Academic journal article Political Economy Journal of India

Mergers in Indian Banking Industry: A Study of the Merger of Centurion Bank of Punjab with HDFC Bank

Academic journal article Political Economy Journal of India

Mergers in Indian Banking Industry: A Study of the Merger of Centurion Bank of Punjab with HDFC Bank

Article excerpt

Introduction

The objectives of the reforms in Indian banking sector were to improve the profitability of banks with effective control and supervision, to create competitive spirit among Indian institutions and to link them with the world markets. Accordingly, in 1991 the Narasimham Committee recommended for deregulation of the interest rate structure, introduction of the prudential norms, proper income recognition, classification of assets based on their quality and provisioning against bad and doubtful debts, deregulation of the entry norms for private sector banks and foreign banks, permitting public and private banks to access the capital market etc. In addition to above reforms, a second high level committee on Banking Sector Reforms (1998) headed by M. Narasimham made wide ranging recommendations covering various aspects of banking policy, institutional, supervisory and legislative dimensions. The committee recommended for strict prudential norms, greater emphasis on asset/liability management and for restructuring of the banking system so as to have three or four large banks which would become international in character, eight to ten national banks and local banks confined to specific regions. Thus, the recent mergers and acquisitions in Indian banking sector have been initiated through the recommendations of Narasimham Committee II. The reforms in the Indian banking industry have led to changes and competition that forced the banks to improve competitiveness via mergers and acquisitions. Thus the suggestions of Narasimham Committee and Khan Committee for consolidation of banking through mergers and amalgamations, has brought about a change in commercial banks and directed them towards universal banking. It is thus, nothing but embracing the completely new objectives through transformation. It foresees the opportunities that lie beyond. ICICI Bank, Kotak Mahindra Bank Ltd., HDFC Bank Ltd and Development Credit Bank Ltd, these banks have made strategic alliances with several foreign Insurance companies for selling the insurance products both in life and general branches. It is a combination of the activities or functions of commercial banking and various activities, including insurance. It provides the entire facilities of financial products under one roof and is an attempt by bank to fulfill the lifelong needs of the customers by combining their activities. Consequently, the Indian banking industry has seen a series of mergers and acquisitions during the last two decades. The present paper studies the merger of Centurion Bank of Punjab with the HDFC Bank which took place on May 24, 2008.

Review of Literature

Various studies have been conducted on the impact of mergers of banks are Fadzlan, Sufian (2004) analyzed the technical and scale efficiency of domestic incorporated Malaysian Commercial Banks during the merger as well as in the pre and post merger period. The paper utilized non-parametric frontier approach, Data Envelopment Analysis. The period of the study ranges from 1998 to 2003. The study found that during the merger year, Malasian banks' overall efficiency level deteriorates significantly as compared to per merger period which was mainly due to scale inefficiency whereas in the post merger period, the overall efficiency was higher as compared to the pre merger period. Further, the study that found the small and medium size banks have benefited most by way of cost savings from expansion and mergers via economies of scale while the large banks are still suffering from scale inefficiency in the post merger period. Gourla, Adrian, Ravishankar Geetha and Jones Tom Weyman (2006) analyzed the efficiency benefits of merger among scheduled commercial banks in India. The paper used Bogeoft and Wang (2005) model and Data Envelopment Analysis to examine the potential for merger gains and decomposed into technical, harmony size efficiency components over the post reform period i.e. from 1991-92 to 2004-05. …

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