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MPRAMunichPersonalRePEcArchiveEciencyofIndianCommercialBanks:ThePost-ReformExperiencefromMergers&AcquisitionsBhattacharyya,SurajitandChatri,AnkitIndianInstituteofTechnologyBombay05.June2012Onlineat:39EfficiencyofIndianCommercialBanks:ThePost-ReformExperiencefromMergers&AcquisitionsSurajitBhattacharyya§&AnkitChatri†AbstractInrecenttimes,Indianbankshaveresortedtomergersandacquisitions(M&A)intheexpectationtoreapefficiencygainsbroughtinbysuchstrategies.ThispaperexplorestheimpactofM&AontechnicalefficiencyofIndiancommercialbanksduringtheseconddecade(2000-2010)ofreforms.WeuseDEAtocomputetherelativetechnicalefficiencyofbanksthatparticipatedinM&Aactivities.Thetechnicalefficiencyiscomputedunderbothcommonandseparatefrontierwiththeassumptionofconstantaswellasvariablereturnstoscale.Wealsocomparethepost-amalgamationefficiencyscoresoftheparticipatingbankswiththatofacontrolgroupcomprisingofsuchbanksthatdidnotundergoanyconsolidationsince1991.Ourresultsindicateevidenceofefficiencygainsforthemergingand/oracquiringbanks.Atthesametimetherearebanksthathaveexperienceddeteriorationintheirpost-M&Aaverageefficiencylevels.ItwouldbewiseforthebankstocarefullyconsiderthepotentialgainsaswellasthreatsposedbyM&Abeforeventuringintosuchactivities.Keywords:CommercialBanking;DEA;TechnicalEfficiency;ControlGroupJELClassification:C61,G21 § AssistantProfessorofEconomicsintheDepartmentofHumanities&SocialSciences,IndianInstituteofTechnologyBombay.E-mail:surajitb@iitb.ac.in † ConsultantinPublicPolicyDivision,AthenaInfonomicsIndiaPrivateLtd.E-mail:ankit@athenainfonomics.in2 EfficiencyofIndianCommercialBanks:ThePost-ReformExperiencefromMergers&Acquisitions1.IntroductionMergersandacquisitions(M&A)asameansofmoderncorporaterestructuringstrategieshavebeenincreasinglyresortedtoinrecenttimestoreapdifferentformsofstrategicbenefits(viz.costefficiencies,maximizationofshareholders’value,synergies,etc.).Financialinnovationshavealsofuelledconsolidationactivities.CommercialbanksacrosstheworldhaveresortedtoM&Ainexpectationtoenhanceefficiencygainsthroughsuchconsolidationstrategies.Inrecentpast,justafterthemassivesub-primecrisiswhentheworldhadwitnessedaglobalfinancialmeltdownthatengulfedsomeofthegiantadvancedeconomies,therehasbeenmuchemphasisontheefficiencyofthecommercialbanks.WefocusonM&AthathadtakenplaceintheIndiancommercialbankingsectorandthegamutofchallengesandopportunitiesthatsuchshakeoutsandrestructuringbroughtintothebanks.Inthiscontext,acentralissuehasbeenwhetherM&AenhancedefficiencyoftheIndiancommercialbanks.Thepost-liberalizationeraofbankingsectorreformshadopenedupfiercecompetitionamonginterandintra-bankgroupsinIndia.Thecutthroatcompetitionhasresultedinnewchallengesespeciallyforthepublicsectorbankstoholdbacktheirmarketshare,retentionoftheconsumerbaseandcreationofanewcustomerbase.Theobjectivehereistoexplorethepreandpost-M&AperformanceofIndianbankswhentherehadbeennumberofmeasures(e.g.,interestratederegulation,operationalautonomy,etc.)thatweretakentowardsthefinancialmarketreforms.Theitineraryofthepaperisasfollows.Section2evaluatesrecentperformanceofthebankswithrespecttocertainparameters.Section3discussesamalgamationamongcommercialbanksandissuesrelatedtoconcentrationinthebankingsector.Section4mentionstheextantempiricalliteraturefollowedbydiscussiononresearchmethodology,dataandvariablesinSection5.EmpiricalresultsarereportedinSection6.Finally,concludingremarksaregiveninSection7.2.PerformanceofScheduledCommercialBanksThebankingsectorinIndiaislargelydominatedbythepublicsectorbanks(PSBs)thataccountfornearly70percentofthebankingassets.iInparticular,thecommercialbanksaccountformajorityofthetotalassetsofIndia’sfinanciallandscapewhichinturnislargelydominatedbythescheduledcommercialbanks(SCBs).Thefastpaceofdepositsgrowthcanbeviewedfromthefactthatoverayeartime(2009to2010)totalbankdepositsincreasedby48.6percent.Notonlythat,thetotaladvancesandinvestmentsmadebytheSCBsgrewatanimpressiverateof16.5percentand18.6percentrespectively,duringthesameperiod.Latestavailablestatisticsrevealthatthenewprivatesectorbankshaveregisteredthehighestgrowthrateat20.8percentinthe3 branchnetworkduring2009-10whileSCBsasawholemarked7percentexpansionintheirtotalbranchnetworkduringthesameperiod.AllcommercialbankshavemigratedtoBaselIIframeworkformaintainingtheirregulatorycapital.Duringtheyear2010,thecapitalbaseofallSCBsincreasedby16.9percentoverthepreviousyear.ROAhasbeenhigherthanthebenchmark(1percent)in12publicsectorand14privatesectorbanks.iiThesefiguresportraythatsincetheinitiationoffinancialsectorreformsinearly1990s,privateandforeignbankshavecarvedanicheforthemselvesintheIndianfinancialsystem.Thesebanksalsostartedsettingnewstandardfortheentirebankingsectorintermsofcapitaladequacy,returnoncapitalandprofitperemployee,etc.iiiTheWorldEconomicForuminitsFinancialDevelopmentIndex(2008)creditsthegradualreformsandprudentialregulationsforthereasonablestabilityoftheIndianbankin