Banking Industry Need for Consolidation

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PRESENTATION ONBANKING INDUSTRY CALLS FOR CONSOLIDATIONPresented To: Ms. Harleen Mahajan Asst. Professor PCTE Presented By: Poonam Khurana Rashi Sachdeva Ruchi Sharma Ruchi Wadhwa MBA- 2C

INDIAN BANKING INDUSTRY Banks act as the store as well as the power house of the countrys wealth. Governed by the Banking Regulation Act of India, 1949 and monitored by the Reserve Bank of India. Size - Rs 66.7 trillion (US$ 1.22 trillion). Public sector banks account for

70% of the Indian banking assets.

Evolution of Banking Industry

Trigger Events Beginning of institutional banking with 3 joint stock banks.

Phases

Major Changes

Phase 1 Pre- Nationalization Phase

Birth of Joint stock Banking Companies. Introduction of deposit banking & Bank Branches. State Bank of India formed out of Imperial Bank. 20 SCBs nationalized in two phases.

Nationalization of Imperial Bank & 20 other scheduled commercial banks Phase 2 Era of Nationalization & Consolidation

Acceptance of recommendations of the Narsimham Committee.

Phase- 3 Introduction of Indian Financial & Banking sector Reforms & Partial Liberalization

Interest rates deregulated. Statutory preemption of resources eased more private players entry. FDI ceiling for the banking sector increased to 74 % from 49 % More liberal branch :Licensing followed.

Hike in F DI ceiling Phase- 4 Period of Increased Liberalization.

Phase 4 continues more liberalization expected

Structure of Indian Banking Industry

BUSINESS DIVISION

RETAIL BANKING

WHOLESALE BANKING

BUSINESS DIVISION

OTHER BANKING BUSINESSES

TREASURY OPERATIONS

NPAS IN BANKS NPAs are a sum of those loans that are vulnerable to

go bad or default out of the total lending a bank hasdone.

NPAs as major challenge for Banking Industry The banking sector has been facing the seriousproblems of the rising NPAs.

One of the main causes of NPAs in the bankingsector is the Directed loans system. Political interference, manipulation, misuse of fund & and unreliable customer.

Causes of Increasing NPAs Improper selection of borrower's activities

Industrial problem Hike in interest rates

Low level of expertise Loans to priority sector

Recession in the market Government policies

Non Performing Assets of Public Sector BanksName of the Bank Allahabad Bank State Bank of India Punjab National Bank Bank of India Canara Bank IDBI Bank Ltd. Oriental Bank of Commerce Total NPAs (in Rs. Cr.) 42,907 23,074 4,379 4,357 2,982 2,785 1,921 Percentage of which are of Micro & Small Enterprise 17.1% 13.6% 30.8% 37.8% 18.6% 16.3% 18.8%

Total NPAs in all Public Sector Banks: Rs. 71,047 Cr

Non Performing Assets of Private Sector BanksName of the Bank ICICI Bank Ltd Total NPAs (in Rs. Cr.) 9,816 Percentage of which are of Micro & Small Enterprise 0.9%

HDFC Bank Ltd

1,660

19.4%

Axis Bank Ltd.

1,587

10.6%

Kotak Mahindra Bank Ltd

603

11.0%

Total NPAs in all Private Sector Banks: Rs. 17,971 Cr

Non Performing Assets of Foreign Sector BanksName of the Bank Total NPAs (in Rs. Cr.) Percentage of which are of Micro & Small Enterprise

Standard Chartered BankHSBC Ltd Citibank Barclays Bank Deutsche Bank

1,148996 839 781 179

0.7%6.0% 19.7% 6.4% 2.1%

Total NPAs in all Foreign Sector Banks: Rs. 5,065 Cr

Consolidation Refers to combining two or more firms through purchase, merger or acquisition.

The ownership is transferred tothe new company that is assets & liabilities of the firms are absorbed by new company.

Consolidation through M&AM& A is used as a strategy to achieve a: larger size faster growth to become more competitive. According to RBIs Report: Maximum mergers are in financial services (15.7 per cent) and the acquisition activity was also the largest (17.9 per cent) in this sector.

Number Of Mergers From 1961-2012Duration1961-1968

PhasePre-nationalization

Number of Mergers46

1969-19921993-2012

NationalizationPost-reform

1321

Post Reform MergersForced Mergers Market driven Mergers 13 5

Convergence of Financial Institutions into BanksRegulatory Compulsions

2

1

Some successful consolidations in Banking Industry

Benefits of Consolidation Withstand external assaults more effectively Banks with complimentary expertise Broadened geographical & regional spread (un-served area) Market image and brand name Easy to venture overseas Single window service

Saving Effective absorption of new technologies

Need for Consolidation In Banking Industry

I. Synergy: E.g.- Oriental Bank of Commerces merger with Global Trust Bank. Benefits: OBC gained 104 branches, 276 ATMs, 1400

employees & 1 million customer base.Drawback:

Merger resulted in low CAR for OBC, which wasdetrimental to solvency.

II. Growth: E.g.- ICICI Bank Ltd. Acquires Bank of Madura (March '01) Benefits: The branch network of the merged entity increased

from 97 to 378. ICICI Bank gained additional customer base of 1.2 million & asset base of crore.

III. Strategic motives E.g.- HDFC Bank Acquires Centurion Bank of Punjab (May '08)

Benefits: The merged entity has an asset size of Rs. 109718 crore

(7th largest in India). Improved distribution with 1148 branches & 2358 ATMs.

IV. Market EntryE.g.- Standard Chartereds merger with ANZ Grindlays Benefits: Standard Chatered became largest foreign bank in India with over 56 branches & more than 36% shares in

credit card.

V. Regulatory InterventionEg- Bank of Baroda Acquires South Gujarat Local Area Bank Ltd. (June 04) Benefits: The SGLAB customers were effectively transferred to more secure & bigger bank.

Risks Associated Inefficient handling of bigger units. De-motivation among employees. HR Issues.

Indian banking industry is presently at a crucialjuncture.

With increasing globalization in sight, there have beencalls for greater consolidation in the industry from both the government as well as regulator.