Magazine article Journal of Services Research

An Analysis of Visionary Architecture of Icicibank through Mergers and Acquisitions - a Case of Merger of Bank of Rajasthan with Icici Bank

Magazine article Journal of Services Research

An Analysis of Visionary Architecture of Icicibank through Mergers and Acquisitions - a Case of Merger of Bank of Rajasthan with Icici Bank

Article excerpt


Why Do Banks Merge?

Like any other industry, even banks aim to grow or expand their operations. This concept of banking merger had started long back in 1921 when three banks- Bank of Bombay, Bank of Madras, and the Bank of Calcutta merged and formed a new company known as the Imperial Bank of India. However in 1955, Imperial Bank of India got partially nationalized and was named as the State Bank of India along with its eight associate banks. Most of the committee's like the Banking Commission-1972 and 1976 and committee for functioning ofPublic Sector Banks-1978, Narasimham Committee (1991) and NarasimhamCommittee (1998) suggested and emphasized consolidation and mergers among strong banks with an aim to improve the credit delivery of the banks.

The Banking and Regulation Act (BRA) 1949, provides the regulatory framework for mergers and acquisitions in the Indian Banking sector. As per this act, there are two types of amalgamations- voluntary amalgamation and compulsory amalgamation. RBI has the full power and authority for approval of the voluntary amalgamations of the two banks under section 44(A) of the Banking Regulation Act, whereas compulsory amalgamations are induced or forced by the Reserve Bank of India under Section 45 of the BRA, in public interest or in the interest of the depositors of a distressed bank, or to secure proper management of a banking company, or in the interest of the banking system. Till the year 1960, all the amalgamations took place on a voluntary basis only later in the year 1960 an amendment has been bought in Banking Regulation Act with respect to compulsory amalgamation. So, section 45 of the act lays down different conditions under which a bank can be amalgamated with another bank under compulsory amalgamation by RBI in consultation with central government. However, RBI should always be watchful and cautious about such mergers because any bank merger might lead to loss of jobs especially at the senior level, so that has to be adjusted. Also, the cost of merger is very high and the merger even leads to many cultural differences.The main reason behind merging of banks is to cut costs and improve the efficiency. Also, there are many weak banks in the country. So, if a merger happens larger banks can absorb the weaker banks which helps them to avoid the problem of financial distress because of infusion of capital funds to address bad loans. The other reasons of merger include market leadership, growth and diversification, risks, synergies, competition and strategic integration. But all mergers are not successful. Reasons for failure of mergers are lack of common vision, weak leadership and team resourcing.

Today, it is one of the accepted facts, that banks need to consolidate in order to grow by overcoming all the pressures of enhancing capital. Latest merger in the Indian banking sector is merger of three banks-Vijaya Bank, Dena Bank and Bank of Baroda. This merger is the second largest merger after State Bank of India in terms of balance sheet; and this is the first ever three-way consolidation of banks in India. All the three banks have some advantages with them called synergies. It also helps in diversification of products, which helps the banks to reduce their risks.

Merger of Bank of Rajasthan With ICICI Bank

Mergers and acquisitions are in a way transforming the Indian Banking sector. This way of expansion through mergers and acquisitions is helping the banks to gain a good market share and thereby reducing the problems of nonperforming assets (NPA's) and thus eliminating those banks which are constantly into losses.

The following research explains thecase of acquisition that happened long back by ICICI Bank as a step to improve its performance and position in the market. The Bank of Rajasthan, which was already into losses and was facing many allegations, found it to be a=the right deal and thus agreed to the acquisition.

Reasons of Merger

Bank of Rajasthan had incurred a net loss for the year ended 31st March, 2010. …

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