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Acme Intellects International Journal of Research in Management, Social Sciences & Technology ISSN 2320 – 2939 (Print) 2320-2793
(Online)
Let your Research be Global search– An Ultimate search of Truth- Reforms through Research Vol- 13 No. 13 Jan 2016
Impact of mergers on Indian Banking Sector: A comparative study of Public

and Private Sector merged Banks
by Dr. (Smt). A.N.Tamragundi [a] Devarajappa S [b]
Abstract
This paper examines the impact of mergers on performance of selected commercial banks
in India. The impact of mergers on performance of the banks has been evaluated from three
prospective i) Physical Performance of merged banks, ii) Financial Performance of Merged
Banks and iii) Share price performance. For this purpose 6 Indian commercial banks merged
during the period 2004 to 2008 were selected out of which, three are merger of public sector
banks with private sector banks and three are merger of private banks with private banks and
data have been collected from CMIE data base at IIM, Bangalore and Bank’s annual reports.
Statistical tool like, Mean, Standard deviation and T-Test have been used for analyzing the
performance and testing the hypotheses. Finally, the study concludes that, Merger is a useful
strategy, through this Banks can expand their operations, serve larger customer base, increases
profitability, liquidity and efficiency but the overall growth and financial illness of the bank can’t
be solved from mergers.
Keywords: Mergers, Commercial Banks, Performance, CMIE
[a] [b]
Dr. (Smt). A.N.Tamragundi, Devarajappa S,
Associate Professor, Assistant Professor,
P.G. Department of Commerce, Department of Commerce,
Karnatak University, University College of Arts,
Dharwad, Tumkur University, Tumkur,
Karnataka State, India. Karnataka State, India.
I. Introduction
Bank in general terminology is referred to as a financial institute or a corporation which
is authorized by the state or central government to deal with money by accepting deposits, giving
out loan and investing in securities. The main role of banks is the growth of economy by
providing funds for investment. In recent times banking sector has been undergoing a lot of
changes in terms of regulations and effects of globalization. These Changes have affected this
sector both structurally and strategically. With the changing Environment, many different
strategies have been adopted by this sector in order to remain efficient and to surge ahead in the
global arena. One such profitable strategy is the process of consolidation of the banks. There are
several ways to consolidate the banking industry; the most common adopted by banks is merger.
Merger of two weaker banks or merger of one healthy bank with one weak bank can be treated as
the faster and less costly way to improve profitability then spurring internal growth (Franz H
Khan 2007). The main motive behind the merger and acquisition in the banking industry is to
achieve economies of scale and scope. Mergers also help in the diversification of the products,
which help to reduce risk.
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Acme Intellects International Journal of Research in Management, Social Sciences & Technology ISSN 2320 – 2939 (Print) 2320-2793 (Online)
The Indian banking sector can be divided into two eras, the pre liberalization era and the
post liberalization era. In the pre liberalization era, Government of India nationalized 14 banks as
19 July 1965 and later on 6 more commercial banks were nationalized as 15 April 1980. In the
year 1993 government merged the New Banks of India and Punjab National banks and this was
the only merged between nationalized banks after that the number of Nationalized Banks reduces
from 20 to 19. In the post liberalization regime, government had initiated the policy of
liberalization and licenses were issued to the private banks which lead to the growth of Indian
banking sector. The Indian banking industry has shown a sign of improvement in performance
and efficiency after the global crises in 2008-2009. The Indian banking industry having far better
position now than it was at the time of the crises. Government has taken various initiatives to
strengthen the financial system. The economic recovery gained strength on the bank of variety of
monetary policy initiatives taken by the RBI.
The Government of India has adopted the route of mergers among others with a view to
restructure the banking system. Many small and weak banks have been merged with other banks
mainly have to protect the interests of depositors. These may be classified as forced mergers.
When a specific bank shows serious symptoms of sickness such as huge NPAs, erosion in net
worth or substantial decline in capital adequacy ratio, RBI imposes moratorium under section
45(1) of Banking Regulation Act 1949 for a specific period on the activities of sick bank. In the
moratorium period RBI identifies strong banks and asks that bank to prepare a scheme of merger.
In the merger scheme, normally the acquiring takes up all assets and liabilities of the weak bank
and ensures payment to all depositors in case they wish to withdraw their claims.
II. The Brief Overview of Indian Banking Sectors

Table-1
Structure of Indian Banking Sector (As on 31 March 2013)
Numbers Amount Rs in Million
S
Bank Group No of Branch No of Investme
No
Banks es Employees nt Advances Deposits
I Public Sector Banks 26 75,779 801659 17591058 44727740 57456972
Market Share (%) 82.27 73.08 67.31 76.07 77.34
a. State Banks & its 1,37,92,2 1,61,84,4
6 21,301 293965 47,29,979
Associates 40 49
1,28,61,0 3,09,35,5 4,12,72,5
20 54,478 507694
b. Nationalized Banks 79 00 23
13,958,35
20 16,001 26991 6261063 11432486
II Private Sector Banks 5
Market Share (%) 17.37 2.46 23.96 19.44 18.79
III Foreign Banks in India 43 334 25384 2280631 2636799 2879997
Market Share (%) 0.36 2.31 8.73 4.48 3.88
IV Total 89 92,114 1096984 26132752 58797025 74295324
Source: Calculated from the statistical tables relating to banks in India, RBI, 2012-13
*Note: Excluded Regional Rural Banks
In India, the Reserve Bank of India acts as a central bank of the country. Banking system
has a wide mix, comprising of scheduled and non-scheduled banks, co-operative sector banks,
post office savings banks, foreign and exchange banks. Table 1.1 provides a brief detail of Indian
commercial banks on the end of March 2013. As on March 2013, the number of commercial is
89 comprises 26 PSBs, 20 Private sector banks and 43foreign banks. It has been observed that
the market share of PSBs in terms of Investment, Advances and Deposits is more than 70%.
Therefore the public sector banks are the biggest player in the Indian Banking System and they
accounts for more than 82% of Branches of commercial banks in India. As on March 2013,
Private sectors banks accounts for nearly 17.37% while foreign banks constitutes less than 1
percent (i.e. 0.36%) and their Investment is near to 9 percent.
III. Background of M&As in Indian Banking Industry:

The banking system of India was started in 1770 and the first bank was the Indian bank
knows as the bank of Hindustan. Later on, some more banks like the bank of Bombay-1840, the
bank of Madras-1843 and the bank of culcutta-1840 were established under the charter of British
East India Company. These banks were merged in 1921 and took the form of a new bank known
as the Imperial bank of India. For the development of banking facilities in the rural areas, the
Imperial Bank of India partially nationalized on July 1955 and was named as the state bank of
India along with its 8 associate banks(at 7%). Later on, the state bank of Bikaner and the state
bank of Jaipur merged and formed the state bank of Bikaner and Jaipur.
Improvement of operational and distribution efficiency of commercial banks has always
been issue for discussion in the Indian policy background and Government of India in
consultation with Reserve Bank of India (RBI) have, over the years, appointed several
committees to suggest structural changes towards this objectives. Some important committees
among these are The Banking commission-1972 and 1976, and committee for functioning of
public sector Banks-1978. All these committees have emphasized on restructuring of the Indian
banking system with an aim to improve the credit delivery and also recommended in favour of
having three to four large banks at the all Indian level and remaining at regional level. However,
the thrust on consolidation has emerged with the Narasimham committee (1991) emphasizing on
convergence and consolidation to make the size of Indian commercial banks comparable with
those of globally active banks. Further, the second Narasimham committee (1998) had
suggested mergers among strong banks/ financial institutions would make for greater economic
and commercial sense and would be a case where the whole is greater than the sum of its part
and have a “force multiplier effect”.
IV. Literature Review

In today’s liberalized economy the corporate has experienced a major restructuring
through M&A route. Mergers and Acquisitions have been considered as a popular strategy for
Growth and Expansion. Empirical studies in this field are few and far in number. Some attempts
have been made in by scholars in the area of mergers which are reviewed and organized into
three sections are as follows:
Section-I: Reviews the post-merger physical performance evaluation of commercial
banks in India.
Section-II: Reviews the literature relates post-merger financial performance of Indian
commercial banks.
Section-III: studies the literature related to impact of mergers on shareholders wealth;
the summary review of each sections is given below Tables-2 & 3
Table-2
A summary of studies on financial performance of Merged Banks
Contributors Common Findings
Dimikris & Ketemina(2006), Technical efficiency and productivity
Santos(2006),Nazir & Alam(2010), Mohamad have been increased but there has
Akbar et all (2012) been decline in the operating
efficiency after bank reforms
Healy et. all, Ghosh, Kruse et. all, Weston and Operating performance (i.e, cash
Mansigka, Vijay & Saxena, Altunbas & inflow) of Merging firms improved
Marques, Mantravadi and Reddy (2007) significantly following acquisitions
Muhammad (2010) M&A fails improve the financial
performance of bank
Antony Akhil (2011), Pramod & Reddy, Tambi There is a significant improvement in
(2005), Bhide et. al (2002), Anup Agraval the profitability of merging firm
(1999), Beena P L (2000), Leepsa et al (2009),
Saplev V(2000)
Vardhan Pawaskar (2001), Kumar (2009), Surjit There was no increase in the post
(2002), Vanitha & Selvan (2007) merger profitability
Nedunchezhin and Premalatha (2011), Public sector banks efficiency score is
Sathye(2003), Ataullah et al (2006) more as compared to Private sector
banks in the post merger period as per
DEA Analysis
Singh and Kumar (1994), Ravi Shankar and Rao The rehabilitation of sick company by
merging with the healthy company is
the most effective way of their
rehabilitation
Table-3
A summary of studies on Shareholders wealth of Merged banks
Contributors Common findings
M Jayadev and Rudra In case of forced merger neither the bidder nor target banks
Sensarma shareholders have benefited
In case of voluntary merger the bidder bank shareholders
gained more than those of target bank
Gerard T O & Michael The acquiring banks dividend are economically significant
S P(2005) determinants of merged banks abnormal stock return
performance
Dr. K Das et al (2009)1 An Average wealth not significantly effect by Mergers and
Acquisition
Deo and Shah (2011), The merger announcements have no significant impact on the
Honston et al (2001) bidder portfolio. However M&A create significant positive
abnormal return for target shareholders
The issue of impact of mergers on the performance of banks has been well studied in the
literature. Most of the studies examined found that mergers and acquisition add significantly to
the profitability and positive impact on efficiency of banking sector except few Vardhan
Pawaskar (2001), Kumar (2009), Surjit (2002), Vanitha & Selvan (2007) and Muhammad (2010)
have contrary views.
V. Statement of the Problem

M & A in the industrial and service sector have brought new life to style of doing
business in today’s world. Globalization, technological changes, Market de-regulation &
liberasition have driven the M & As were across the world. The M & A deals are common not
only in the developed countries but also have become more apparent in the developing countries.
In the pre-liberasition period in India the phenomenon recorded and upsurge in the wake of
liberasition measures resulting into lessening the government controls, regulations and
restrictions where upon the corporate houses got freedom to expand, diversify modernize the
operation by reporting to mergers, takeovers etc with increasing competition and the economy
heading towards globalization M & A are expects to occur at a much larger scale than any time
in the past and have played a major role in achieving competitive edge in the dynamic market
environment.
The service industry is not far behind. According to the Reserve Bank of Indi’s Annual
Report 2007-2008, the year witnessed maximum mergers in financial services (15.70 per cent)
and the acquisition activity was also the largest (17.90 per cent) in the sector. It was due to
impact of liberalization in service sector. Bank Mergers and Acquisitions are not a new
phenomenon for Indian banking industry. Since 1961 there have been as many as 84
amalgamations between banks in India, out of which 46 took place before nationalization of
banks in 1969 while the remaining 38 occurred in post-liberalization period. Initially, bank
Mergers and Acquisitions were viewed as a regulatory mandate from the Reserve Bank of India
wherein the central bank forced a profitable bank to embrace the sick bank to revitalize the latter
(David, C. Cheng, 1989). In the pre period of 1999 the amalgamation of banks was primarily
triggered by the weak financial of the bank being merged, whereas in the post period of 1999 is
there have also been mergers between healthy banks driven by business and commercial
consideration. The government also proposed to recapitalize the weak banks (Sujit Sikidar 1996).
The recapitalized of weak banks has not yielded the expected results in the past and hence should
be linked to be a viable and time bound restructuring plan. With this backdrop, in the present
study, the researcher has made an attempt to analyze the performance evaluation of Mergers and
Acquisitions of scheduled commercial banks in India. Hence, the researcher wants to know the
answers for the following research questions:
1. What is the physical performance of select scheduled commercial bank in India during
the pre and post- period of Mergers and Acquisitions?
2. What is the financial position of select scheduled commercial bank in India during the pre
and post- period of Mergers and Acquisitions?
3. What is the benefit to the shareholders of select scheduled commercial bank in India after
Mergers and Acquisition?
VI. Need for the Study:

Mergers and acquisitions are very older strategies. The reasons may be different from
time to time and may vary from company to company. The tasks of combinations have become
more convenient after the new economic policy (liberalization policy in 1991). There have been
a plethora of studies in the area of mergers and acquisitions, but most of them focused on
manufacturing sector. Further very few studies have attempted to analyze the M&A activity in
the service sector. Furthermore literature available on M&A vis-a-vis banking sector has been
scanty. Hence, there is a need for a study of the present nature.
VII. Objectives of the study:

The present study entitled “Impact of Mergers on Performance Indian Banking Sector: A
Comparative Study of Public and Private Sector Merged Banks” set forth the following
objectives:
1) To study the impact of Mergers on Physical Performance of Public and Private Merged
Banks.
2) To analyze the impact of Mergers on Financial Performance of Public and Private
Merged Banks.
3) To examine the impact of mergers on share price performance of the Public and Private
merged Banks.
VIII. Scope of the Study:

The study focused on various issues relating to mergers and acquisitions in Indian
Banking Sector. It covers the different aspects like- legal implications for M&As, trends and
progress of M&As, physical, financial performance and share price performance of selected
merged banks before and after the merger.
IX. Research Hypothesis:

Hypothesis-1:
This hypothesis is focuses on Physical performance of Merged Banks. The dimensions of
physical performance of Banks considered for testing include Number of branches, Number of
employees and Changes in growth of the Deposits, Advances.
Hence the statement of hypothesis is as under:
H0: There is no significant difference between the physical performance of Indian commercial
Banks before and after the merger.
H1: There is significant difference between the physical performance of Indian commercial
Hypothesis-2:
This hypothesis deals with financial performance of the Banks.
Hence the statement of hypothesis is as under:
H0: There is no significant difference between the financial performance of Indian commercial
H1: There is significant difference between the financial performance of Indian commercial
The above hypothesis is studied by using the CAMEL Model and the same is sub divided into
the following five hypotheses:
 There is no significant difference between pre and post merger capital adequacy of the
merged banks
 There is no significant difference between pre and post merger assets quality of the
merged banks
 There is no significant difference between pre and post merger management efficiency of
the merged banks
 There is no significant difference between pre and post merger earnings quality of the
merged banks
 There is no significant difference between pre and post merger liquidity of the merged
banks
Hypothesis-3:
This hypothesis focuses on Impact of Mergers on short term share price performance of merged
banks. The dimension used for analysis is Abnormal Return (AR) and Cumulative Abnormal
Return (CAR)
H0: Mergers announcement do not have any significant impact on wealth of Merged Bank
Shareholders.
H1: Mergers announcement do not have any significant impact on wealth of Merged Bank
Shareholders.
X. Research Methodology:
a. Sample Descriptions:
As the complete sources of list of all the banks is not available, the data for this study
have been selected based on the convenience sampling method, among the banks list with RBI
Report. In the list of commercial banks only six scheduled commercial banks merged during the
period 2004 to 2008 were selected. During the course of study two major categories of mergers
were identified and accordingly six banks are divided into three Private and Public and
remaining three are Private and Private and the same is presented in Table-1.4.
Table-4
The list of Selected Merged Banks
S. No Target Bank Acquiring Bank Category Year
1 South Gujarat Local Area Bank Ltd. Bank of Baroda Pr-P 2004
2 Global Trust Bank Ltd. Oriental Bank of Commerce Pr-P 2004
3 Bharat Overseas Bank Ltd. Indian Overseas Bank Pr-P 2007
4 Ganesh Bank of Kurundwad Ltd. Federal Bank Ltd. Pr-Pr 2006
5 Sangli Bank Ltd. ICICI Bank Ltd. Pr-Pr 2007
6 Centurion Bank of Punjab Ltd. HDFC Bank Ltd. Pr-Pr 2008
Note: P=Public sector Pr=Private Sectors
In order to evaluate post merger financial performance of the merging banks in the long
run, at least 10 years financial data is required i.e., five years pre merger period and five years
post merger period. Only domestic mergers taking place were selected. Cross-border mergers,
i.e., in which either bidder or the target was based outside India were dropped. This was done to
ensure homogeneity of the economic and industrial environment so that generalizability of the
results could be achieved for Indian Mergers.
b. Data Collection:
The data variable required for the study and respective sources are discussed below;
 Financial statements and Accounting ratios
For the purpose of analyzing the impact of mergers on physical performance and
financial performance of selected commercial banks in India, the various financial variables and
accounting ratios have been used. For this purpose the data have been obtained from CMIE
database, Capitaline database, RBI reports and Bank’s annual reports.
 Share price performance in short term

Another important objective of the research is, to examine the impact of merger on short
term performance of share price by calculating abnormal return (AR) and Cumulative Abnormal
return (CAR). AR and CAR have been determined as per Event Study methodology. For this
purpose the required data is collected from yahoofinance.com
c. Data Analyses Method:
The statistical tool like- Mean, Standard deviation, simple and multiple correlation, Regression,
T-test, one way and two way ANOVA are used to study the trends & progress of M&A,
Physical and financial performance and share price performance of the selected merged banks
before and after merger. The year of merger was considered as a base year and denoted as 0 and
it is not considered for analysis.
XI. Analysis and Interpretation

 Comparative Analysis Of Physical Performance Of Public And Private Sectors Merged
Bank:
From the table 5 & 6, it can be say that, there is a perfect positive correlation between
explanatory variable (deposits, advances, business, number of branches and number of
employees) and predictor of profit of both public and private sector merged banks. As per the
Analysis of Variance (see table 5.26), the merger of public sector banks with private sector banks
are highly significant (F<0.001<0.05) and the merger of private sectors banks with private sector
banks is insignificant (F>1.687>0.05). This is indicates that, the physical performance of public
sector merged banks is well after the merger while the private sector banks not performed well
after the merger.
Table-5: Regression Analysis of select public and private merged banks
Sector* Multiple R R Square Adjusted R Square Standard Error
Public sector 0.986 0.973 0.945 220.733
Private sector 1.000 0.999 0.998 223.834
Source: CMIE Database, Bank’s Annual Reports
Table-6: ANOVA of select public and private merged banks
Sector Df SS MS F** Significance F*
Regression 5 8644935.179 1728987.036 35.486 0.001
Public Sector Residual 5 243614.549 48722.910
Total 10 8888549.728
Regression 5 251969652.751 50393930.550 1005.833 1.687
Private sector Residual 5 250508.482 50101.696
Total 10 252220161.232
Source: Source: CMIE Database, Bank’s Annual Reports
*predictor variable- profit at 5% level of significance
**explanatory variable-deposits, advances, business, no. of branches and no. of employees
 Comparative Analysis of Financial Performance of Public and Private sectors merged

Banks
Table-7
Statistical summary of financial performance of Public sector and Private Sector Banks in India
PUBLIC SECTOR BANKS PRIVATE SECTOR BANKS
Parameters Ratios Merger N df P(T<=t) P(T<=t)
Mean SD t Stat Mean SD t Stat
two-tail two-tail
PRE 5 12.68 0.85 - 11.91 0.84 -
CAR 8 0.501 0.000
CAPITAL ADEQUACY
POST 5 12.98 0.37 0.704** 17.95 0.66 12.649*

PRE 5 16.87 1.63 12.45 0.93
DER 8 1.879** 0.097 12.980* 0.000
POST 5 15.00 1.50 6.71 0.34
PRE 5 45.87 4.19 51.32 2.66
AAR 8 -6.831* 0.000 -4.479* 0.002
POST 5 60.63 2.41 57.47 1.54
PRE 5 32.87 0.85 72.33 4.65
GS/TI 8 -4.618* 0.002 1.522** 0.166
POST 5 36.47 1.52 68.09 4.14
NNAP / PRE 5 2.78 1.22 2.14 1.54
QUALITY
8 3.211* 0.012 2.120** 0.067

ASSETS
NA POST 5 1.00 0.21 0.67 0.18

PRE 5 39.11 1.44 34.69 3.00
TI / TA 8 13.340* 0.000 3.756* 0.006
POST 5 26.01 1.66 29.35 1.06
PRE 5 114.61 1.77 141.18 11.07 -
TA / TD 8 -3.322* 0.011 0.359
POST 5 118.11 1.55 146.07 1.92 0.973**
MANAGEMENT
EFFICIENCY
PRE 5 0.24 0.09 0.66 0.08

PPE 8 -4.052* 0.004 -2.640* 0.030
POST 5 0.47 0.09 0.88 0.16
PRE 5 26.17 9.05 67.32 4.25 -
PPE 8 -4.810* 0.001 0.013
POST 5 87.60 27.08 78.82 6.88 3.181**
PRE 5 22.46 3.22 19.52 2.52
RONW 8 5.890* 0.000 4.928* 0.001
POST 5 12.36 2.08 12.56 1.90
PRE 5 1.57 0.39 1.75 0.28
OP / WF 8 2.824* 0.022 -3.520* 0.008
POST 5 1.06 0.12 2.42 0.32
EARNINGS
QUALITY
PRE 5 1.07 0.23 1.38 0.15

NP / WF 8 2.879* 0.021 -2.659* 0.029
POST 5 0.74 0.12 1.69 0.21
PAT PRE 5 130.93 28.64 156.39 54.11
8 0.713** 0.496 1.371** 0.208
Growth POST 5 117.81 29.50 123.02 5.99
PRE 5 45.88 2.72 46.48 3.02
LA / TD 8 6.302* 0.000 3.208* 0.012
LIQUIDIDTY
POST 5 37.38 1.31 40.57 2.80

PRE 5 40.06 2.72 33.47 0.72
LA / TA 8 6.539* 0.000 4.916* 0.001
POST 5 31.67 0.91 28.04 2.36
PRE 5 12.50 2.01 24.92 0.84
GS / TA 8 2.928* 0.019 8.932* 0.000
POST 5 9.64 0.84 19.77 0.98
Source: CMIE Database, Bank’s annual Reports *Significant, **Not Significant at 5 percent level
From the Table-7, the following observation can be made;

Capital Adequacy:
Capital Adequacy Ratio (CAR) and Debt equity ratio (DER) of public sector banks got
insignificant t value while private sector bank’s CAR and DER got significant t value. Therefore,
it can conclude paying capacity and financial health of private sector bank has been increased
after the merger but paying capacity public sector banks is more or less during pre and post-
merger.
Assets quality:
Mean Net NPA ratio of both the sector is decreased after the merger but NPA ratio of public
sector banks got significant t value while private sector banks got t value insignificant t value. It
shows that, assets quality of public sector banks increased after the merger while private sector
banks efficiency is more or less same during pre and post merger period.
Management Efficiency:
All management efficiency ratios of public sector banks got significant t value while private
sector bank’s efficiency ratios also go significant t value except the TA to TD ratio. Therefore it
can conclude that, the overall productivity and efficiency of both the sector improved during
post-merger.
Liquidation:
Liquidity ratios of both the sector are deceased after the merger, this is positive sign for the bank
and all the ratios got significant t value. Hence it is concluded that efficiency of both sector
banks increased after the merger.
 Performance of Public Sector and Private Sector Banks

To evaluate market reaction to public sector and private sector bank’s activities acquiring other
private limited banks, the AAR and CAAR for 20 days surrounding the event day (41 days event
period) based on market adjusted model are given in table -8.
Public Sector Banks

According to table 7.7, during pre-announcement period, the risk adjusted average abnormal
return (AAR) is negative for 14 days out of 20 days, n which 8 days (-20, -19, -18, -11, -10, -8, -
4 &-3) AAR is negative and significant at 1 percent level. During period after the announcement,
the AAR is negative on +1 to +3, +5, +6, +8, +9 & +12 and significant at 1 percent level. On the
day of event the AAR is negative and significant at 1 percent level. The CAAR is negative
during the whole window period. Significantly, the AAR is positive only for few days.
The above picture implies that, the market has anticipated the merger events in public sector
banks and considered the merger activity as unfavorable, in turn destructing the shareholders
wealth.
Private Sector Banks

According to table 8, AAR of public sector bank is positive for 21 days out of 41 days
window period. During pre announcement period AAR is positive for 11 days out of 20 days, in
which AAR is significant at 1 percent level on day -20 (AAR=0.0161, t=6.05), -19
(AAR=0.0166, t=6.24), -18 (AAR=0.0177, 6.67) -16 (AAR=0.0129, t=4.84) -11 (AAR=0.106 ,
t=3.9745) -8 (AAR=0.0293, t=11.009), -3 (AAR=0.0071, t=2.68), -2 (AAR=0.0158, t=5.922).
Though the significant negative AAR in some days of pre announcement period, it can
be said that, market has anticipated the merger activity and considered the activity as favorable.
On the day of event the AAR is also positive and significant at 1 percent level (AAR=0.0083,
t=3.123), this is further supported the favorable positive reaction of the market to private sector
banks.
During post-merger period also positive 9 days out of 20 days and which is significant on
+1(AAR=0.005, t=1.88, p<0.10), +5 (AAR=0.0072, t<2.69 p<0.05), on +13, +14, +17 & +18
AAR is positive and significant at 1 percent level.
From the above it is cleared that, market has anticipated and welcomed the merger
activity of Private sector Banks in turn resulting in increased the wealth to the shareholders.
Table-7.6
Result of Average Abnormal return, CAAR ant Statistical test of Public Sector Banks and Private Sector
Banks
Public sector Banks Private sector Banks
Event Days AAR CAAR t-test AAR CAAR t-test
-20 -0.0238 -0.0238 -9.8335 0.0161 0.0161 6.0512
-19 -0.0151 -0.0389 -6.2324 0.0166 0.0327 6.2472
-18 -0.0262 -0.0652 -10.8312 0.0177 0.0505 6.6701
-17 0.0151 -0.0501 6.2374 0.0040 0.0545 1.5117
-16 0.0057 -0.0443 2.3623 0.0129 0.0674 4.8419
-15 -0.0021 -0.0464 -0.8472 -0.0314 0.0360 -11.7926
-14 0.0071 -0.0393 2.9268 -0.0141 0.0219 -5.2876
-13 -0.0292 -0.0685 -12.0598 -0.0056 0.0163 -2.1206
-12 0.0169 -0.0516 6.9902 -0.0150 0.0013 -5.6344
-11 -0.0158 -0.0674 -6.5144 0.0106 0.0119 3.9745
-10 -0.0146 -0.0820 -6.0306 -0.0011 0.0108 -0.3955
-9 0.0063 -0.0757 2.5842 -0.0008 0.0100 -0.3142
-8 -0.0094 -0.0851 -3.8632 0.0293 0.0393 11.0009
-7 0.0065 -0.0786 2.6669 -0.0118 0.0274 -4.4402
-6 0.0323 -0.0463 13.3378 0.0005 0.0280 0.1986
-5 0.0104 -0.0359 4.2943 0.0021 0.0301 0.8071
-4 -0.0238 -0.0597 -9.8047 -0.0077 0.0225 -2.8755
-3 -0.0249 -0.0845 -10.2595 0.0071 0.0296 2.6841
-2 -0.0022 -0.0867 -0.9153 0.0158 0.0454 5.9221
-1 -0.0013 -0.0881 -0.5488 -0.0148 0.0306 -5.5559
0 -0.0097 -0.0978 -4.0218 0.0083 0.0389 3.1232
1 -0.0122 -0.1101 -5.0527 0.0050 0.0439 1.8862
2 -0.0033 -0.1134 -1.3608 -0.0162 0.0277 -6.0911
3 -0.0036 -0.1170 -1.4969 -0.0011 0.0266 -0.4314
4 0.0166 -0.1004 6.8627 -0.0049 0.0216 -1.8588
5 -0.0098 -0.1102 -4.0517 0.0072 0.0288 2.6930
6 -0.0303 -0.1405 -12.4967 -0.0364 -0.0076 -13.6856
7 0.0062 -0.1342 2.5662 -0.0398 -0.0474 -14.9462
8 -0.0017 -0.1359 -0.7005 0.0403 -0.0071 15.1557
9 -0.0193 -0.1553 -7.9837 0.0019 -0.0052 0.7021
10 0.0157 -0.1396 6.4903 -0.0077 -0.0130 -2.9079
11 0.0122 -0.1274 5.0301 -0.0256 -0.0385 -9.6085
12 -0.0088 -0.1362 -3.6478 -0.0181 -0.0567 -6.8145
13 0.0002 -0.1360 0.0882 0.0085 -0.0482 3.1778
14 0.0048 -0.1312 1.9906 0.0176 -0.0306 6.6293
15 0.0113 -0.1199 4.6524 -0.0046 -0.0352 -1.7271
16 0.0111 -0.1088 4.5617 -0.0081 -0.0433 -3.0494
17 0.0146 -0.0943 6.0053 0.0249 -0.0184 9.3418
18 0.0190 -0.0753 7.8364 0.0173 -0.0011 6.4970
19 0.0103 -0.0650 4.2663 0.0060 0.0049 2.2484
20 0.0191 -0.0458 7.8920 -0.0035 0.0014 -1.3126
Source: Computed on the basis of Yahoofinance data base
*Significant at 1% level, **Significant at 5% level ***Significant at 10% level
Figure-7.13
Shows the relationship between Average Abnormal Return (ARR) to time
during the event period (day -20 to +20)
Figure-7.14
Shows the relationship between Cumulative average abnormal return (CAAR) to time
during the event period (day -20 to +20)
Test of Hypothesis:
H0= there is no difference in abnormal return of merged bank before and after announcement of
period.
H1= there is a difference in abnormal return of merged bank before and after announcement of
period.
Conclusion: Reject Null Hypothesis, because there is difference in abnormal returns of merged
banks before and after announcement period.
XII. Suggestions and Conclusion:

The banking industry is one of the rapidly growing industries in India. The growth rate of
this sector is remarkable and it has become the most preferred banking destinations for
International Investors. After economic reforms, 1991, there have been paradigm shift in Indian
banking sectors. A relatively new dimension in Indian banking industry has accelerated through
Mergers and Acquisitions. It is observed in the study that, the finance and banking industries
contributes highest number of M&As deals during the study period 2008 to 2014 (Kar (1990-
2000) and Priya Bhalla (2001-2007) were also found the same) and the trends of consolidation in
Indian Banking Industry is so for restricted to merger of small and weak banks with large and
public sector banks. To this backdrop, the present study examined the ‘Impact of Mergers on
Performance of selected commercial banks in India’. The impact of mergers on performance of
the banks has been evaluated from three prospective i) Physical Performance of merged banks,
ii) Financial Performance of Merged Banks and iii) Share price performance.
Analysis of physical performance of merged banks emphasizes that, there is a significant
improvements in Deposits, Advances, Businesses and Number of Employees of all selected
banks. Therefore, this result indicates that Mergers can help commercial banks to achieve
physical performance. While the analysis of financial performance of merged banks yields mixed
results, the results indicates that, a significant improvement in Assets Quality, Management
Efficiency, Earnings quality and liquidity of the selected banks and Capital Adequacy of Public
sector banks did not indicate improvements, this may be the policy matters of public sectors
banks but on an average the overall financial performance of merged banks increased after the
merger. So Merger could be considered as a useful strategy in order to achieve financial
performance of commercial banks by achieving economies of scale, competitiveness, and
increased efficiency and Market share. Further the analysis of share price performance of merged
banks shown that, there is no consistent pattern of Abnormal Returns of selected merged banks,
Market positively reacted only in case ICICI Bank and Federal Bank. The rest of the cases
market negatively reacted for merger announcement. Therefore from this result it can be said
that, Merger is not a preferable tool to achieve shareholders wealth of banks in short term.
It is also suggested to Government of India and RBI to liberalize their policies in
connection with Mergers and Acquisitions to increase number of deals between the banks. To
conclude, Merger is a useful strategy, through this Banks can expand their operations, serve
larger customer base, increases profitability, liquidity and efficiency but the overall growth and
financial illness of the bank can’t be solved from mergers.
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Acme Intellects International Journal of Research in Management, Social Sciences & Technology ISSN 2320 – 2939 (Print) 2320-2793

Impact of mergers on Indian Banking Sector: A comparative study of Public

II. The Brief Overview of Indian Banking Sectors

III. Background of M&As in Indian Banking Industry:

IV. Literature Review

V. Statement of the Problem

VI. Need for the Study:

VII. Objectives of the study:

VIII. Scope of the Study:

IX. Research Hypothesis:

 Share price performance in short term

XI. Analysis and Interpretation

 Comparative Analysis of Financial Performance of Public and Private sectors merged

POST 5 12.98 0.37 0.704** 17.95 0.66 12.649*

8 3.211* 0.012 2.120** 0.067

NA POST 5 1.00 0.21 0.67 0.18

PRE 5 0.24 0.09 0.66 0.08

PRE 5 1.07 0.23 1.38 0.15

POST 5 37.38 1.31 40.57 2.80

From the Table-7, the following observation can be made;

 Performance of Public Sector and Private Sector Banks

Public Sector Banks

Private Sector Banks

XII. Suggestions and Conclusion:

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