset has decreased after merger. Liquidity in Banks Liquidity is very important to obtain the financial performance of banking industry and to sustain and enhance the position for banks in the banking sector. Liquidity means the ability of bank in converting an asset in to cash .In order to meet all maturing unsecured debt obligations ,liquidity should be sufficient enough through out year . Liquid asset to total asset and Liquid asset to total deposit is used to measure the liquidity status of the bank. Liquid Asset to Total asset
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It determines the proportion of the liquid asset in the total Asset. It has been observed in the table that the average liquid asset ratio during the pre merger period was recorded at5.39 percent and after merger the average ratio was recorded at 8.73 percent .Thus it shows that the liquid asset of banks has increased. Higher liquidity negatively affects the profit of the bank . Liquid Asset to Deposit It determines the proportion of the liquid asset from the total deposit received from the depositors. In the table it was observed that the average liquid asset to total deposit ratio was recorded at 8.66 percent during the pre merger period whereas after the merger it was recorded at 12.06 percent. Thus it shows that the liquidity has increased in post merger period. It has direct impact on the profitability of the bank. Table 4 FINANCIAL RATIOS OF KOTAK MAHINDRA BANK
Year Investm Net Gross Net NPA Interest Non ent - Interest NPA ratio income to Interest Deposit income ratio total asset income to ratio Ratio total Asset 2010 52.38 4.96 2.4 1.3 8.69 1.67 2011 58.51 4.41 2.0 0.7 8.46 1.24 2012 55.96 3.82 1.6 0.6 9.41 1.48 2013 55.58 3.83 1.6 0.6 9.60 1.38 2014 43.14 6.47 2.0 1.1 13.68 6.03 Averag 53.11 4.69 1.92 0.86 9.96 2.36 e Post Merger 2015 37.48 5.99 1.9 0.9 12.56 7.68 2016 36.97 3.58 2.4 1.1 10.61 3.96 2017 28.63 3.78 2.6 1.3 10.40 5.43 2018 33.51 4.78 2.2 1.0 9.48 5.16 2019 31.51 4.72 2.1 0.8 9.58 5.13 Averag 33.62 4.57 2.24 1.02 10.52 5.47 e Source : Compiled from Annual Reports of Kotak Mahindra Bank for the year 2010 to 2019
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Ratio of Interest Income to Total Asset It has been observed from table that the average ration of before merger of Kotak Mahindra Bank was 9.96 percent to Total Asset and post Merger period has increased i.e 10.52 percent . Thus it indicates that the during the post merger period the interest income of the bank has enhanced. It shows that during the post merger period the loans and advances has increased. Non – Interest Income to Total Income It has been observed from the table that the Average non – interest income ratio for the first five year period is 2.36 percent and post merger period it is 5.47 percent thus it shows that the non-interest income of the bank has increased during the post merger period. Increase in Non – interest income will enhance the total Asset turnover of commercial banks. Net Interest Income Ratio Bank earned interest on loans and advances provided to customers and at the same time bank have to pay the interest on the amount received as deposits. The difference in the interest earned and paid is the net interest income and that is the net income of the Bank. It has been observed in the table that the Average net income ratio during the pre – merger period is recorded as 4.69 percent and after the merger it has been recorded as 4.57 percent . Thus it has been reduced from the pre merger period to post merger period. Investment – Deposit Ratio The investment deposit ratio measures the efficiency of the management in converting the available deposit into investment.. It was observed in the table that the average Investment -deposit ratio was 53.11 before merger and after merger the ratio was recorded 33.62. Thus it is concluded that the investment deposit ratio has been reduced in the post merger period. The bank was converting more deposit into investment during the pre merger period than after the merger. The ratio is calculated by using the following formula Gross NPA ratio The gross NPA is calculated by Gross NPA to Gross Advances . Non performing Asset of Kotak Mahindra Bank during at the pre merger bank has recorded as 1.92 percent and after merger it has recorded 2.24 percent . Thus it shows that the Gross NPA during the post merger period has increased.
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Net NPA Ratio The net NPA is calculated by Net NPA to Net Advances . The Net Non performing Asset of Kotak Mahindra bank before Merger has recorded at 0.86 percent and after merger recorded at 1.02 percent .Thus it shows that the Net NPA during the post merger period has increased. Table 5 RATIOS OF KOTAK MAHINDRA BANK
Year Interest Deposit Capital Deposit Credit - expens to Total Adequa Burden Burde s to deposit e Ratio asset cy ratio to total n to Total ratio Asset Intere Liabiliti ratio st es Ratio Incom e ratio 2010 35.97 63.80 18.4 1.49 17.23 63.80 86.97 2011 41.69 57.54 19.9 1.80 21.38 57.54 100.23 2012 51.23 58.68 17.5 1.30 13.86 58.68 101.40 2013 52.54 60.97 16.0 1.25 13.04 61.02 94.98 2014 36.55 67.44 18.8 1.90 13.92 48.32 89.76 Aver 43.59 61.68 18.12 1.54 15.88 57.87 94.66 age Post Merg er 2015 32.44 70.61 17.2 1.55 11.99 50.38 88.37 2016 33.82 72.11 16.3 1.34 16.73 57.57 85.59 2017 28.16 73.36 16.8 1.20 14.61 56.99 86.44 2018 32.11 72.71 18.2 0.93 9.87 57.04 88.09 2019 33.02 72.35 17.5 1.00 10.44 57.16 91.06 Aver 31.91 72.22 17.2 1.20 12.72 55.82 87.91 age Source : Compiled from Annual Reports of Kotak Mahindra Bank for the year 2010 to 2019
Credit Deposit ratio Credit -Deposit Ratio is a commonly used statistics for assessing banks liquidity by dividing banks total loan by its total deposit. It measures the
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efficiency of the management in converting the available deposits into advances. The efficiency is positively related to the value of the ratio. It was observed in the table that before the pre merger period the bank credit deposit ratio was 94.57 percent indicates that out of Rs 100 deposited Rs94.57 is advanced as loans whereas after the merger it has reduced to 87.91 percent . Higher ratio indicates higher amount of deposit received from the customer which were converted in to advances. Large amount of revenue is received from the interest earned. Higher the advances higher will be the revenue to Bank. Higher advancing loans from the deposit indicates that bank may not have enough liquidity to cover any unforeseen fund requirements. Capital Adequacy Ratio Capital Adequacy ratio measures the amount of a Banks Capital in relation to its risk weighted credit exposures and is most widely used to measures soundness of bank. It determines the capacity of a bank to withstand the unexpected losses arising out of its operation. It has been observed in the table that the Average Capital Adequacy Ratio during the pre merger period was 18.12 percent and after merger it was recorded at 17.2 . Deposit to total Asset ratio The deposit total Asset shows proportion of deposit received from the customer to total Asset of the bank . Total assets includes fixed asset ,current asset and investment made by bank in various securities. Higher the total asset stronger the bank. Deposit received by bank from customers are liability of bank which need to be returned after specific period. Bank merged to have enough asset to meet the liabilities. Deposits should be lesser than the assets of bank. The average ratio of deposit to total Asset during the premerger period was recorded at 61.68 percent and after merger the ratio was recorded at 72.22 percent. Thus it shows that the ratio has been increased in the post merger period. Interest Expense ratio Interest expenses constitute the major part of the total expenses incurred by any bank .Interest is paid on the amount deposited by customer on term deposits, fixed deposit and other account such as saving deposits ,recurring deposits etc. The average ratio during the pre merger period has been recorded at 43.59 percent and during the post merger period it has recorded 31.91 percent which has been reduced in the post merger period Ratio of Burden to Total Assets
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The difference between Non- interest expenses and Non- interest income of Bank is called burden. It measures the burden as percentage of Total assets .If the burden is more than it adversely affect profit It has been observed in the table that the burden ratio to total asset has been recorded at 1.54 percent and during the post merger period it has been recorded at 1,20 .Thus it shows that during the post merger period it has been reduced. Ratio of Burden to Interest Income The difference between Non- interest expenses and Non- interest income of Bank is called burden. The ratio Burden to interest income measures the burden as a percentage of income .Higher value of ratio adversely affect profit. It was observed in the table that during the pre merger period the ratio was recorded at 15.88 percent and in the post merger period it has recorded at 12.72 percent . Deposits to Total Liabilities Ratios The total deposit to total Liabilities ratio measures the total deposit as a percentage of total liabilities. the higher this ratio indicates that a bank received high deposits and its liquidity is high. It was observed in the table that the average deposit – liabilities ratio during the pre merger period was recorded at 57.87 percent and after the merger it recorded at 55.82 percent . Thus it shows that the deposit has been increased during the post merger period. Deposit which are received from customer are of term deposit and fixed deposit which are required to return after specific period. Findings From the analysis the following findings has been derived 1) Profit Margin ratio has been increased in post merger period whereas the operating profit during the post merger period is reduced. 2) Return on equity and Return of Assets in post merger period is reduced indicating less efficient in utilizing the resources. 3) The liquidity of the banks with reference to deposit and total Asset has been increased in post merger period. Increase in liquidity reflect on the profitability of the bank. 4) Gross NPA and Net NPA in post merger period has been increased indicating poor recovery of debts. 5) Investment – deposit ratio has been reduced during the post merger period indicating less investment made from the deposit funds .
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6) Net interest income ratio has been reduced in post merger period 7) Interest income ratio and Non – interest income ratio and income expense ratio has been reduced in post merger period. 8) Deposit to total Asset has been increased in post merger period whereas deposit to total Liabilities has been reduced in post merger period. 9) Burden to total Asset ad Burden to Interest income ratio has been reduced in post merger period 10) Capital Adequacy ratio and Credit to deposit ratio in post merger period has been reduced.
Conclusion and Suggestions Mergers and Acquisition in Banking industry has started during the pre – nationalization period and continued till today. There has been merger between private and private, private and public and public sector with public sector banks. The merger between two private banks kotak Mahindra Bank and ING Vysya has resulted mix trend with increase in profit margin ratio and liquidity whereas reduction in interest income and non interest income. The merger also increased the NPA of the Bank. The government should encourage the merger of the strong banks with strong banks rather than weak banks so that the benefits of the merger will pass onto stakeholders in Banking process such as customers, stakeholders , employees and government. Recommendation 1) Kotak Mahindra Bank should take corrective measure in reducing the NPA of the Bank. 2) The bank also need to take some measures to reduce the liquidity , since it has direct impact on the profitability of the banks. REFERENCES 1) Dr ( Mrs) Prashanta Atham and A. Bhavani Mergers in Banking sector in India : An analysis of Pre and post merger performa. SBI abd HDFC bank , IOSR Journal for Business and Management (IOSR-JBM) e- ISSN : 2278-487, P- ISSN : 2319-7668, PP 07-16 2) Dr ( Mrs) Prashanta Atham and A. Bhavani Mergers in Banking sector in India : An analysis, Vol 6, No 4 Oct- Decem 2017 , Sumedha Journal of Management
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3) Saurabh Babel (2017) Need of Consolidation in Indian Banking Industry ISSN( Print) 2393-8374 ( online) 2394-0697, volume 4 Issue 7 2017 4) Jai Bansal and Dr Gurudatt Kerkar( 2018) A research on the analysis of merger of SBI with its fie associate banks and Bhartiya Mahila Bank International Journal of Science technology and management, volume no 7 Issue No 12 December,2018 5) Devarajappa S. (2012) ,Mergers in Indian Banks: A Study on mergers of HDFC bank ltd and Centurion Bank of Punjab Ltd. , International Journal of Marketing, financial Services and Management research ,vol 1 Issue 9 Sept.2012 ISSN 2277 – 3622 6)Sureshkumar (2013) Impact of Bank Mergers on the efficiency fo Banks: A study of mergers of Bharat Overseas Bank with Indian Overseas Bank , vol 3 No 12 ,ISSN 2222- 6990, 2013 7)V.Mahesh ( 2019) A study on Financial Position of SBI after Merger, International Journal of Research in Applied Science and engineering Technology, ISSN : 2321-9653, Volume 7 Issue XI Sept ,2019 8) Ishwara ( 2019) A study on Mergers and Acquisition of Banks and a case study on SBI ad it associates, Conference proceeding published in International Journal of trends in research and development (ISSN) ,2394- 9333,25ht sept.2019 9) Ramnath H.R, D.M Subramanyam and Dr U.N Laksham(2019) Performance Analysis of State bank of India before and After Mergers,JETIR,Jan,2019 volume issue 10) Dr Sanjeev Dhawan (2016) , Mergers and Acquisitions in India : A case study of Indian Banks , International Journal of Business Management and scientific research , Vol 15, March 2016 11) Neha Duggal ( ) Mergers and acquisitions in India : A Case study on Indian Banking, International Journal of Research and Development 12) K Abirami (2017) Mergers in Indian Banking Industry – A case study on ICICI bBank and Indian Overseas Bank, International Journal of Applied research ,3( 1) : 01-05
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13) Dr ( smt) A.N Tamragundi ad Devajappa S( 2016) Impact of Mergers on Indian Banking Sector : A comparative study of public and private sector merged Banks 14) Dr Veena K.Pa and Prof S,N Pathi( 2017) Pre and Post Merger performance on Asset quality Banking sector : A case study of ING Vysya bank and Kotak Mahindra Bank, IOSR Journal of Humanities and Social Science, Volume 22 , issue 9 e- ISSN 2279-0845 15) Kantamanen Heema Divya T ( 2018) , A study on the performance of Kotak Mahindra Bank for pre and post merger period , International Journal of Mechanical engineering and technology (IJMET) Volume 9,Issue 5 , May 2018 16) Manjunath Narasagondar(2016) recent Mergers ad Acquisitions in Indian Banking sector - A study , JETIR , Volume 3 , Issue 10 ,Oct 2016 17) Annual reports of the Kotak Mahindra Banks from 2010to 2019 18) Reports of trends in banking and progress from 2010-2019 19) Annual Reports of the RBI from 2011 to 2019
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IMPACT OF MERGERS IN BANKING INDUSTRY : A CASE STUDY OF KOTAK MAHINDRA BANK Dr S B. Patkar ABSTRACT Mergers and acquisitions helps to expand their business through customer base, technology ,expansion of market and marketing strategies. The study is based on the merger and acquisitions in banking industry in India and selected merger of two private sector banks. The present study is conducted to asses the scenario of the merger and acquisitions in banking industry in India and to evaluate the performance of the selected transferee bank during premerger and post-merger period. The study is based on the secondary data collected from journals, reports and internet for the 10 years consisting of five years before the merger and five years after the merger .Ratios have been calculated to assess the performance of the transferee bank during premerger and post- merger period on different financial parameters. It was found in the study that the merger between two private banks has shown increase of profit margin ration but reduction in operating profit.
------Dr S.B. Patkar , principal, Saraswat Vidyalaya’s Sridora Caculo college of commerce and Management studies ,khorlim Mapusa Goa
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