Need of Mergers and Acquisitions in Banking Industry of India

Abstract

This paper analyzes some critical issues of consolidation in Indian banking with particular emphasis on the views of two important stake-holders viz. shareholders and managers. First we review the trends in consolidation in global and Indian banking. Then to ascertain the shareholders "views, we conduct an event study analysis of bank stock returns which reveals that in the case of forced mergers, neither the bidder nor the target banks "shareholders have benefited. But in the case of voluntary mergers, the bidder banks "shareholders have gained more than those of the target banks. In spite of absence of any gains to shareholders of bidder banks, a survey of bank managers strongly favors mergers and identifies the critical issues in a successful merger as the valuation of loan portfolio, integration of IT platforms, and issues of human resource management. Finally we support the view of the need for large banks by arguing that imminent challenges to banks such as those posed by full convertibility, Basel-II environment, financial inclusion, and need for large investment banks are the primary factors for driving further consolidation in the banking sector in India and other Asian economies.