Source: E-mail dt. 8.10.2012


Restructuring of Banks and Financial Institutions - A Revisit


Prof. J. Chandra Prasad

Department of Management Studies

Rajiv Gandhi College of P.G. & Professional Studies

Rajahmundry, Andhra Pradesh, India




The concept of corporate restructuring, commonly known as Mergers and Acquisitions (M&A) in Asian Countries, took its birth in America somewhere in 1890.  Till date about two-third of very large public corporations in US have had mergers in the corporate history.


A strong banking system is critical for sound economic growth so it is natural to improve the comprehensiveness and quality of the banking system to bring efficiency in the performance of the real sectors.  Since more than one decade, the banking industry has been transformed throughout the world from a highly protected and regulated industry to a competitive and deregulated one.  Especially, globalization coupled with technological development has shrunk the boundaries by which financial services and products are being provided to the customers residing at any part of the globe.  Further, due to innovations and improvements in service delivery channels, the trend of global banking has now been marked by twin phenomena of consolidation and convergence.


If banks are to be made more effective, efficient and comparable with their counterparts functioning abroad, they would need to be more capitalized, automated and technology oriented, even while strengthening their internal operations and systems.  Similarly, in order to make them comparable with their competitors from abroad with regard to the size of their capital and asset base, it would be necessary to restructure the banks.  It can be out rightly proclaimed that mergers and acquisitions are the real strategies to achieve the requisite size and financial strength.


Narasimham Committee on Banking Reforms gave its report during November 1991 providing operational flexibility and functional autonomy to strengthen the financial system and also for increasing the productivity and profitability of the banks.  The Union Finance Minister, P. Chidambaram gave an inkling of the government’s stance on mergers in the banking sector when he stated that The Government would encourage consolidation among banks in order to make them globally competitive.


Broadly there are five reasons that drive mergers viz., (a) Economies of scale, (b) Economies of scope, (c) Potential for risk diversification (d) Personal incentives of management and (e) Public policy, e.g., a desire to have a small number of global players rather than a large number of local players.

The  second report of  Narasimham    committee (1998) made the proposal for the process of consolidation in the 27 public sector banks, suggesting that they should be brought down to 3-4 global entities and 5-6 national entities. India is a hugely over-banked and under-serviced country. If one includes the branch network of old and new private banks, collectively the spread could be over 68,000 branches across the country. Besides, there are a few thousand co-operative bank branches. On an average one bank branch caters to 15,000 people. However, only one bank-State Bank of India-is among the top 100 banks in the world. This calls for consolidation as an imperative in the Indian banking industry.




The main objective of the paper is to focus and explain the trend, need and modalities of Restructuring of banks and financial institutions. The paper helps to have an insight into the mergers and acquisitions and the strategies of restructuring initiated in the case of different financial institutions like Commercial Banks, Regional Rural Banks, Cooperative Banks and Development Financial Institutions.




According to Dymski (1999) ,”Mergers may thus be desirable for bank if they are expected to enhance the acquiring bank’s capacity to increase profits, independent of the effect they may have if any on operational efficiency”.  There is some support for the hypothesis that links market power and profits in banking market. According to the findings of Berger (1995) the Banks may use mergers as a way of seeking out market power, so as to, enhance their ability to generate net profits.      As such the rationale behind mergers is to increase the efficiency levels across the Board and enhance shareholders’ value.


Indian banking is today at the cross-roads, it’s not because there aren’t enough of them going around [there were close to 300 of them at last count, including foreign, PSU and regional banks].  The problem is there aren’t enough of global scale and size going around.  And that’s one reason why India remains an over-banked, under-serviced market.  As Malcolm Knight, General Manager of the Basel, Switzerland-based Bank for International Settlements [BIS], an international organization that fosters international monetary and financial co-operation, puts it; “India’s banks [globally]”.  That clearly calls for a frenetic bout of Mergers & Acquisitions [M & AS].  Inorganic growth via mergers is one way to develop size.  From the capital point of view, a merged entity will be better placed to meet the Basel II norms, to invest in technology and to penetrate deeper on a regional basis.  Customers, in turn, will benefit via lower transaction costs, as the merged banks gain from economies of scale.  With banks becoming more efficient on the distribution, technology and capital fronts, they will be a lot safer.  Consolidation will also help Indian banks spruce up on the profitability front.


The Indian banking sector would do well to take a look at the pace of consolidation in the rest of Asia; South Korea began its second round of consolidation in 2001.  That helped its banks to improve their credit rating by creating economies of scale and scope.  In Japan, the once very crowded domestic banking sector has undergone significant consolidation, which has resulted in the emergence of the five key banking groups.  These banks now hold approximately 46 per cent of total bank deposits in Japan.  Similarly, the Malaysian banking industry has brought down the number of banks from 55 to 10 and is poised to enter its second phase of consolidation.  This will involve mergers between banks and their finance company subsidiaries.




Mergers are well-recognized commercial practices for growth and diversification of manufacturing, business and service activities.

The factors that motivate mergers are to –


a) diversify the areas of activities to achieve optimum size of business.

b) remove certain key factors and other bottlenecks of input supplies.

c) improve the profitability.

d) serve the customer better.

e) achieve economies of scale and size, internal and external,

f] acquire assets at lower than the market price,

g] bring separate enterprises under single control,

h] grow without  any  gestation period; and nurse a sick unit and get tax advantages by acquiring a running concern.


There could be other influencing factors.  But, by and large, they will be subsumed in one or the other of the above listed factors.




The increasing customer led demands for more sophisticated banking services is a force for and output expected of mergers.  The other benefits are cost savings due to economies of scale, revenue enhancement due to size, deregulation of banking business, shareholders’ profitability

a] Cost savings – Cost savings constitute an important outcome ass the reason of mergers and acquisitions.  It emerges that economies of scale is a very important motivating factor for consolidations.

b] Revenue enhancement – The revenue enhancement  due to increased size is a moderately important factor motivating domestic within segment mergers.

c] Deregulation – easing of legal and regulatory barriers has opened the way for increased Mergers and acquisitions, both within and across national boundaries and both within and across financial industry segments.  Deregulation has been an important factor encouraging consolidation.

d] Shareholder pressures – Shareholders have gained power relative to other stakeholders in recent years.  This development has put increased pressure on financial institutions to improve profitability.  Consolidation has in many cases seemed an attractive way to accomplish this objective.




Mergers can be economically classified into four categories viz., horizontal, vertical, congener or concentric and conglomerate.


1] HORIZONTAL MERGER:  This is the merger of corporates engaged in the same line of business.  E.g.: Merger of a bank with another bank.

2] VERTICAL MERGER: This is the merger of corporates engaged in various stages of production in an industry.

3] CONGENERIC OR CONCENTRIC MERGER: In Congener or Concentric merger the acquirer and target companies are related through the basic technologies, production process or markets.  Concentric merger represents an outward move by the acquiring company from its current set of business into contiguous businesses.

4] CONGLOMERATE MERGER:  This is the merger of corporate engaged in related lines of activities.




The New Economic Policy was the outcome of acute financial crisis faced by the country in mid 1991 caused primarily by the political uncertainty and aggravated by the impact of Gulf-War.  During the period the country was passing through an unprecedented economic crisis following strain on balance of payments, galloping inflation, frustrating position of foreign exchange reserves and other macro economic imbalances.  The New Economic Policy was based on a combination of measures aimed at economic stabilization and structural reforms to overcome the shortcomings of socialistic pattern of economy adopted by India.


A Committee was set up under the chairmanship of Mr. M. Narasimham to examine all aspects of the structure, organization, function and the procedure of the financial sector.  The committee recommended radical changes in the financial system as per international norms to cater the needs of the sector and to strengthen the system.  One of the recommendations of the committee was the revamping the structure of the banking system.


The financial sector reforms set in motion in 1991 have greatly changed the face of Indian banking.  In the past, mergers were initiated by Reserve Bank and the Government to protect the interest of depositors of weak banks.  But it is now expected that market led mergers may gain momentum in the coming years.  The smaller banks with firm financials as well as the large ones with weak income statements would be the targets for the larger and better run banks.


In the IBA document  “Banking Industry: Vision 2010”, it is visualized  that mergers between the public sector banks, or public sector banks and private sector banks, could be the next logical thing to happen as market players tend to consolidate their position to remain in the competitive race.  Mergers and acquisitions route is providing a quick step to acquire competitive size and offering banks an opportunity to share markets and reduce cost of product development and delivery.


Consolidation in the banking sector is inevitable.  It is worth to note that four trends in the Banking Industry world over are taking place – 1] Consolidation of players through merger & acquisition,  2] Globalization of operations, 3] Development of new technology and    4] Univerlisation of banking,   The  Indian Banking Industry is also moving in a tandem with the Global Banking Scenario.


Financial sector would be opened up for greater international competition under WTO.  Banks will have to gear up to meet stringent prudential capital adequacy norms under Basel II, with implementation to take effect in G-10 countries by year end 2006 and in India has to be decided with the specified time schedule.  The RBI has already suggested that in the first phase, the Basel II will be applicable for the internationally operative banks.  In addition to WTO and Basel II, the Free Trade Agreements [FTAs] such as with Singapore, may have an impact on the shape of the banking industry. 

Indian Commercial Banks will also have to cope with challenges posed by technological innovations in banking.


In a bid to facilitate consolidation in the Indian Financial System, the Centre is planning to promulgate an ordinance, which will pave the way for mergers between Financial Institution [FIs] and Public Sector Banks [PSBs].  The proposed ordinance will also facilitate consolidation between PSBs and Regional Rural Banks [RRBs] and address some legal and procedural issues relating to mergers between two PSBs.  As per existing provisions of Banking Regulation Act, there is no provision for obtaining approval of the Reserve Bank of India for any acquisition or merger of any financial business by any banking institution.






Although nationalization of banks helped the spread of banking to the rural and hitherto uncovered areas, the monopoly granted to the public sector and lack of competition led to overall inefficiency and low productivity.  By 1991, the country’s financial system was saddled with an inefficient and financially unsound banking sector.  Some of the reasons for this were [i] high reserve requirements, [ii] administered interest rates, [iii] directed credit and [iv] lack of competition [v] political interference and corruption.


As recommended by the Narasimham Committee Report [1991] several reform measures were introduced.  The period 1991-97 laid the foundations for reform in the banking system [Rangarajan, 1998].  The second Narasimham Committee Report [1998] focused on issues like strengthening of the banking system, upgrading of technology and human resource development.  Commercial banks in India are expected to start implementing Basel II norms with effect from March 31, 2007.  They are expected to adopt the standardized approach for credit risk and the basic indicator approach for operational risk initially.


At present, banks in India are venturing into non-traditional areas and generating income through diversified activities other than the core banking activities.  Strategic mergers and acquisitions are being explored and implemented.  With this, the banking sector is currently on the threshold of an exciting phase.


Stupendous branch expansion programme has helped the public sector banks to mobilize savings substantially.  Banks have, no doubt penetrated into rural, semi-urban and backward areas.  But the massive branch expansion programme has thrown up several problems.  In the first place, the processes of diversification, coupled with rapid expansion of branch network have resulted in a scarcity of skilled manpower at all levels.


Secondly, large and rapid branch expansion, especially in rural and semi-urban areas has adversely affected the profits and profitability of banks.  Thirdly, customer service has deteriorated a great deal.  Fourthly, credit monitoring by the central management of banks has become difficult because of the geographical spread of branches.  Fifthly, large-scale expansion has resulted in increasing the amounts of NPAs.  In view of the above problems, commercial banks could not cooperate as effectively as was expected.  A suitable restructuring of the banking system may help to remove many of these deficiencies.


The restructuring of the banks was intended: [a] to eliminate excessive and unfair competition within the banking system,   [b] to provide geographical and functional specialization  for  different categories of banks with a view to enabling them to put in intensive efforts to accelerate economic  progress through development banking,  [c] to ensure optimal utilization of the  available resources and skilled manpower; and [d] to reduce the operational and administrative costs of the banks through economies of scale.


The number of public sector commercial banks should be reduced from 28 to a maximum of 10 or 12 by merging and amalgamating the existing banks, so that there may be banks with an all-India character and the other 7 to 9 may be zonal banks.


The Narasimham Committee [1991] proposed substantial reduction in the number of public sector banks through mergers and acquisitions.  The Recommendations on restructuring include:


[i] Three of four large banks including SBI should become international in character.

[ii] Eight to ten banks should become national banks with a wide network of branches throughout the country.

[iii]The rest could remain as local banks with operations confined generally to a specific region.

[iv] RBI should permit the establishment of new banks in the private sector, provided they conform to the minimum start-up capital and other requirements. There should be no difference in the treatment between the public sector banks and private sector banks.

[v] Foreign banks should be allowed to open offices in India either as branches or as subsidiaries.  This would improve competitive efficiency as well as upgrade work technology.

[vi] Foreign banks and Indian banks should be permitted to set up joint ventures in regard to merchant and investment banking, leasing and other newer forms of financial services.  Banks should have the freedom to open branches.


Narasimham Committee on Banking Sector Reforms [1998] was asked to “review the progress of banking sector reforms to-date and chart a programme on financial sector reforms   necessary to strengthen India’s financial system and make it internationally competitive”.  The Narasimham Committee [1998] has recommended the merger of strong banks which will have a “multiplier effect” on industry.  The Committee has, however, cautioned the merger of strong and weak banks, as this may have a negative impact on the asset quality of the stronger bank.


The consolidation process of Indian banks has started in the early 1960s itself.  The rapid branch expansion resulted in stretching beyond the optimum level of supervision and control.  The banks were faced with losses.  Then there were a series of policy initiatives taken by the RBI.  From 1960 to June 1993, there were 20 voluntary amalgamations, 18 mergers with the State Bank of India or its associates and 132 transfers of assets and liabilities.


Indian Banking took all clues from Narasimham Committee recommendations in marching ahead on the path of mergers and reconstruction.  In the recent past the merger of Times Bank with HDFC Bank is a coming together of two like minded private banks for mutual benefit.


The integration of bank of Madura with ICICI Bank stood distinct because they belong to two different generations.  The merger that took place in a healthy and growing market was of UTI Bank and Global Trust Bank and was meant for attaining a critical size.  The merger of Global Trust Bank with the oriental bank of commerce was for crisis management and survival through size.  Strategic alliances and merger of strong banks should be encouraged.  The reason should not be to save a bank from extinction but to join the hands for mutual benefit of the banks and to safeguard the interests of the stakeholders especially the depositors.  The Narasimham Committee also suggested that the merger could be a solution to weak banks’ with a strong public sector bank.  It was proved disastrous and no public sector bank come forward to takeover a weak bank as it is considered not a win-win merger.  Off late in August 2007 the merger of State Bank of India needs a mention.  The successful mergers in the recent past raise hopes that the trend would continue for the survival of the biggest.




Co-operative banks in India have come a long way since the enactment of the Agricultural Credit Co-operative Societies Act in 1904.  The century old co-operative banking structure is viewed as an important instrument of banking access to the rural masses and thus a vehicle for democratization of the Indian financial system.  Co-operative banks mobilize deposits and purvey agricultural and rural credit with a wider outreach.  The Co-operative banking structure in India comprises urban co-operative banks and rural co-operative credit institutions.


Several measures were initiated during 2004-05 to strengthen the co-operative credit structure in the country.  Importantly, a vision document was prepared to rationalize the existing supervisory structure for UCBs.  Prudential norms applicable to UCBs and rural co-operatives were strengthened.  The recommendations of the Task Force [Chairman; Prof. A. Vaidyanathan] to strengthen the rural Co-operative credit structure are being considered by the Government of India for implementation.


The Co-operative Credit Structure occupies a formidable and almost indispensable place  in the rural credit scenario of the country.  It consists of a short term structure with 30 State Co-operative Banks [SCBs] with 861 branches, 367 District Central Cooperative Banks [DCCBs] with 12,600 branches and 1.12 lakh Primary Agriculture Credit Societies [PACS].  Besides a long term structure with 20 State Cooperative Agriculture and Rural Development Banks [SCARDBs] with 865 branches, 768 Primary Cooperative Agriculture and Rural Development Banks [PCARDBs] with 1,008 branches are purveying LT credit to farmers/villagers.


The Rural Cooperative Credit Structure is passing through a severe financial crisis as 7 SCBs and 143 DCCBs do not comply with the stipulated minimum share capital requirement.  Nearly half of PACS are incurring losses year after year.  Under the LT structure, 12 SCARDBs are incurring losses and have huge baggage of accumulated losses and the financial position of more than 500 PCARDBs is no better.  Given the necessity of a healthy Co-operative Credit Structure for ensuring continuous flow of rural credit, their present precarious financial position is a cause of concern.  For achieving the objective of rural credit, there is a strong case for strengthening and restructuring.


It is shared vision and distilled wisdom of many a committees of the past that cooperatives should be member-driven, fully autonomous, operationally sound and financially viable institutions.  Almost all the committees like Hazari Committee, Madhavadas Committee, Khusroo Committee, Sivaraman Committee, Capoor Committee  and Vikhe Patil Committee have favored strengthening  and revitalization of the cooperative credit structure by way of recapitalization , dovetailed to cooperative reforms and consolidation.


The major recommendations of the Task Force are as under:


The co-operative Credit Structure [CCS] is impaired in governance, managerial and financial fronts and hence needs to be revived and restructured.  Financial assistance be made available for [i] wiping out accumulated losses; [ii] covering invoked but unpaid guarantees  given by the State Governments; [iii] increasing the capital to a specified minimum level;  [iv] retiring Government share capital; and [v] technical assistance.

Availability of financial assistance from the Government of India shall be strictly subject to legal and institutional reforms in the co-operative sector to ensure that the co-operatives become truly democratic and member driven.  Removing provision for Government equity and participation in the Boards of co-operatives.  Permitting Co-operatives the freedom to take loans from any financial institution and not necessarily from only the upper tier and similarly place their deposits with any financial institution of their choice.  Permitting co-operatives under the existing co-operatives societies Acts and vice versa.  Limiting powers of the State Governments to supersede Boards.  Ensuring timely elections before the expiry of the term of the existing Boards; facilitating full regulatory  powers for the Reserve Bank in case of co-operative banks; introducing prudential  norms including CRAR  for all financial co-operatives including PACS.

The Task Force has also recommended certain major amendments to the provisions of the B.R. Act, 1949 enabling removal of dual control and bringing the co-operatives under the regulatory control of the Reserve Bank.  These include:  [i] all co-operative banks would be on par with the commercial banks as far as regulatory norms are concerned;  [ii] the Reserve Bank will prescribe fair and proper criteria for election to the Boards of co-operative banks;  [iii] the  Reserve Bank will prescribe certain criteria for professionals to be on the Boards of  co-operative banks;  [iv] the CEOs of the co-operative banks would be appointed by the respective banks themselves; and   [v] co-operatives, other than co-operative banks as approved by the Reserve Bank, would not accept non-voting member deposits.


NABARD be designated as the Nodal Implementing and Pass Through Agency to coordinate and monitor the progress of the programme representing the Government of India.  NABARD will prepare model MoUs, model balance sheet proforma for PACS and CCBs.




Over the years, the RRBs, which are often viewed as the small man’s bank, have taken deep roots and have become a sort of inseparable part of the rural credit structure.  They have played a key role in rural institutional financing in terms of geographical coverage, clientele outreach and business volume as also contribution to development of the rural economy.  A remarkable feature of their performance over the past three decades has been the massive expansion of their retail network in rural areas.  From a modest beginning of 6 RRBs with  17 branches covering 12 districts in December 1975, the numbers have grown into  196 RRBs with 14,446 branches working in 518  districts across the country  in  March 2004. RRBs have a large branch network in the rural area forming around 43 per cent of the total rural branches of commercial banks.  The rural orientation of RRBs is formidable with rural and semi-urban branches constituting over 97 per cent of their branch network.  The growth in the branch network has enabled the RRBs to expand  banking activities in the unranked areas  and mobilize rural savings.




The mandate of promoting banking with a rural focus, however, would be an enduring phenomenon only when the financial health of the RRBs is sound.  With built-in restrictions on their operations, it is common to expect that the financial health of the RRBs itself would be a matter of concern.  As regards their financial status, during the year 2003-04, 163 RRBs earned profits amounting to Rs. 953 crore while 33 RRBs incurred losses to the tune of Rs. L84 crore.  Ninety RRBs had accumulated losses as on March 31, 2004.  Aggregate accumulated loss of RRBs amounted to Rs. 2,725 crore during the year 2003-04.  Of the 90 RRBs having accumulated loss, 53 RRBs had eroded their entire owned funds as also a part of their deposits.   Furthermore, non-performing assets [NPAs] of the RRBs in absolute terms stood at Rs. 3,200 crore  as on March 31, 2004.  The percentage of gross NPAs was 12.6 during the year ending March 31, 2004.  While 103 RRBs had gross NPAs less than the National average, 93 had NPAs more than it.




The financial viability of RRBs has engaged the attention of the policy makers from time to time.  In fact, as early as 1981, the Committee to Review Arrangements for Institutional Credit for Agriculture and Rural Development [CRAFICARD] addressed the Issue of financial viability of the RRBs.  The CRAFICARD recommended that ‘the loss incurred by a RRB should be made good annually by the shareholders in the same proportion of their shareholders’.  Though this recommendation was not accepted, under a scheme of recapitalization, financial support was provided by the shareholders in the proportion of their shareholdings.   Subsequently, a number of committees have come out with different suggestions to address the financial non-viability of RRBs.For instance , the working group on RRBs(Kelkar committee) in 1984 recommended that small uneconomic  RRBs should be merged in the interests of economic viability. 


Five years down the line, in a similar vein, the Agricultural Review Committee(Khusro committee), 1989 pointed out that the weaknesses RRBs are endemic to the system and non-viability is built into it,and the only option was to merge the RRBs with the sponsor banks.The objective of serving the weaker sections effectively could be achieved only by self sustaining credit institutions.  The  Committee on Restructuring of RRBs , 1994 [Bhandari  Committee ]  identified 49 RRBs for comprehensive restructuring.                          It recommended greater devolution of decision-making powers to the Boards of RRBs in  the  matters of business development and staff matters.  The option of liquidation again was mooted by the Committee on Revamping of RRBs, 1996 [Basu Committee].


The Expert Group on RRBs in 1997 [Thingalaya Committee] held that very weak RRBs should be viewed separately and possibility of their liquidation be recognized.  They might  be merged with neighbouring RRBs.  The Expert Committee  on Rural  Credit, 2001 [Vyas Committee I ] was  of the view that the sponsor bank  should ensure necessary autonomy for RRBs in their credit  and other portfolio management system.  Subsequently, another committee under the Chairmanship of Chalapathy Rao in 2003 [Chalapathy Rao Committee] recommended that the entire system of  RRBs may be consolidated while retaining the advantages of their regional character.  As part of the process, some sponsor banks may be eased out.  The sponsoring institutions may include other approved financial institutions as well, in addition to commercial banks.  The Group of CMDs of Select Public Sector Banks, 2004 [Purwar Commiyyee] recommended the amalgamation of RRBs on regional basis into six commercial banks -  one  each for the  Northeern, Southern, Eastern, Western, Central and North-Eastern Regions.  Thus one finds that a host of options have been suggested starting  with vertical merger [with sponsor banks], horizontal merger [amongst RRBs operating in a particular region] to liquidation by  different  committees that have gone into the issue of financial viability and restructuring strategies for the RRBs.


More recently, a committee under the Chairmanship of A.V. Sardesai  revisited the issue of restructuring the RRBs [Sardesai Committee, 2005].  The  Sardesai Committee held that ‘to improve the operational viability of RRBs and take advantage  of the economies of  scale, the route of merger/amalgamation of RRBs may be considered taking  into account  the views of the various stakeholders’.  Merger of RRBs with the sponsor bank is not  provided in the RRB Act 1976.  Mergers, even if allowed, would not be a desirable way of restructuring.  The Committee was of the view that merging a RRB with its  sponsor bank would go against the very spirit of seting up of RRBs as local entities and for providing credit primarily to weaker sections.  Having discussed various options for restructuring, the committee was of the view that  ‘a change in sponsor banks may, in some cases help in improving the performance of RRBs.  A change in sponsorship may, inter alia; improve the competitiveness, work culture, management and efficiency of the concerned RRBs’.


A number of options aree being considered to restructure the RRBs.  Different strategies need to be thought of keeping in view whether the RRB under  consideration  is making profits or incurring losses.




Very recently, 28 RRBs sponsored by nine banks in six States have been amalgamated into nine new RRBs, bringing down the number of RRBs to 177.  The consolidation exercise mostly involved merger of profit making RRBs of the same sponsor bank within a State.  It is much easier [as they are in any case financially viable] to decide about the course of restructuring of the RRBs that are making profits.  The approach to the restructuring of the  loss making RRBs is an area, which would require deeper analysis.  Merger of loss making RRBs operating in a contiguous area has the possibility of bringing some rewards in terms of house keeping, better administrative control, etc.      The other possibility is that by merging two RRBs that are financially unviable, the inefficiencies are compounded and the merged entity falls under its own dead weight.  For the loss making RRBs, the sponsor banks need to play a more proactive role.


The loss making RRBs need focused attention of the all the stake holders, in general, and of the sponsor bank, in particular, so as to transform them into profitable ventures.  In view of the intricacies involved, some critical thinking is called for at the policy level in restructuring the loss making RRBs.  The sponsor bank for the loss making RRBs could be given a time frame and if within this period significant improvement is not made, the possibility of changing the sponsor bank as suggested by the Sardesai Committee may be a worthwhile option.




RBI appointed  the M.C. Bhandari Committee to suggest measures for restructuring RRBs.  Most of the recommendations of the Bhandari Committee are being implemented.  The issued share capital of RRBs has  been enhanced – up to Rs. 75 lakhs and in certain others up to Rs.1 crore.    In view of the unsatisfactory recovery position of RRBs, NABARD monitors the working of RRBs, on a quarterly basis, as regards productivity, cash management, advances portfolio, and recovery performance and advises RRBs about necessary remedial steps.  NABARD has also devised a package of short-term measures for RRBs.


[a] RRBs are freed from their service area obligations.

[b] They are allowed to increase their non-target group financing from 40 per cent to 60 per cent.

[c] They are permitted to relocate some of  their  loss-making branches at agricultural produce centres, market yards, mandis, etc.

[d] They are given freedom to open extension counters;

[e] They are allowed to provide loans for non-priority sector purposes like loans for  consumer durables and loans for various purposes to both target groups and non-target groups; and

[f]Upgrading and deepening the range of their activities to cover non-funds business such as remittance and discount facilities.

As many as 49 RRBs have been selected in the first phase of restructuring.  They have drawn up development action plans in consultation with NABARD and sponsoring banks.




Development Banks are specified financial institutions performing the twin functions of providing medium and long term finance and performing various promotional roles for economic development of the country.  In recent years, the DFIs have suffered serious decline in profitability and even the  All-India institutions viz., IFCI and IDBI  have lost their financial viability.  This has been due to certain weaknesses in their loan operations:

[a] Considerable and unwanted relazation in the  appraisal standards by the institutions;

[b] deficiencies in the licensing system leading to promotion and financing of several unviable projects by entrepreneurs without proven competence;

[c] the Government’s policy regarding nursing of sick units forcing DFIs to provide financial support to sick units, against their commercial judgement;

[d] total absence of competition to DFIs operations in the field of term finance; and

[e] State level institutions have been  working  as wings of State Governments rather than as autonomous financial institutions.




Considering  the  weaknesses of DFIs  The Narasimham Committee [1991] has dwelt in detail and came out with its recommendations for restructuring.  These are as below.

[a] The ownership pattern of DFIs should be broad-based, like that of ICICI.

[b] The Government should ensure a measure of autonomy to the DFIs in matters of internal administration.

[c] The chief executives of DFIs should be men of proven professional competence selected on the recommendations of a panel of eminent persons.

[d] The boards of DFIs should include representatives from the industrial sector.

[e] In the case of state-level financial institutions, the link with the State Governments should be broken.

[f] The DFIs should raise their funds from the capital market at market-related rates.

[g] Each DFI should be guided by professional appraisal of the technical and  economic aspects of the project evaluation of the promoters, competence and integrity.

[h] In all cases, the DFIs should exercise their individual professional judgements free of any extraneous pressures.


The Narasimham Committee had proposed that DFIs should adopt internationally accepted norms, inject an element  of competition in term-lending finance with a view to providing  greater choice to the borrowers.  The Committee had also recommended that commercial banks should be encouraged to extend term finance while the DFIs should start extending loans for short periods for working capital requirements.


The Committee recognized the fact that in India, operations of development financial institutions are marked by total absence of competition in the matter of provision of long and medium term finances.  The system had evolved into a segmentation of business between development financial institutions and the banks, the former concentrating on investment finance while the latter on working capital finance.  Borrower as a consequence had no choice in selecting an institution to finance their projects. The committee suggested a reform by way of delinking these institutions from the state governments for better efficiency. The operations of DFIs in respect of loan sanctions should be the sole responsibility of the institutions themselves based on a professional appraisal of the projects.


In recent years, DFIs have taken steps to widen their resource base and mobilize funds from domestic as well as international markets.  The Government of India amended IDBI act 1964 in 1992 with a view to restructure IDBI’s share capital and empower IDBI to raise equity from the capital market.  In July 1995, IDBI raised over Rs. 2,370 crores by way of equity from the market.  IFCI through its maiden public issue raised over Rs. 600 crores as equity (including premium).


In March 1994, RBI issued guidelines on prudential norms to be followed by the five all India DFI’s viz., IDBI, ICICI, IFCI, IRBI (now IIBD) and Exim Bank.  The norms are broadly similar to those prescribed for scheduled commercial banks.  In tune with the changing environment, the DFI’s have been diversifying their operations and reorienting their business strategies.  IDBI has expanded the scope of its Venture Capital Scheme to include a wide spectrum of projects.  As a  result the government has also undertaken a process of disinvestments in some of the bigger institution like IDBI, ICICI, IFCI etc.


IDBI has promoted the setting up of a commercial bank, a mutual fund and a stock broking firm.  UTI has floated the UTI Bank which has been in operation since 1994-95.  Interest regime has become more liberalized.  Ceiling on interest rate on debentures and bonds is removed except for those on tax-free PSU bonds.  DFI’s have also amended their increase promoters stake in projects.




The second Narasimham Committee (1998) recommended for the DFI’s to get converted either as Banks or Non-Banking Financial Companies (NBFC’s).


Narasimham Committee observed that the Indian Financial System had evolved into a segmentation of business between development financial institutions and the banks, the former concentrating on investment finance and the latter on working capital finance.  There felt a need for harmonizing the role and operations of DFI’s and Banks.


RBI set up a high power working group headed by IDBI Chairman S.H. Khan for the purpose of harmonizing the role of development financial institutions and banks.  This group submitted its report to RBI towards the end of April 1998.  The Khan Working Group, recommended that DFI’s be allowed, over a period of time, to convert themselves into banks and that they be granted licences for this purpose.  The Khan Working Group recommended the merger of one or more strong banks with DFI’s, purely based on viability and profitability considerations.


The Group suggested that the stake of State Government in SFC’s should be lowered below 50 per cent.  Besides, IDBI shareholding of SFC’s should be transferred to SIDBI and the ownership of SIDBI, in turn, should be transferred to RBI or to the Government of India.  RBI accepted the recommendations of Khan Working Group towards the setting up of Universal banking.  The first universal bank has been set up by ICICI merging with ICICI bank.  IDBI and IFCI and UTI followed.




Mergers and acquisitions in Indian banking is not new and dates back from Imperial Bank of India which was formed by the amalgamation  of the three presidency banks – the Bank of Bengal,  the Bank of Bombay and the  Bank of Madras in 1921.  Few mergers have taken place thereafter, mainly in the public sector, primarily to protect the interests of depositors of weak private banks.  The mergers were not for economic considerations and usually distress mergers e.g. State Bank of India taking over Bank of Cochin and Kashinath Seth Bank; New Bank of India merging with Punjab National Bank.  However,  the Times Bank merger with HDFC Bank raised the curtain for a new wave of consolidation in the Indian banking industry for mutual benefit.  The mergers in these cases sought to attain critical size.


Liberalisation of the Indian banking industry since a decade has seen a host of new private players entering it and has led to cut-throat competition in the public sector dominant banking industry.  India has about 100 commercial, foreign, private and state-run banks and several hundred co-operative banks.  There are about 90 scheduled commercial banks, 4 non-scheduled commercial banks and 196 regional rural banks  [RRBs].  The  State Bank and its seven associates have about 13,700 branches; the 19 nationalised banks  about 33,500 branches;  the RRBs  about 14,500 branches and foreign banks  around 215 branches.  Size is a great competitive advantage for banks.  And this level of fragmentation needs to be corrected so as to create 4-5 right  size banks, banks  of the size of SBI, with world class standards, which will enable them to respond to the stimulus  of global  opportunities.


Banking operations are becoming increasingly customer dictated.  The demand for ‘banking supermalls’ offering one-stop integrated financial services is well on the rise.  The ability of banks to offer clients access to several markets  for different classes of  financial instruments has become a valuable competitive edge. Convergence in the industry to cater to the changing demographic expectations is now more than evident.  The Indian banking system would therefore see consolidation through mergers and acquisitions and a co-existence of both national and international players.


The core objective of restructuring is to maintain long-term profit ability and strengthen the  competitive edge of banking business in the context of changes in the fundamental  market scenario.  Mergers as a  competition strategy in a globalized environment  is understandable.  But Mergers and acquisitions are however, no substitutes for poor assets quality; tax management, indifference to technology upgradation and lack of functional autonomy and operational flexibility etc.