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Background
Efficiency Gains from Mergers and Research Question
Acquisitions of Indian Banks: Literature review
A Data Envelopment Analysis Approach Methodology
Model Used
Data Sources
Results
Conclusions
Till 1991, Indian Banking industry was highly protected and Consequences of liberalizing and deregulating the banking sector:
The Indian Banking industry has slowly been liberalized and Increased banking sector mergers due to:
¾ Increased competition: Entry of new private sector and foreign banks
deregulated since 1991
¾ RBI, India’s Central Bank, requires that all Banks operating in India must
compulsorily adopt Basel II framework by 2009.
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List of Bank mergers in India since 1969 Manoj Kumar Research Question Manoj Kumar
Significance of Research Question Manoj Kumar Significance of Research Question Manoj Kumar
While theoretically bank mergers should increase the overall Most existing studies are in context of developed economies
efficiency of merging banks, yet poorly conceived or badly and present contradictory findings.
executed bank mergers can make the merging entities
inefficient, which in turn can present risks to the entire
economy as a stable banking system is a prerequisite for a Rare studies in context of emerging economies like India
healthy economy.
Research on the efficiency gains from banking sector M&As
Therefore, effectiveness or otherwise of bank mergers should in India is scarce, largely because M&A deals in the Indian
necessarily be gauged in context of their influence on the banking sector is a recent phenomenon.
efficiency of the merging banks.
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Literature Review Manoj Kumar Literature Review Manoj Kumar
3
Summary of Possible Inputs and Outputs for Manoj Kumar Literature Review Manoj Kumar
Measuring the Relative Efficiency of Banks
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Literature Review Manoj Kumar Literature Review Manoj Kumar
Berger and Mester (1997) Several researchers have assessed the impact of mergers
used 6000 pieces of commercial bank data for US banks to measure amongst banks and financial institutions on their efficiency.
bank efficiency over the period from 1990 to 1995.
They use varied economic efficiency concepts--- cost, profit Methodologies used:
efficiencies. a comparison of pre- and post-merger performance; and/or
They found that efficiency estimates are different among all these an event-study type methodology based on prices of specific financial
concepts, since each of them involves different information.
market assets.
Berger et al. (1999) performed an extensive study of the Amel et al (2004) make another detailed review of the empirical literature
concerning the efficiency gains from bank mergers in the developed
existing literature concerning efficiency consequences of the
countries over the past twenty years in order to find common patterns that
consolidation of financial institutions and banks in particular. transcend national and sector specificities of each country.
Early studies of efficiency effects of mergers found that there is Their review suggested that the gains derived from the use of economies of
scale and scope have been less than what is commonly believed.
no substantial improvement for efficiency after the mergers and
some even found negative relations between bank efficiency and
mergers. They found economies of scale gains from M&As mainly for the smaller
banks only, while convincing evidence for economies of scope or gains in
managerial efficiency was not found.
On the other side, more recent research found that a substantial
improvement in the efficiency of banks after the merger. They also noted that it is difficult to see any gains from merger, if the post-
merger period under investigation is short.
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Literature Review Manoj Kumar Methodology Manoj Kumar
The DEA relative efficiency scores are calculated for all the public and Model Used
private sector banks operating in India using the Efficiency Measurement
System (EMS) software.
Inputs Outputs
Profit Efficiency Interest expenses Net interest income
Non-interest expenses Non-interest income
A single year data on input and output efficiency parameters for banks in
our sample is fed into the EMS software, which uses DEA to generate that
year’s relative efficiency scores for the banks in our sample.
Following the above procedure, the relative efficiency scores are calculated
separately for all the years in the post reform period starting from 1991 till
2006.
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Methodology Manoj Kumar Data Source and Sample Manoj Kumar
The changes in the relative efficiency score of the merging banks in the post merger would
indicate that bank mergers have influenced the efficiency of the merged entities. The banks specific inputs and outputs data required for the
DEA model was taken from
Year-wise average efficiency score of all banks is calculated.
CMIE’s Prowess database.
Excess efficiency score is calculated for all the merging banks by deducting the average RBI
relative efficiency score of the entire industry from the relative efficiency score of the bank.
Capitaline
The yearly excess efficiency scores for the merged banks are calculated for three years
starting from one year period before the year of bank merger being analyzed.
The directional trends in the yearly excess efficiency scores for each of the merged entities
are observed.
Results
List of Bank Mergers Analyzed Manoj Kumar Trends in the yearly excess efficiency scores for the Manoj Kumar
merged entities
Year Merger Table shows the year-wise excess efficiency scores for the merged entities starting from one year
1993 State Bank Of India and BCCI before the merger (shown as Y(-1) ) to one year after the merger (shown as Y(+1) ). The year of merger is
1994 Bank Of India and Bank of Karad shown as Y(+1). Table also shows directional trend in excess efficiency scores for each of the merged
banks. The increasing,
1995 State Bank Of India and Kashinath Seth Bank
decreasing and unsteady trends in excess efficiency scores are, respectively, shown by +, - and ± symbols.
1996 Oriental Bank Of Commerce and Punjab Co-operative Bank Merger Y(-1) Y(0) Y(+1) Trend
1996 Oriental Bank Of Commerce and Bari Daab Bank State Bank of India and BCCI 1.99% -1.47% -1.83% -
1999 Bank Of Baroda and Bareilly Corporation Bank Bank of India and Bank of Karad -14.97% -7.09% -2.02% +
1999 H D F C Bank Ltd.and Times Bank State Bank of India and Kashinath Seth Bank -1.83% 8.57% 12.43% +
Oriental Bank of Commerce and Punjab Co-operative Bank 7.09% 18.32% 15.45% +
1999 Union Bank Of India and Sikkim Bank
Oriental Bank of Commerce and Bari Daab Bank 7.09% 18.32% 15.45% +
2000 I C I C I Bank Ltd. and Bank of Madura Bank of Baroda and Bareilly Corporation Bank -4.02% 4.07% 8.68% +
2002 ICICI and I C I C I Bank Ltd. H D F C Bank Ltd.and Times Bank 16.14% 7.74% 10.48% ±
2002 Benaras State Bank Ltd. & Bank Of Baroda Union Bank of India and Sikkim Bank 10.73% 1.36% -3.91% -
I C I C I Bank Ltd. and Bank of Madura -1.23% 6.61% -1.63% ±
2002 Nedungadi Bank Ltd. & Punjab National Bank
ICICI and I C I C I Bank Ltd. -1.63% -3.09% 0.93% +
2004 Oriental Bank Of Commerce and Global Trust Bank Benaras State Bank Ltd. & Bank of Baroda 2.94% 13.17% 14.97% +
2005 IDBI and I D B I Bank Ltd. Nedungadi Bank Ltd. & Punjab National Bank 3.56% 14.96% 11.80% +
2005 Bank of Punjab Ltd. and Centurion Bank Oriental Bank of Commerce and Global Trust Bank 15.34% 8.63% 0.85% -
IDBI and I D B I Bank Ltd. 1.44% 4.39% #N/A +
Bank of Punjab Ltd. and Centurion Bank -26.64% -0.87% #N/A +
Average Excess Efficiency of Merged Entities 1.06% 6.24% 6.28% +
#N/A: As of the date of analysis, year-specific inputs and outputs data for the bank was not yet
available from any of the data sources used in this study.
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Results Manoj Kumar Conclusions Manoj Kumar
Fifteen mergers were analyzed: Bank mergers in India, at large, has positively influenced the
In ten mergers, the excess efficiency scores have been positively efficiency of the merged entities.
influenced the merged entity.