Presentation on banking sector needs consolidation

Presented by – Pankaj singla

IntroductionA bank is a financial institution and a financial

intermediary that accepts deposits and channels those deposits into lending activities, either directly or through capital markets.

A bank connects customers that have capital deficits to customers with capital surpluses.

Types of banks

Savings bankCommercial banksIndustrial banksLand development banksNational banksCo-operative banksExchange banksConsumer banks

Facilities by banks Utility paymentsMerchant bankingFactoring servicesMutual fundsGift cheques Feasibility reportsDemat accountCredit and debit cardsinsurance

The IT revolution had a great impact in the indian banking system.

The use of computers had led to introduction of online banking in india.

The Indian banks were finding it difficult to compete with the international banks in terms of the customer service without the use of the information technology and computers.

Adoption of banking technology

• In 1994, committee on technology issues relating to payments system, cheque clearing and securities settlement in the banking industry (1994)[was set up.

• Total numbers of ATMs installed in India by various banks as on end March 2005 is 17,642.

• The new private sector banks in India is having the largest numbers of atm.

ConsolidationConsolidation or amalgamation is the act

of merging many things into one. In business, it often refers to the mergers and

acquisitions of many smaller companies into much larger ones.

Functions of Reserve Bank of India Bank of Issue - Under Section 22 of the

Reserve Bank of India Act, the Bank has the sole right to issue bank notes of all denominations.

Banker to Government - The second important function of the Reserve Bank of India is to act as Government banker, agent and adviser.

Bankers' Bank and Lender of the Last Resort - The Reserve Bank of India acts as the bankers' bank. banks have been asked to keep cash reserves equal to 3 per cent of their aggregate deposit liabilities.

Controller of Credit - The Reserve Bank of India is the controller of credit i.e. it has the power to influence the volume of credit created by banks in India.

Custodian of Foreign Reserves - The Reserve Bank of India has the responsibility to maintain the official rate of exchange.

Supervisory functions - In addition to its traditional central banking functions, the Reserve bank has certain non-monetary functions of the nature of supervision of banks and promotion of sound banking in India.

Benefits of Consolidation 1.Growth-The loan to GDP ratio for Indian

banks is about 30 percent which is very low in comparison to banks in other emerging South East Asian economies.

Consolidation leads to growth in business prospects as well as reduces operating costs.

ICICI Bank Limited’s merger with Bank of Madura is an example where the motive behind consolidation was growth.

Consolidation: a need for the indian banking industry

2. Universal banking model and integration of financial services - Due to the flexibility provided to banks by RBI in credit delivery, the DFIs(Developmental Financial Institutions) which were opened with the aim of improving allocation efficiency of resources.

Example is idbi’s merger with IDBI bank ltd. In 2004.

3. Synergy benefits - Synergies lead to revenue enhancement and cost reduction. Consolidation helps to get a jumpstart by allowing banks to build on an already established platform.

Oriental Bank of Commerce’s merger with Global Trust Bank is an example where the motive behind consolidation was synergy benefits.

4. Strategic benefits - Banks with complimentary business interests can merge together to strengthen their market position.

HDFC Bank’s merger with Centurion Bank of Punjab is an example.

This merger enabled HDFC bank to build a strong SME (strong and medium enterprises)

5. Ease of market entry - cash rich firms acquire already established players to enter into new markets. This provides them an already existing platform on which they can build upon easily.

Standard Chartered’s merger with ANZ Grindlays is an example where the motive behind consolidation was market entry.

6. Regulatory Intervention - RBI in certain cases forces the merger of ill banks to safeguard the interests of the depositors and to prevent financial destabilization.

ChallengesPeople issues - The mergers of banks pose

human resource management problems. The cross cultural integration is an important post merger issue to be handled by the management of the two banks.

Technology integration - Integration of technology platforms poses a stiff challenge as the merging banks use different working platform and  are at different stages of technology implementation.