Mergers In Banking Industry

Overview of mergers in Indian banking industry

Brief History: Overview

The history of Indian banking can be divided into three main phases:

Phase I (1786- 1969) - Initial phase of banking in India when many small banks were set up.

Phase II (1969- 1991) - Nationalization, regularization and growth

Phase III (1991 onwards) - Liberalization and its aftermath

With the reforms in Phase III the Indian banking sector, as it stands today, is mature in supply, product range and reach, with banks having clean, strong and transparent balance sheets. The major growth drivers are increase in retail credit demand, proliferation of ATMs and debit-cards, decreasing NPAs due to securitization, improved macroeconomic conditions, diversification, interest rate

Historically, mergers and acquisitions activity started way back in 1920 when the Imperial Bank of India was born when three presidency banks (Bank of Bengal, Bank of Bombay and Bank of Madras) were reorganized to form a single banking entity, which was subsequently known as State Bank of India.

In the 1950s and 1960s there were instances of private sector banks, which had to be rescued or closed down because they had very low capital and were mostly operating with other people’s money. For instance, against total deposits of Rs.2750 crore at the end of December1968, the paid-up capital of private sector banks was only Rs.28.5 crore or just a little over 1%. In 1960, the failure of Palai Central Bank and Laxmi Bank led to loss of confidence in the banking system as a whole. So mergers were initiated to avoid losses to depositors and maintain confidence in the system.

In India, mergers have been used to bail out weak banks till the Narasimham Committee-II discouraged this practice. For instance, since the mid-1980s, several private banks had to be rescued through mergers with public sector

These fourteen banks, back then, contained a whooping eighty five per cent of the total bank deposits in our country. 1980, was witness to yet another round of nationalization and six more commercial banks came under the government control. With this huge leap, an enormous ninety one per cent of the banking sector came under direct control of the Indian Government. With this, the number of nationalized banks in India rose to twenty. Sometime later, in the year 1993, the government took yet another stride towards economic prosperity and made a turn towards merger of banks. The New Bank of India was merged with the Punjab National Bank (PNB). This was the first merger between nationalized banks in india. At present in india have 27 nationalized banks and 22 private sector banks and

Report of the Narsimhan Committee

The Narsimhan Committee, to file a report regarding the reforms in the Indian Banking Sector, was set up in the month of December, 1997. It submitted a report with the following suggestions, on April 23, 1998.

 It stressed on the use of merger of banks, to enhance size as well as operational strength for each of the