CONTENTS

SR.NO. TOPIC PAGE

NO.
1. Introduction Of Indian Banking Sector 1 - 25
2. Review Of Literature 26 - 34
3. Objective Of Project 35
4. Introduction Of Mergers And Acquisition 36 - 39
5. Purpose Of Mergers And Acquisition 40 - 48
6. Procedure Of Bank Mergers And Acquisition 49 - 52
7. Risk In Bank Mergers And Acquisition 53 - 54
8. Challenges And Opportunities In Indian Banking Sector 55 -59
9. Conclusion 60
10. Bibloghraphy 61 - 62
1. INTRODUCTION OF INDIAN BANKING SECTOR

Banking in India originated in the last decades of the 18th century. The oldest bank in existence
in India is the State Bank of India, a government-owned bank that traces its origins back to June
1806 and that is the largest commercial bank in the country. Central banking is the responsibility
of the Reserve Bank of India, which in 1935 formally took over these responsibilities from the
then Imperial Bank of India, relegating it to commercial banking functions. After India's
independence in 1947, the Reserve Bank was nationalized and given broader powers. In 1969
the government nationalized the 14 largest commercial banks; the government nationalized
the six next largest in 1980. (Ahluwalia, 2002)

Currently, India has 96 scheduled commercial banks (SCBs) - 27 public sector banks (that is with
the Government of India holding a stake), 31 private banks (these do not have government
stake; they may be publicly listed and traded on stock exchanges) and 38 foreign banks. They
have a combined network of over 53,000 branches and 17,000 ATMs.
According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75
percent of total assets of the banking industry, with the private and foreign banks holding 18.2%
and 6.5% respectively
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 nationalization of banks
in 1969. The focus during this period was to lay the foundation for a sound banking system in
the country.

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As a result the phase witnessed the development of necessary legislative framework for
facilitating re-organization 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 nationalization of 14 major private banks during 1969.
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 no. 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. (Mohan,
2013)

2
On July 19, 1969, the Govt. promulgated Banking Companies (Acquisition and Transfer of
Undertakings) Ordinance 1969 to acquire 14 bigger commercial bank with paid up capital of
Rs.28.50 cr, deposits of Rs.2629 cr, loans of Rs.1813 cr and with 4134 branches accounting for
80% of advances. Subsequently in 1980, 6 more banks were nationalized which brought 91% of
the deposits and 84% of the advances in Public Sector Banking. During December 1969, RBI
introduced the Lead Bank Scheme on the recommendations of FK Nariman Committee.

In the post-nationalization period, there was substantial increase in the no. of branches opened
in rural/semi-urban centres 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 Service Area Approach
was introduced during 1989.

3
OBJECTIVE OF BANKS

Development Banks are those financial institutions that provide funds and financial assistance
to new and upcoming business enterprises. Development bank helps in According to Willian
Diamond, "development bank is a financial institution to promote and finance enterprises in
private sector."Development banks like IDBI, SIDBI, and IFCI etc. were set up to meet long term
and short term capital requirements of the industry. Development banks coordinate the
activities of those institutions, engaged in financing, promoting and developing industries. They
help in accelerating industrial and economic growth.

The following are the objectives of development banks:

1. Rapid Industrial growth:

Industrial sector is the dynamic sector of the Indian economy. This sector contributes to the
generation of employment and income in the country. Funds are provided by the development
banks to start a new business venture, expansion and diversification of the business in new
sector etc.

These funds are utilised to achieve several objectives that leads to accelerate industries and
economic growth. Development banking supports the programmes of industrialisation of the
country, by promoting entrepreneurial activities.

2. Encouraging entrepreneurs:

Industrialisation helps in curbing economic and social problems thereby making economies
progress. Emerging entrepreneurs are encouraged to give shape to their ideas. Development
bank helps those entrepreneurs by providing funds for commencing new business.

4
Government has recognised the importance of entrepreneurs in the industrial development
and thus providing number of facilities and incentives to motivate them for undertaking
industrial projects.

3. Balanced regional development:

There has been always an issue related to regional disparities. Development bank helps in
curbing these regional disparities by providing funds to the entrepreneurs at low rate of interest
if the organisation is planned in the backward areas. This would lead to the development of all
areas thereby making balanced regional development.

4. Filling gaps:

It is not possible for the commercial banks to fulfill all financial needs of all the customers.
Absence of organised capital market, absence of adequate facilities for financing industries
arise the problem of slow development of industrialisation. Such development banks can fulfill
the credit gap. They provide long- term funds for industries where gestation period may be
longer.

5. Helps government:

Government formulates financial policies with the help of development banks. They also help
in implementing these policies. For example, NABARD bank is set up as an apex development
bank for extending support to the rural areas. It helps the government in matters relating to
the rural development, offers training and research facilities for banks working in the field of
rural development, and acts as a regulator for co-operative banks and RRB's.

5
TYPES OF BANKING:

Banking is defined as the accepting purpose of lending or investment of deposits, money from
the public, repayable on demand or otherwise and withdrawable by cheque, draft, order or
otherwise this definition is given in Indian Banking Regulation Act (1949). From this
definition, we can say that a bank has two main features: (1) the bank accepts deposits of
money which are withdrawable by cheques, (2) the bank uses the deposits for lending. To be
recognised as bank the institution must use the deposits to give loans to the general public.

If an institution accepts deposits withdraw able by cheques but uses the deposits for its own
purpose, such an institution cannot be regarded as a bank. Post office, savings banks are not
banks, because they accept chequable deposits but do not sanction loans. In the same way. Lie
is not bank because it does not grant loans in general. LITI, non- banking financial institutions
as LIC, IDBI etc. are regarded as the they do not create money.

(a) Organized and unorganized banking:

Indian banking system can broadly be classified into two categories:

(i) Organized banking and

(ii) Unorganized banking.

That part of Indian banking system which does not fall under the control of our central bank
(i.e. Reserve Bank of India) is called as un-organised banking. For example, Indigenous banks.
Whereas, organized banking system refers to that part of the Indian banking system which is
under the influence and control of the Reserve Bank of India. For example. Commercial Banks,
Industrial Banks, Agricultural Banks.

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(b) Scheduled and Non-scheduled banks:

Under the Reserve Bank of India Act, 1939, banks were classified as scheduled banks and non
scheduled banks.. The scheduled banks are those which are entered in the second schedule of
RBI Act, 1939. Scheduled banks are those banks an which have a paid up capital and reserves
of aggregate value of not less than Rs 5 lakhs and which satisfy RBI.

All Commercial Banks, Regional Rural Banks, State Cooperative Banks are scheduled banks. On
the other hand, non-schedule banks are those banks whose total paid up capital is less than Rs
5 lakh and RBI has no specific control over these banks. These banks are not included in the
second schedule of RBI Act, 1934.

(c) Indigenous Bankers:

From very ancient days indigenous banking as different from the modern western banking has
been organized in the form of family or individual business. They have been called by various
names in different parts of the country as Shroffs, Sethus, Sahukars, Mahajans, Chettis and so
on. They vary in their size from petty money lenders substantial Shroffs.

(d) Central Bank:

In each country there exists central bank which controls a countrys money supply and
monetary policy. It acts as a bank to other banks, and a lender of last resort. India Reserve Bank
of India (RBI) is the Central Bank.

7
(e) Commercial Bank:

A bank dealing with general public, accepting deposits from making loans to large numbers of
households and firms. Through the process of accepting deposits and lending, commercial
banks create credit in the economy. Some examples (commercial banks in India are State Bank
India (SBI), Punjab National Bank (PNB) etc

(f) Development Banks:

Development banks are specialised financial institutions. To promote economic development,

development banks provide medium term and long term loans the entrepreneurs at relatively
low rate o interest rates. Some examples of development banks in India are Industrial
Development Bank of India (IDBI), Industrial Financial Corporation of India (IFCI), Industrial
Credit and Investment Corporation of India (ICICI) etc.

(g) Co-Operative Banks:

Co-operative banks are organised under the provisions of the Co- operative societies law of the
state. These banks were originally set up in India to provide credit to the farmers at cheaper
rates. However, the co-operative banks function also in the urban sectors.

(h) Land Mortgage Banks:

The primary objective of these banks is to provide long-term loans to farmers at low rates in
matters related to land, The land mortgage banks are also known as the Land Development
Banks.

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(i) Regional Rural Banks:

Regional Rural Banks (RRBs) are established in the rural areas to meet the needs of the weaker
section of the rural population.

(j) National Bank for Agricultural and Rural Development (NABARD):

This bank was established in 1982 in India in view of providing the rural credit to the
farmers. Actually, it is an apex institution which coordinates the functioning of different
financial institutions working in the field of rural credit. NABARD has been making continuous
efforts through its micro-finance programme or improving the access of the rural poor to formal
institutional credit. The self help group (SHG) Bank linkage programme was introduced in 1992
as a mechanism to provide financial services to the rural poor people on a sustainable basis.

(k) Exchange Banks:

These banks are engaged in buying and selling foreign exchange. These banks help the growth
of international trade.

(i) Exim Bank:

It is popularly known as Export Import Bank. Such banks provide long term financial assistance
to the exporters and importers.

9
CHALLENGES OF BANKS
Restrictive industrial licensing policies have been almost completely reversed, although their
consequences still linger (most notably in the weak performance of Indian manufacturing). But
bank nationalisation endures as a millstone around the Indian economy, a grim reminder and
legacy of Indira Gandhi's policies.

Undoing this legacy may well turn out to be one of the most critical tasks for the Reserve Bank
of India's (RBI's) current governor, Raghuram Rajan. The problem is so intractable and so
embedded in Indian politics that only he can, and can afford to, take on the challenge.On the
face of it, that task has begun. The RBI will soon be awarding new banking licences to allow for
a greater role for private sector banks. But this may not be enough Consider why.

Since 1991, an overarching principle for eliminating inefficiency in vast parts of the economy
has been this: to promote competition via private sector entry rather than change ownership
through privatisation. This approach had some intrinsic merit - after all, Russia went from
communism to gangsterism because it sold public assets cheaply to a few oligarchs.

More importantly, the entry-favouring approach had the virtue of political expediency.
Privatizing public sector companies would have encountered significant opposition from their
managers as well as from strong unions. Allowing private sector companies to enter
the MARKET without touching the public sector incumbents bypassed some of these costs and
allowed reform to proceed by stealth.

10
The logic and hope, of course, were that a vibrant private sector would grow rapidly while the
public sector would shrink, at least in relative terms.
And the strategy broadly worked. Yes, Air India is still a mess and a public burden, but the Indian
aviation and telecommunication sectors of today are mercifully - and unrecognisably - different
from what they were 20 years ago, with enormous benefits for the Indian economy.

Public sector companies now account for a small share of the overall size of these sectors.This
entry-favouring strategy was tried in banking too. Since the early 1990s, a number of new
banking licences were given to the private sector - think of ICICI, HDFC, Axis Bank, Kotak
Mahindra, Yes Bank, and so on. Yet, the share of public sector banks in total banking (measured
as a share of assets or deposits) has stubbornly persisted around 75 per cent. And the reason is
simple. The private banks have grown, but the public sector banks have grown too because
India's politicians have used them as a way to channel MONEY to private sector operators -
often very influential ones. The credit boom of the 2000s, which is now manifesting itself in
rising non-performing loans, emanated mostly in the public sector. Vijay Mallya did not borrow
from private banks; he was enabled into borrowing from, and undermining, the public ones. So,
going forward the fact of more private banks is no guarantee of reducing the role of public
sector Bank.

This will be especially true if the new banks are encumbered with regulations such as priority
sector lending, which restricts their ability to grow. So, as new banking licences are awarded,

11
the aim should be to tilt the playing field as much as possible against the public sector
incumbents in whose favour the playing field is already hugely tilted by way of
unlimited FINANCIAL supportfrom the public exchequer.
One possibility relates to foreign banks. It is true that the world over - and especially in the
United States - regulators are forcing foreign banks to create subsidiaries in host countries so
that they will have more capital to cushion against crises. But in India the benefits of
subsidiarisation must be weighed against the costs of deterring foreign bank entry, which
might have other benefits such as being able to effectively compete and out-compete public
sector banks.

What can be done more directly to reduce the role of public sector banks? Because such banks
are important levers of political control and influence, and because bank unions remain
powerful, explicit privatisation seems off the table. But there is an indirect way of privatising
them, or at least beginning the process of privatisation, which the RBI should seize. And the
opportunities could present themselves soon.

As growth declines and exposes the fragility of some of the public banks in the form of rising
non-performing loans, the RBI should be brutal in its assessment of them, erring on the side
of declaring some banks as unviable commercial institutions. The government will want to bail
out the failing banks through fresh capital infusions.

But here is where the RBI should stand firm, urging the government to let them go, on the
grounds that a fragile economy can afford neither the fiscal costs of bailouts nor the efficiency
costs of bad banks continuing

12
to be prolonged on life support. The worse the economy, the more the bargaining chips Dr
Rajan will have. And he should use them to resolve the bad public banks, in part by transferring
their good parts to the private sector.
This strategy may sound difficult to implement. Indeed, it will be. But it is the only way forward.
The past two decades have taught us that private banks cannot really grow unless and until
public sector banks are shrunk. That shrinking may have to be achieved by allowing the bad
public sector banks to fail because politics will never allow good public sector banks to be
privatised. It was famously said that in science progress is made one funeral at a time.
Unfortunately, that may be the only realistic way of reforming Indian banking too. (Mohan,
2013).

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IMPORATANCE OF BANK
Banking plays an important role in the financial life of a business, and the importance of banks
can be seen from the fact that they are considered as to be the life-blood of modern economy.
Although no wealth is created by Bank, but their essential activities facilitates the process of
production, exchange and distribution of wealth. In this way they become the effective partners
in the process of economic development and growth. In the words of Stephenson &
Britain Banks are the custodians and distribution of liquid capital, which is the life-blood of our
commercial and industrial activities and upon the prudence of their administration depend the
economic well-being of the nation.

1. Collections of Savings and Advancing Loans

Acceptance of deposit and advancing the loans is the basic function of commercial banks. On
this function, all other functions depend accordingly. Bank operates different types of accounts
for their customers.

2. Money Transfer

Banks have facilitated the making of payments from one place or persons to another by means
of cheques, bill of exchange and drafts, instead of cash. Payment though cheques, draft is more
safe and convenient, especially in case of huge payments, this facility is a great help for traders
and businessmen. It really enhances the importance of banks for business community.

14
3. Encourages Savings

Banks perform an invaluable service by encouraging savings among the people. They induce
them to save for profitable investment for themselves and for national interest. These savings
help in capital formation.

4. Transfer Savings into Investment

Bank transfer the savings collected from the people into investment and thus increase the
amount of effective capital, which helps the process of economic growth.

5. Overdraft Facilities

The banks allow the overdraft facilities to their trusted customers and thus help them in
overcoming of temporary financial difficulties.

6. Discounting Bill of Exchange

Importance of banks can be seen through the facility of discounting bill of exchange. Banks
discount their bill of exchange of consumers and help them in the financial difficulties. By
discounting bill of exchange, they able to get the desire amount for investment they want.

7. Financing Internal & External Trade

Banks help merchants and traders in financing internal and external trade by discounting
foreign bill of exchange, issuing of letter of credit and other guarantees for their customers.

15
8. Act as an Agent

The bank act as a agent and help their customers in the purchase and sales of shares, provision
of lockers payment of monthly and dividends on stock.

9. Issue of Travelers Cheques

For the convenience and security of money for travelers and tourists, bank provides the facility
of travelers cheques. These cheques enable the travelers and tourists to meet their expenses
during their journey, as these are accepted by issuing bankers, restaurants, and other
businessmen both at home and abroad. No doubt, this is also one of the great functions of
banks and shows the importance of banks for us in more precise ways.

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FUNCTIONS OF BANKS
Primary Functions of Banks:
The primary functions of a bank are also known as banking functions. They are the main
functions of a bank.

Accepting Deposits: The bank collects deposits from the public. These deposits can be of
different types, such as
a. Saving Deposits
b. Fixed Deposits
c. Current Deposits
d. recurring Deposits

a) SAVING DEPOSITS
This type of deposits encourages saving habit among the public. The rate of interest is low. At
present it is about 4% p.a. Withdrawals of deposits are allowed subject to certain restrictions.
This account is suitable to salary and wage earners. This account can be opened in single name
or in joint names.
b) FIXED DEPOSITS
Lump sum amount is deposited at one time for a specific period. Higher rate of interest is paid,
which varies with the period of deposit. Withdrawals are not allowed before the expiry of the
period. Those who have surplus funds go for fixed deposit.

c) CURRENT DEPOSITS
This type of account is operated by businessmen. Withdrawals are freely allowed. No interest
is paid. In fact, there are service charges. The account holders can get the benefit of overdraft
facility.

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d) RECURRING DEPOSITS
This type of account is operated by salaried persons and petty traders. A certain sum of money
is periodically deposited into the bank. Withdrawals are permitted only after the expiry of
certain period. A higher rate of interest is paid.

GRANTING OF LOANS AND ADVANCES:

The bank advances loans to the business community and other members of the public. The
rate charged is higher than what it pays on deposits. The difference in the interest rates (lending
rate and the deposit rate) is its profit.

The types of bank loans and advances are:-

a. Overdraft
b. Cash Credits
c. Loans
d. Discounting of Bill of Exchange

a) OVERDRAFT
This type of advances is given to current account holders. No separate account is maintained.
All entries are made in the current account. A certain amount is sanctioned as overdrafts which
can be withdrawn within a certain period of time say three months or so. Interest is charged on
actual amount withdrawn. An overdraft facility is granted against a collateral security. It is
sanctioned to businessman and firms.

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b) CASH CREDITS
The client is allowed cash credit up to a specific limit fixed in advance. It can be given to current
account holders as well as to others who do not have an account with bank. Separate cash
credit account is maintained. Interest is charged on the amount withdrawn in excess of limit.
The cash credit is given against the security of tangible assets and / or guarantees. The advance
is given for a longer period and a larger amount of loan is sanctioned than that of overdraft.

c) LOANS
It is normally for short term say a period of one year or medium term say a period of five years.
Now-a-days, banks do lend money for long term. Repayment of money can be in the form of
installments spread over a period of time or in a lump sum amount. Interest is charged on the
actual amount sanctioned, whether withdrawn or not. The rate of interest may be slightly lower
than what is charged on overdrafts and cash credits. Loans are normally secured against
tangible assets of the company.
d) DISCOUNTING OF BILL OF EXCHANGE
The bank can advance money by discounting or by purchasing bills of exchange both domestic
and foreign bills. The bank pays the bill amount to the drawer or the beneficiary of the bill by
deducting usual discount charges. On maturity, the bill is presented to the drawee or acceptor
of the bill and the amount is collected.

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SECONDARY FUNCTIONS OF BANKS:
The bank performs a number of secondary functions, also called as non-banking functions.
AGENCY FUNCTIONS: The bank acts as an agent of its customers. The bank performs a number
of agency functions which includes:-
a. Transfer of Funds
b. Collection of Cheques
c. Periodic Payments
d. Portfolio Management
e. Periodic Collections
f. Other Agency Functions

a) TRANSFER OF FUNDS
The bank transfer funds from one branch to another or from one place to another.

b) COLLECTION OF CHEQUES
The bank collects the money of the cheques through clearing section of its customers. The bank
also collects money of the bills of exchange.

c) PERIODIC PAYMENTS
On standEttying instructions of the client, the bank makes periodic payments in respect of
electricity bills, rent, etc.

d) PORTFOLIO MANAGEMENT
The banks also undertake to purchase and sell the shares and debentures on behalf of the
clients and accordingly debits or credits the account.

20
This facility is called portfolio management.
e) PERIODIC COLLECTIONS
The bank collects salary, pension, dividend and such other periodic collections on behalf of the
client.

f) OTHER AGENCY FUNCTIONS

They act as trustees, executors, advisers and administrators on behalf of its clients. They act as
representatives of clients to deal with other banks and institutions.

GENERAL UTILITY FUNCTIONS: The bank also performs general utility functions, such as:-

a. Issue of Drafts, Letter of Credits, etc.

b. Locker Facility
c. Underwriting of Shares
d. Dealing in Foreign Exchange
e. Project Reports
f. Social Welfare Programmers

a) ISSUE OF DRAFTS AND LETTER OF CREDITS

Banks issue drafts for transferring money from one place to another. It also issues letter of
credit, especially in case of, import trade. It also issues travellers' cheques.

21
b) LOCKER FACILITY
The bank provides a locker facility for the safe custody of valuable documents, gold ornaments
and other valuables.

c) UNDERWRITING OF SHARES
The bank underwrites shares and debentures through its merchant banking division.

d) DEALING IN FOREIGN EXCHANGE

The commercial banks are allowed by RBI to deal in foreign exchange.

e) PROJECT REPORTS
The bank may also undertake to prepare project reports on behalf of its clients.

f) SOCIAL WELFARE PROGRAMMES

It undertakes social welfare programs, such as adult literacy programs, public welfare
campaigns, etc.

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E-BANKING
Traditional banks offer many services to their customers, including accepting customer money
deposits, providing various banking services to customers, and making loans to individuals and
companies. Compared with traditional channels of offering banking services through physical
branches, e-banking uses the Internet to deliver traditional banking services to their customers,
such as opening accounts, transferring funds, and electronic bill payment.

E-BANKING ADAVANTAGES

Internet banking is convenient and quick compared to doing your banking in person or over
the telephone. You never have to wait to be served at a bank counter, or work your way
through the layers of questions that you often get with an automated phone service. If you
know what you are doing, you can check your account balance, transfer money, etc in a
matter of minutes when banking online.

Online access also gives you a sense of control over your account, as you can perform all
your everyday banking tasks yourself, rather having to go through a bank staff member,
which can sometimes be time-consuming and frustrating. You can also get an easier
overview of your account, and search archives for older transactions.

You always have 24 hour banking with banking online. When visiting a bank in person, and
sometimes with telephone services too, there are restricted hours of operation.

Banking can effectively be done paperless the vast majority of the time. No need for
mountains of statements, letters, to be filed

23
and stored for future reference. Some banks offer deals if you go paperless too.

Most banks now offer you smartphone apps, allowing customer to monitor and manage
their finances on the move, as well as via a home or work computer.

Internet banking is especially useful and convenient for setting up and monitoring regular
bill payments for utility services, rent, or mortgage payments etc.

It doesnt matter where you are when you do your banking online - you can be in another
part of the country to where your bank operates and still have access to your account, or
even access your account from abroad for no extra cost.

Sometimes banking via the web is cheaper. This is because it costs the bank less in terms
of staffing, property upkeep etc. You can therefore often get some great bargains with
internet accounts.

It's often possible to get better interest rates through online banking. Some offers and deals
are also only available online.

DISADAVANTAGES OF E-BANKING

You really need to have at least a basic level of internet and computer experience, if you
wish to do your banking online. People who are used to traditional banking will find that
the online version is completely different. Using a website is not straightforward to a novice
and often the help and support from the bank is severely limited.

Fraud and ID theft are the biggest causes of concern for many people, although its fair
to say in practice that more people are defrauded through scams where fraudulent
emails ask them to sign into their account on counterfeit websites (giving their name and
password), known as "phishing", rather than by having their accounts hacked into by
outsiders.

24
Financial organizations do lose sensitive information sometimes, however.

It can be easy to lose track of automated bill payments. You set them up and then dont
monitor them. Six months later you may come back to find that your bill has changed and
you have been overpaying. Alternatively, sometimes you have more money debited from
your account than you were expecting.

Banking online is completely impersonal. As well as making the experience less friendly,
this can create problems with more complex transactions such as applying for a loan. The
ability to convey subtle information is often lost when banking online and it is also difficult
to know if the person at the other end grasps what you are trying to say.

Internet banking websites are often set up to prioritize advertising and sell extra banking
services, rather than to help the customer use the website. Adverts often take up most of
the spare space on the page, while links to help and support, or contact details for speaking
to a member of staff in person are small text links that can be hard to find.

Online banking also relies on you having at the very least, a working computer and a reliable
internet connection. If your computer is unreliable or old, or your connection speed is slow,
or patchy, it is a difficult service to use.

25
 2.REVIEW OF LITERATURE OF BANK

A study on public and private sector banks and their study shows that quality gap between
expectations of consumers and perceptions of service delivered is highest in public sector banks
and lowest in private sector banks(using gap 5). Another study found out that public sector
banks are better than private sector banks. Other studies and their findings are given below

Joseph M. et al (1999)- The study investigates role of technology on Australian banking sector
and 300 customers were surveyed. The findings suggested that except from
convenience/accuracy and efficiency e banking services did not match with importance rating
specified by customers.

Lassar, et al (2000)- The study compared two models, that is , SERVQUAL and
technical/functional quality model of technology using 65 bank customers using SERPERF
SCALE. The findings revealed that technical/functional quality model was better than
SERVQUAL because latter was lacking technical dimensions. 2 models were having distinct and
unique strength for measuring service quality aspects.

Bahia, K and J Nantel (2000)- The paper suggested an alternative scale for measuring service
quality in retail banking. The study developed a scale called as Banking Service Quality Scale
which contained factors like effectiveness and assurance, access, price, tangibles, service
portfolio and reliability.

26
This model was found to be more reliable than SERVQUAL
Jamal, A., Naser, K., 2002-The study examined key drivers of customer satisfaction using 167
customers and it was found that core and relational performances had impact on customer
satisfaction and there was negative relationship between customer expertise and customer
satisfaction

Sureshchandar et al(2002).- The study examined relationship between service quality and
customer satisfaction in Indian banking sector. These were found to be independent but closely
related. Both constructs vary significantly in core services ,human element, systematization of
service delivery, tangibles and social responsibility.

Gani A,Mushtaq Bhatt(2003)-The study is conducted to do a comparative study of service

quality of commercial banks and its dimensions in commercial banks. SERVQUAL is used and
sample size was 800 customers. The study found out that CITI bank and Standard chartered
bank are good in tangibility and in reliability also they are good. In responsiveness parameter
Indian banks are inferior to foreign banks. In Assurance and empathy Indian banks are inferior.

Navdeep Aggarwal and Mohit Gupta (2003)- This study basically finds out the primary
dimensions and sub dimensions of service quality. Informal structured interviews are
conducted with branch managers and academicians to formulate a banking service quality
model. The study found out that service time and personal interactions are very important
along with ambience for service quality.

27
Zhou, L( 2004)- The study analysed impact of service quality in banks on customer satisfaction
in chinas retail banking and it was found out that reliability and assurance were the primary
drivers of customer satisfaction. It was also found out that there were significant variations in
expectations and perceptions in customers.

Arora S (2005)- This study analysed factors influencing customer satisfaction in public sector,
private sector and foreign banks in northern India. 300 customers were given questionnaires
which reveled that significant differences exist in customer satisfaction level of customers in
each group of banks regarding routine operation and situational and interactive factors. Foreign
banks were found to be the leaders in mechanization and automation.

Debashis and Mishra(2005)-The study analysed and measured customer satisfaction in branch
services provided by nationalized banks in northern India . 1200 customers were given
questionnaires and it was found out that computerization, accuracy in transactions, attitude of
staff and availability of staff influenced customer satisfaction. Least important factor was
promotion of the products and various schemes.

Mushtaq M Bhat (2005)- This study finds out service quality parameters in bank through
SERVQUAL and influence of demographic variables . The study was limited to SBI,PNB ,Jammu
and Kashmir bank Citi bank and Standard Chartered Grind lays bank. Sample size was 800 and
study found out that foreign banks are better than Indian banks. SBI was found to be relatively
poor on reliability and responsiveness.
Banks in Delhi were comparatively better in service quality.

28
Joshua A J, V Moli, P. Koshi (2005)- The study evaluated and compared service quality in old
and new banks using sample size of 480. The study found out that customers were satisfied in
reliability, empathy and price and for other parameters the difference between expectations
and perceptions were smaller than public sector banks.

Mohammad et al(2005)- The study tries to develop a comprehensive model of banking

automated service quality taking into consideration unique attributes of each delivery channel
and other dimensions which influence service quality.

Raul and Ahmed(2005)-The study investigated customer service in public sector banks in 3
districts in Assam and it was found that customers were dissatisfied with the management,
technology and interactive factors along with high service charges. Communication gap was the
root cause of poor service and service was different in rural and urban sectors.

Sharma and Sharma( 2006)-The study analysed customer delight in urban consumer banking.
The study found out that customers were satisfied with loan facilities, bank environment,
routine work procedures, location ,interest rates etc and were dissatisfied with loan formalities
and promotion through media.

Dash et al(2007)- The study measured customer satisfaction through 5 service quality
dimensions in Noida and Ghaziabad and findings revealed that assurance was the most
important dimension of service quality followed by reliability and responsiveness. Tangibles
was found to be least important.

29
Sharma S, et al (2007)-The study did a comparison of public and private banks with respect to
perceptions of customers regarding service quality. It was found out that service quality is
associated with satisfaction and there was significant difference between quality of services
provided by banks. Banks in smaller cities are far behind big cities in this regard.

Tracey Dagger ,Jillian Sweeney (2007)- The study consists of qualitative research to investigate
the effect of consumption stage on service quality perceptions and then development of
hypothesis. The findings indicate the evidence that customers rely more heavily on attributes
that are search based in the initial stages of service experience and in later stages consumption
becomes important.

Dr.Vannirajan&B.Anbazagan(2007)- The study tries to make an assessment of SERVPERF scale

in the Indian Retail banking sector by doing a survey in banks at Madhurai.
The study found that in public sector banks tangibles and assurance are most important and in
private sector banks reliability ,,responsiveness and tangibles are most important.

P K Gupta(2008)-Objective of this study was to find out the behavior of customers with respect
to internet banking vis--vis conventional banking. The study found out that internet banking
was found to be easier and speedier than conventional banking and trust, accuracy and
confidentiality were the most important factors here.

Ellaine Wallce&Leslie De Cheratatony(2009)-Study finds out the importance of ,assurance and

reliability, customer orientation teamwork etc in performance of . Also the study highlights
criticality of branch& employee teamwork for performance.

30
Continuous commitment and service recovery were also found important.
Mohammed Siddique Khan,Siba Sankar Mahapatra(2009)-The study was to identify important
parameters affecting service quality in internet banking. Factor analysis of the data collected
finds 7 factors which included factors like reliability, access, user friendliness privacy etc.
Correlation analysis shows that a significant positive correlation exists between factors..Also it
was found out that business class differs from other classes in perception.

Padhy P K and B N Swar(2009)- the paper investigated role of technology in banking and its
impact on perceived service quality in public, private and foreign banks in Orissa using a s ample
size of 300 customers. Foreign bank was found to be very close to expectations of customers
followed by ICICI and AXIS. Service quality in public sector banks was found to be very low.

Rod et al(2009)-The study focused on relationship between service quality, overall internet
banking service quality and customer satisfaction in New Zealand. The study found out that
online customer service quality and online information systems were significantly and positively
related to overall customer internet banking service quality. Overall internet banking service
quality and customer satisfaction were positively correlated.

Sandip Khosh Hazra, Dr.Kailash Srivatava (2010)-The study was done to find out the
association between service quality, customer satisfaction ,loyalty and commitment.
SERVQUAL is used and the study finds out that in private banks dimensions of service quality,
assurance and reliability are significant for satisfaction of customers, loyalty and commitment.
The banks taken differed in these parameters.

31
Akiko Ueno(2010)- The paper talks about the importance of quality. The study finds out the
features that are fundamental in supporting service quality. The secondary research finds out
the human resource functions like recruitment, teamwork etc in maintain service quality

Monica Bedi(2010)-The study investigates relationship between service quality, customer

satisfaction and behavioral intentions. The findings also indicated the importance of service
quality. The study also found out that banks differed in the service quality parameters.

Fulbag Singh, Davinder Kaur(2010-11)- The study combines all literature review done in service
quality And related areas in banking till 2010. It contains the works of Cronin& Taylor, Bahia
and Nantel and others on this area.

Dr Ravichandran et al(2010)- The paper analyses existing study and tries to understand socio
demographic and rational profile of public retail banking consumers. It also finds out the
importance of service quality dimensions to predict the multidimensional model of behavioral
intentions among public sector consumers in India. Loyalty was found to be influenced by
operating hours, modern equipments, error free records etc. Service quality parameters like
tangibility, responsiveness and empathy dimensions were also found to be very important.

Davood Feiz et al(2010)-The study uses hypothesis to find out service quality in Iran railways.
It was found out that perceived service was found to be within zone of tolerance and service
was satisfactory. The difference between ideal level and current level was significant. There was
significant relationship between service adequacy variables and perceived value.

32
The study in nutshell gives an image of service quality.

Sachin Mittal & Rajnish Jain(2010)-This paper is basically a literature review of banking industry
and effect of IT based services on customer satisfaction. The study highlights customer
satisfaction levels among young customers in banking industry. A survey indicates the gaps
between customers expectations and perception with respect to IT based banking services.
Findings indicated need to improve the IT based services for enhancing customer satisfaction.

H.Emari et al(2011)- The main objective of this research was to determine the dimensions of
service quality in the banking industry of Iran. For this the study empirically examined the
European perspective suggesting that service quality consists of three dimensions, technical,
functional and image. The results from a banking service sample revealed that the overall
service quality is identified more by a consumers perception of technical quality than functional
quality.

Kumbhar, Vijay (2011)- It examined the relationship between the demographics and
customers satisfaction in internet banking,. It also found out relationship between service
quality and customers satisfaction as well as satisfaction in internet banking service provided
by the public sector bank and private sector banks. The study found out that overall satisfaction
of employees, businessmen and professionals are higher in internet banking service. Also it was
found that there is significant difference in the customers perception in internet banking
services provided by the public and privates sector banks.

33
Kailash M (2012)- The paper compares public and private sector banks in Vijayawada city using
SERVQUAL model. The findings revealed that private sector banks have good services to
customers and they retained customers by providing better facilities. The study finds out
importance of new products and services for banks for retaining customers.

The studies mentioned above clearly points out to the importance of having a structured study
on this where banks in different categories are compared with respect to the service quality
aspect which will help them to find out their core competencies and to capitalize on them and
at the same time find out the areas where they can improve. This is the major aim of my thesis.

34
 3. OBJECTIVE OF PROJECT

OBJECTIVES
To study the purpose of mergers and acquisitions in the Bankingsector
To study the benefits of mergers and acquisitions.
To understand Bank merger/amalgamation under various Acts
To study the Procedure of Bank Mergers and Acquisitions
To study the motives behind consolidation in the Banking sector.
To study the risk involved in merger and acquisition.
To study the HR issues during merger and acquisition.
To understand the challenges and opportunities in the Indian Banking Sector.
To study the major Banks involved in Mergers and Acquisitions.

DATA COLLECTION

The analysis is purely based on the secondary data.

Secondary Research based on:
Business Magazines
Internet Sources
Finance books

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 4. INTRODUCTION OF MERGERS AND ACQUISIATION

MERGER
Merger is defined as combination of two or more companies into a single company where
one survives and the others lose their corporate existence. The survivor acquires all the
assets as well as liabilities of the merged company or companies. Generally, the surviving
company is the buyer, which retains its identity, and the extinguished company is the seller.
Merger is also defined as amalgamation. Merger is the fusion of two or more existing
companies. All assets, liabilities and the stock of one company stand transferred to
Transferee Company in consideration of payment in the form of:

Equity shares in the transferee company,

Debentures in the transferee company,

Cash, or

A mix of the above modes.

TYPES OF MERGERS

Merger or acquisition depends upon the purpose of the offeror company it wants to achieve.
Based on the offerors objectives profile, combinations could be vertical, horizontal, circular
and conglomeratic as precisely described below with reference to the purpose in view of the
offeror company.

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(A)Vertical combination:

A company would like to takeover another company or seek its merger with that company
to expand espousing backward integration to assimilate the resources of supply and
forward integration towards market outlets. The acquiring company through merger of
another unit attempts on reduction of inventories of raw material and finished goods,
implements its production plans as per the objectives and economizes on working capital
investments. In other words, in vertical combinations, the merging undertaking would be
either

The following main benefits accrue from the vertical combination to the acquirer company
i.e.
It gains a strong position because of imperfect market of the intermediary

(B) Hori zontal combination:

It is a merger of two competing firms which are at the same stage of industrial process. The
acquiring firm belongs to the same industry as the target company. The main purpose of such
mergers is to obtain economies of scale in production by eliminating duplication of facilities and
the operations and broadening the product line, reduction in investment in working capital,
elimination in competition concentration in product, reduction in advertising costs, increase in
market segments and exercise better control on market.

(C) Circular combination:

Companies producing distinct products seek amalgamation to share common distribution and
research facilities to obtain economies by elimination of cost on duplication and promoting
market enlargement.

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The acquiring company obtains benefits in the form of economies of resource sharing and
diversification.

(D) Conglomerate combination:

It is amalgamation of two companies engaged in unrelated industries like DCM and Modi
Industries. The basic purpose of such amalgamations remains utilization of financial resources
and enlarges debt capacity through re-organizing their financial structure so as to service the
shareholders by increased leveraging and EPS, lowering average cost of capital and thereby
raising present worth of the outstanding shares. Merger enhances the overall stability of the
acquirer company and creates balance in the companys total portfolio of diverse products and
production processes. A supplier or a buyer using its product as intermediary material for final
production.

ACQUISITION

A corporate action in which a company buys most,if not all,of the target companies
Owenership stakes in order to assume control of the target firm. Acquistion are often made as
part of companys growth strategy whereby it is more benifitial to takeover An existing firms
operation & niche compared to expanding on its own.

Acquisition Are often paid in cash,the acquiring companys stock or a combination of both
Acquisition in general sense is acquiring the ownership in the property. In the context of
business combinations, an acquisition is the purchase by one company of a controlling interest
in the share capital of another existing company.

38
Methods of Acquisition:

An acquisition may be affected by:-

Agreement with the persons holding majority interest in the company management like
members of the board or major shareholders commanding majority of voting power;

Purchase of shares in open market;

To make takeover offer to the general body of shareholders;

Purchase of new shares by private treaty;

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 5. PURPOSES OF MERGERS AND ACQUISITIONS

The purpose for an offeror company for acquiring another company shall be reflected in the
corporate objectives. It has to decide the specific objectives to be achieved through
acquisition. The basic purpose of merger or business combination is to achieve faster growth
of the corporate business. Faster growth may be had through product improvement and
competitive position. Other possible purposes for acquisition are short listed below: -

Procurement of supplies:

To safeguard the source of supplies of raw materials or intermediary product;

To obtain economies of purchase in the form of discount, savings in transportation costs,

overhead costs in buying department, etc.;

To share the benefits of suppliers economies by standardizing the materials.

(2) Revamping production facilities:

To achieve economies of scale by amalgamating production facilities through more intensive

utilization of plant and resources;

To standardize product specifications, improvement of quality of product, expanding

Market and aiming at consumers satisfaction through strengthening after sale ServeTo obtain
improved production technology and know-how from the offered company.

40
To reduce cost, improve quality and produce competitive products to retain and Improve
market share.

(3) Market expansion and strategy:

To eliminate competition and protect existing market;

To obtain a new market outlets in possession of the offer

To obtain new product for diversification or substitution of existing products and to enhance
the product range;

Strengthening retain outlets and sale the goods to rationalize distribution;

To reduce advertising cost and improve public image of the offeree company;

Strategic control of patents and copyrights.

(4) Financial strength:

To improve liquidity and have direct access to cash resource;

To dispose of surplus and outdated assets for cash out of combined enterprise;

To enhance gearing capacity, borrow on better strength and the greater assets backing;

41
To avail tax benefits;

To improve EPS (Earning Per Share).

(5) General gains:

To improve its own image and attract superior managerial talents to manage its affairs;

To offer better satisfaction to consumers or users of the product.

(6) Own developmental plans:

The purpose of acquisition is backed by the offeror companys own developmental plans. A
company thinks in terms of acquiring the other company only when it has arrived at its own
development plan to expand its operation having examined its own internal strength where
it might not have any problem of taxation, accounting, valuation, etc. But might feel resource
constraints with limitations of funds and lack of skill managerial personnels. It has to aim at
suitable combination where it could have opportunities to supplement its funds by issuance
of securities, secure additional financial facilities, eliminate competition and strengthen its
market position.

42
Further, reserve bank is empowered to determine the Markey value of shares of minority
shareholders who have voted against the scheme of amalgamation. Since nationalized banks
are not Baking Companies and SBI is governed by a separate statue, the provisions of section
44A on voluntary amalgamation are not applicable in the case of amalgamation of two public
sector banks or for the merger of a nationalized bank/SBI with a banking company or vice versa.
These mergers have to be attempted in terms of the provisions in the respective statute under
which they are constituted. Moreover, the section does not envisage approval of RBI for the
merger of any other financial entity such as NBFC with a banking company voluntarily.
Therefore a baking company can be amalgamated with another banking company only under
section 44A of the BR act.

Sector 45- Compulsory Amalgamation of banks

Under section 45(4) of the banking regulation act, reserve bank may prepare a scheme of
amalgamation of a banking company with other institution (the transferee bank) under sub-
section (15) of section 45. Banking institution means any banking company and includes SBI and
subsidiary banks or a corresponding new bank.
A compulsory amalgamation is a pressed into action where the financial position of the bank
has become week and urgent measures are required to be taken to safeguard the depositors
interest. Section 45 of the Banking regulation Act, 1949 provides for a bank to be reconstructed
or amalgamated compulsorily i.e. without the consent of its members or creditors, with any
other banking institutions as defined in sub section(15) thereof. Action under there provision
of this section is taken by reserve bank in consultation with the central government in the case
of banks, which are weak, unsound or improperly managed.

43
Under the provisions, RBI can apply to the central government for suspension of business by a
banking company and prepare a scheme of reconstitution or amalgamation in order to
safeguard the interests of the depositors.

Under compulsory amalgamation, reserve bank has the power to amalgamate a banking
company with any other banking company, nationalized bank, SBI and subsidiary of SBI.
Whereas under voluntary amalgamation, a banking company can be amalgamated with banking
company can be amalgamated with another banking company only. Meaning thereby, a
banking company can not be merged with a nationalized bank or any other financial entity.

Companies Act

Section 394 of the companies act, 1956 is the main section that deals with the reconstruction
and amalgamation of the companies. Under section 44A of the banking Regulation Act, 1949
two banking companies can be amalgamated voluntarily. In case of an amalgamated of any
company such as a non banking finance company with a banking company, the merger would
be covered under the provisions of section 394 of the companies act and such schemes can
be approved by the high courts and such cases do not require specific approval of the RBI.
Under section 396 of the act, central government may amalgamate two or more companies
in public interest.

44
 State Bank of India Act, 1955

Section 35 of the State Bank of India Act, 1955 confers power on SBI to enter into negotiation
for acquiring business including assets and liabilities of any banking institution with the
sanction of the central government and if so directed by the government in consultation with
the RBI. The terms and conditions of acquisition by central board of the SBI and the concerned
banking institution and the reserve bank of India is required to be submitted to the central
government for its sanction. The central government is empowered to sanction any scheme
of acquisition and such schemes of acquisition become effective from the date specified in
order of sanction.

As per sub-section (13) of section 38 of the SBI act, banking institution is defined as under
banking institution includes any individual or any association of individuals (whether
incorporated or not or whether a department of government or a separate institution),
carrying on the business of banking.

SBI may, therefore, acquire business of any other banking institution. Any individual or any
association of individuals carrying on banking business. The scope provided for acquisition
under the SBI act is very wide which includes any individual or any association of individuals
carrying on banking business. That means the individual or body of individuals carrying on
banking business. That means the individual or body of individuals carrying on banking business
may also include urban cooperative banks on NBFC. However it may be observed that there is
no specific mention of a corresponding new bank or a banking company in the definition of
banking institution under section 38(13) of the SBI act.

45
It is not clear whether under the provisions of section 35, SBI can acquire a corresponding new
bank or a RRB or its own subsidiary for that matter. Such a power mat have to be presumed by
interpreting the definition of banking institution in widest possible terms to include any person
doing business of banking. It can also be argued that if State Bank of India is given a power to
acquire the business of any individual doing banking business it should be permissible to acquire
any corporate doing banking business subject to compliance with law which is applicable to
such corporate. But in our view, it is not advisable to rely on such interpretations in the matter
of acquisition of business of banking being conducted by any company or other corporate. Any
such acquisition affects right to property and rights of many other stakeholders in the
organization to be acquired. The powers for acquisition are therefore required to be very clearly
and specifically provided by statue so that any possibility of challenge to the action of
acquisition by any stakeholder are minimized and such stakeholders are aware of their rights
by virtue of clear statutory provisions.

Nationalised banks may be amalgamated with any other nationalized bank or with another
banking institution. i.e. banking company or SBI or a subsidiary. A nationalized bank can not be
amalgamated with NBFC.

Under the provisions of section 9 it is permissible for the central government to merge a
corresponding new bank with a banking company or vice versa. If a corresponding new bank
becomes a transferor bank and is merged with a banking company being the transferee bank,
a question arises as to the applicability of the provisions of the companies act in respect to the
merger. The provisions of sec. 9 do not specifically exclude the applicability of the companies
act to any scheme of amalgamation of a company.

46
Further section 394(4) (b) of the companies act provides that a transferee company does not
include any company other than company within the meaning of companies act. But a
transferor company includes any body corporate whether the company is within the meaning
of companies act or not. The effect of this provision is that provision contained in the companies
act relating to amalgamation and mergers apply in cases where any corporation is to be merged
with a company.

Therefore if under section 9(2)(c) of nationalization act a corresponding new bank is to merged
with a banking company( transferee company), it will be necessary to comply with the
provisions of the companies act. It will be necessary that shareholder of the transferee banking
company the in value present and voting should approve the scheme of amalgamation.
Section 44A of the Banking Regulation Act which empowers RBI to approve amalgamation of
any two banking companies requires approval of shareholders of each company 2/3rd in value.
But since section44A does not apply if a Banking company is to be merged with a corresponding
new bank, approval of 3/4th in value of shareholders will apply to such merger in compliance
with the companies act.

Amalgamation of co-operative banks with Other Entities

Co-operative banks are under the regulation and supervision of reserve bank of India under
the provision of banking regulation act 1949(as applicable to cooperative banks). However
constitution, composition and administration of the cooperative societies are under
supervision of registrar of co-operative societies of respective states (in case of Maharashtra
State, cooperative societies are governed by the positions of Maharashtra co operative
societies act, 1961).

47
Amalgamation of cooperative banks

Under section 18A of the Maharashtra State cooperative societies act 1961(MCS Act) registrar
of cooperatives societies is empowered to amalgamate two or more cooperative banks in
public interest or in order to secure the proper management of one or more cooperative
banks. On amalgamation, a new entity comes into being.

48
 6. PROCEDURE OF BANK MERGERS AND AQUISITIONS

The procedure for merger either voluntary or otherwise is outlined in the respective state
statutes/ the Banking regulation Act. The Registrars, being the authorities vested with the
responsibility of administering the Acts, will be ensuring that the due process prescribed in the
Statutes has been complied with before they seek the approval of the RBI. They would also be
ensuring compliance with the statutory procedures for notifying the amalgamation after
obtaining the sanction of the RBI.

Before deciding on the merger, the authorized officials of the acquiring bank and the merging
bank sit together and discuss the procedural modalities and financial terms. After the
conclusion of the discussions, a scheme is prepared incorporating therein the all the details of
both the banks and the area terms and conditions. Once the scheme is finalized, it is tabled in
the meeting of Board of directors of respective banks. The board discusses the scheme
threadbare and accords its approval if the proposal is found to be financially viable and
beneficial in long run.

After the Board approval of the merger proposal, an extra ordinary general meeting of the
shareholders of the respective banks is convened to discuss the proposal and seek their
approval.

After the board approval of the merger proposal, a registered valuer is appointed to valuate
both the banks. The valuer valuates the banks on the basis of its share capital, market capital,
assets and liabilities, its reach and anticipated growth and sends its report to the respective
banks.

49
Once the valuation is accepted by the respective banks, they send the proposal along with all
relevant documents such as Board approval, shareholders approval, valuation report etc to
Reserve Bank of India and other regulatory bodies such Security & exchange board of India
(SEBI) for their approval.

After obtaining approvals from all the concerned institutions, authorized officials of both the
banks sit together and discuss and finalize share allocation proportion by the acquiring bank to
the shareholders of the merging bank.

After completion of the above procedures, a merger and acquisition agreement is signed by
the bank.

RBI Guidelines on Mergers & Acquisitions of Banks

With a view to facilitating consolidation and emergence of strong entities and providing an
avenue for non disruptive exit of weak/unviable entities in the banking sector, it has been
decided to frame guidelines to encourage merger/amalgamation in the sector.

Although the Banking Regulation Act, 1949 (AACS) does not empower Reserve Bank to
formulate a scheme with regard to merger and amalgamation of banks, the State
Governments have incorporated in their respective Acts a provision for obtaining prior
sanction in writing, of RBI for an order, inter alia, for sanctioning a scheme of amalgamation
or reconstruction.
The request for merger can emanate from banks registered under the same State Act or from
banks registered undera the Multi State Co-operative Societies Act (Central Act) for takeover
of a bank/s registered under State Act.

50
While the State Acts specifically provide for merger of co-operative societies registered under
them, the position with regard to take over of a co-operative bank registered under the State
Act by a co-operative bank registered under the CENTRAL

Although there are no specific provisions in the State Acts or the Central Act for the merger of
a co-operative society under the State Acts with that under the Central Act, it is felt that, if all
concerned including administrators of the concerned Acts are agreeable to order merger/
amalgamation, RBI may consider proposals on merits leaving the question of compliance with
relevant statutes to the administrators of the Acts. In other words, Reserve Bank will confine
its examination only to financial aspects and to the interests of depositors as well as the
stability of the financial system while considering such proposals.

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MOTIVES BEHIND CONSOLIDATION IN BANKING SECTOR

Based on the cases, we can narrow down the motives behind M&As to the
following :
Growth -
Organic growth takes time and dynamic firms prefer acquisitions to grow quickly in
size and geographical reach.
Synergy -
The merged entity, in most cases, has better ability in terms of both revenue
enhancement and cost reduction.
Managerial efficiency -
Acquirer can better manage the resources of the target whose value, in turn, rises
after the acquisition.
Strategic motives -
Two banks with complementary business interests can strengthen their positions in
the market through merger.
Market entry -
Cash rich firms use the acquisition route to buyout an established player in a new
market and then build upon the existing platform.
Tax shields and financial safeguards - Tax concessions act as a catalyst for a strong
bank to acquire distressed banks that have accumulated lossesand unclaimed
depreciation benefits in their books.

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 7.RISKS IN BANK MERGERS AND ACQUISITIONS

When two banks merge into one then there is an inevitable increase in the size of the
organization. Big size may not always be better. The size may get too widely and go beyond the
control of the management. The increased size may become a drug rather than an asset.

Consolidation does not lead to instant results and there is an incubation period before the
results arrive. Mergers and acquisitions are sometimes followed by losses and tough
intervening periods before the eventual profits pour in. Patience, forbearance and resilience
are required in ample measure to make any merger a success story. All may not be up to the
plan, which explains why there are high rate of failures in mergers.

Consolidation mainly comes due to the decision taken at the top. It is a top-heavy decision and
willingness of the rank and file of both entities may not be forthcoming. This leads to problems
of industrial relations, deprivation, depression and demotivation among the employees. Such a
work force can never churn out good results. Therefore, personal management at the highest
order with humane touch alone can pave the way.

The structure, systems and the procedures followed in two banks may be vastly different, for
example, a PSU bank or an old generation bank and that of a technologically superior foreign
bank. The erstwhile structures, systems and procedures may not be conducive in the new
milieu. A thorough overhauling and systems analysis has to be done to assimilate both the
organizations.

53
This is a time consuming process and requires lot of cautions approaches to reduce the
frictions.

There is a problem of valuation associated with all mergers. The shareholder of existing entities
has to be given new shares. Till now a foolproof valuation system for transfer and compensation
is yet to emerge.

Further, there is also a problem of brand projection. This becomes more complicated when
existing brands themselves have a good appeal. Question arises whether the earlier brands
should continue to be projected or should they be submerged in favour of a new
comprehensive identity. Goodwill is often towards a brand and its sub-merger is usually not
taken kindly.

54
 8. CHALLENGES AND OPPORTUNITIES IN INDIAN BANKING SECTOR
In a few years from now there would be greater presence of international players in Indian
financial system and some of the Indian banks would become global players in the coming
years. Also competition is not only on foreign turf but also in the domestic field. The new mantra
for Indian banks is to go global in search of new markets, customers and profits. But to do so
the Indian banking industry will have to meet certain challenges. Some of them are

FOREIGN BANKS India is experiencing greater presence of foreign banks over time. As a result
number of issues will arise like how will smaller national banks compete in India with them, and
will they themselves need to generate a larger international presence? Second, overlaps and
potential conflicts between home country regulators of foreign banks and host country
regulators: how will these be addressed and resolved in the years to come? It has been seen in
recent years that even relatively strong regulatory action taken by regulators against such
global banks has had negligible market or reputational impact on them in terms of their stock
price or similar metrics. Thus, there is loss of regulatory effectiveness as a result of the presence
of such financial conglomerates. Hence there is inevitable tension between the benefits that
such global conglomerates bring and some regulatory and market structure and competition
issues that may arise.

GREATER CAPITAL MARKET OPENNESS - An important feature of the Indian financial reform
process has been the calibrated opening of the capital account along with current account
convertibility. It has to be seen that the volatility of capital inflows does not result in
unacceptable disruption in exchange rate

55
determination with inevitable real sector consequences, and in domestic monetary conditions.
The vulnerability of financial intermediaries can be addressed through prudential regulations
and their supervision; risk management of non-financial entities. This will require market
development,Enhancement of regulatory capacity in these areas, as well as human resource
development in both financial intermediaries and non-financial entities.

TECHNOLOGY IS THE KEY IT is central to banking. Foreign banks and the new private sector
banks have embraced technology right from their inception and continue to do so even now.
Although public sector banks have crossed the 70%level of computerization, the direction is to
achieve 100%. Networking in banks has also been receiving focused attention in recent times.
Most recently the trend observed in the banking industry is the sharing of ATMs by banks. This
is one area where perhaps India needs to do significant catching up. It is wise for Indian banks
to exploit this globally state-of-art expertise, domestically available, to their fullest advantage.

CONSOLIDATION We are slowly but surely moving from a regime of "large number of small
banks" to "small number of large banks." The new era is one of consolidation around identified
core competencies i.e., mergers and acquisitions. Successful merger of HDFC Bank and Times
Bank; Stanchart and ANZ Grindlays; Centurion Bank and Bank of Punjab have demonstrated
this trend. Old private sector banks, many of which are not able to cushion their NPAs, expand
their business and induct technology due to limited capital base should be thinking seriously
about mergers and acquisitions.

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PUBLIC SECTOR BANKS - It is the public sector banks that have the large and widespread reach,
and hence have the potential for contributing effectively to achieve financial inclusion. But it
is also they who face the most difficult challenges in human resource development. They will
have to invest very heavily in skill enhancement at all levels:

at the top level for new strategic goal setting; at the middle level for implementing these goals;
and at the cutting edge lower levels for delivering the new service modes.
Given the current age composition of employees in these banks, they will also face new
recruitment challenges in the face of adverse compensation structures in comparison with the
freer private sector.

Basel II As of 2006, RBI has made it mandatory for Scheduled banks to follow Basel II norms.
Basel II is extremely data intensive and requires good quality data for better results. Data
versioning conflicts and data. streamline their operations and adopt enterprise wide IT
architectures. Banks need to look towards ensuring a risk culture, which penetrates throughout
the organization.

COST MANAGEMENT Cost containment is a key to sustainability of bank profits as well as

their long-term viability. In India, however, in 2003, operating costs as proportion of total assets
of scheduled commercial banks stood at 2.24%, which is quite high as compared to in other
economies. The tasks ahead are thus clear and within reach.

RECOVERY MANAGEMENT This is a key to the stability of the banking sector. Indian banks
have done a remarkable job in containment of non-performing loans (NPL) considering the
overhang issues and overall difficult environment.

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Recovery management is also linked to the banks
interest margins. Cost and recovery management supported by enabling legal framework hold
the key to future health and competitiveness of the Indian banks. Improving recovery
management in India is an area requiring expeditious and effective actions in legal, institutional
and judicial processes.

REACH AND INNOVATION - Higher sustained growth is contributing to enhanced demand for
financial savings opportunities. In rural areas in particular, there also appears to be increasing
diversification of productive opportunities. Also industrial expansion has accelerated;
merchandise trade growth is high; and there are vast demands for infrastructure investment,
from the public sector, private sector and through public private partnerships. Thus, the
banking system has to extend itself and innovate. Banks will have to innovate and look for new
delivery mechanisms and provide better access to the currently under-served. Innovative
channels for credit delivery for serving new rural credit needs will have to be found. The
budding expansion of non-agriculture service enterprises in rural areas will have to be financed.
Greater efforts will need to be made on information technology for record keeping, service
delivery, and reduction in transactions costs, risk assessment and risk management. Banks will
have to invest in new skills through new recruitment and through intensive training of existing
personnel.

RISK MANAGEMENT Banking in modern economies is all about risk management. The
successful negotiation and implementation of Basel Accord is likely to lead to an even sharper
focus on the risk measurement and risk management at the institutional level.

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Sound risk management practices would be an important pillar for staying ahead of the
competition. Banks can,on their part, formulate early warning indicators suited to their own
requirements, business profile and risk appetite in order to better monitor and manage risks.

GOVERNANCE The quality of corporate governance in the banks become critical as

competition intensifies, banks strive to retain their client base, and regulators move out of
controls and micro-regulation.
The objective should be to continuously strive for excellence. Improvement in policy-
framework, regulatory regime, market perceptions, and indeed, popular sentiments relating to
governance in banks need to be on the top of the agenda to serve our societys needs and
realities while being in harmony with the global perspective.

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 9. CONCLUSION

Post- liberalization, most Indian business house are undergoing major structural changes, the
level of restructuring activity is increasing rapidly and the consolidation through M&A have
reached every corporate boardroom.

most of the merger that took place in India during the last decade seemed to have follow the
consequences of merger in India. Corroborate the conclusion

Based on the trends in the banking sector and the insights from the cases highlighted in this
study, one can list some steps for the future which banks should consider, both in terms of
consolidation and general business. Firstly, banks can work towards a synergy-based merger
plan that could take shape latest by 2009 end with minimisation of technology-related
expenditure as a goal. There is also a need to note that merger or large size is just a facilitator,
but no guarantee for improved profitability on a sustained basis. Hence, the thrust should be
on improving risk management capabilities, corporate governance and strategic business
planning. In the short run, attempt options like outsourcing, strategic alliances, etc. can be
considered. Banks need to take advantage of this fast changing environment, where product
life cycles are short, time to market is critical and first mover advantage could be a decisive
factor in deciding who wins in future. Post-M&A, the resulting larger size should not affect
agility. The aim should be to create a nimble giant, rather than a clumsy dinosaur. At the same
time, lack of size should not be taken to imply irrelevance as specialized players can still seek to
provide niche and boutique services.

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 10. BIBLOGRAPHY

1. www.bankofrajasthan.com
2. WWW.WIKIPEDIA.COM
3. WWW.SBI.CO.IN

BOOKS
RACHNA JAWA, MERGER & ACQUSITION & CORPORATE
RESTRUCTURE IN INDIA

KAMATAN SRINIVAN, MERGERS & ACQISITIONS IN

INDIAN BANKING SECTOR
A STUDY OF SELECTED BANK

JAYSHREE BOSE, BANK MERGERS INDIAN SCENARIO

ABHISHEK THRIPATHI, MERGERS AND ACUISITIONS IN

INDIAN BANKING INDUSTRY

A P DASH, MERGERS AND ACQUISITIONS

[61]
 VASANT DESAI, BANK AND INSTITUTIONAL
MANAGEMENT

S. M. Jha, BANK MARKETING

SONALI JAIN, BANKING INDUSTRY IN INDIA

Reforms,Regulations & service Quality.

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