Business Strategy
The Impact of Mega Mergers on the Efficiency of Indian PSU Banks

Article Details
Pub. Date : June' 2020
Product Name : The IUP Journal of Business Strategy
Product Type : Article
Product Code : IJBS20620
Author Name : Shabnam Nishat, Tagar Lal Khan
Availability : YES
Subject/Domain : Strategic Journals
Download Format : PDF Format
No. of Pages : 13

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Abstract

The present business environment deems Mergers and Acquisitions (M&As) as a very familiar and efficient strategy to grow and survive. In emerging economies like India, M&As undoubtedly help in sustaining economic growth. M&As help to get faster growth, to compete with rivals, to expand business abroad and also to increase market share. This paper investigates the efficiency of the Indian Public Sector Undertaking (PSU) banks in the light of upcoming mergers in the Indian banking sector. The paper computes bank efficiency by using non-parametric Data Envelopment Analysis (DEA) technique considering the original inputs-outputs data and also the data of hypothetical mergers, considering Non-Performing Assets (NPAs) as undesirable output in both the cases. After computing the efficiency of the Indian PSU banks for merger and non-merger situations, Wilcoxon matched pairs signed-rank test has been applied to examine any significant change in the efficiency levels of banks' accounting from mergers. The study reveals that only merging of banks might not be fruitful for improving the efficiency of the Indian PSU banks and might not be sufficient for overcoming the challenges and threats facing them. The managers of banks should put serious efforts for improving their efficiency through better cooperation, understanding, efficient utilization of common resources and by implementing better strategic decisions overall.


Description

For a country, the banking sector with its efficient functioning is of foremost importance for creating national wealth and for fostering growth of the country' s economy. In the history of Indian banking, we always observe certain obvious changes, ups and downs. Over the last few decades, the Indian banking business has faced drastic changes due to liberalization and opening up of the Indian economy. Technological changes, changes of customers' needs and global threats are some of the major reasons for the change in banking operations. To cope with this changing business environment, banks are compelled to adopt different strategies for their survival in the global market. One of the most important strategies that banks adopt in this changing environment is Mergers and Acquisitions (M&As). When banks enter into M&As, they enjoy the benefits of economies of scale and can strengthen and expand the customer base, upgrade technology, fill up business gaps, reduce operation costs, foster growth in national economy and so on. M&As in the banking sector have provided evidence that it is a useful tool for survival of weak banks by merging into larger banks (Goyal and Joshi, 2011). The study by Quey-Jen Yeh (1996) talked about the proper method of measuring the success or failure of bank mergers. Traditionally, financial ratios were used to measure bank performance, but ratio analysis fails to provide sufficient information when the effects of economies of scale, the identification of benchmarking policies and the estimation of overall performance measures of banks are taken into consideration (Yang, 2009). Recently, the Indian regulators announced the mergers of 10 Indian Public Sector Undertaking (PSU) banks, viz., Punjab National Bank, Oriental Bank of Commerce, United Bank of India, Union Bank, Canara Bank, Andhra Bank, Allahabad Bank, Corporation Bank, Indian Bank and Syndicate Bank into four groups, which would have an obvious effect on their functioning and performance. It is obvious that proper evaluation of bank performance gives guidance to depositors and investors about their savings and investments and to the bank managers and bank employees about their efficient performance. Against this backdrop, this paper first measures the efficiency of the Indian PSU banks, considering Non-Performing Assets (NPA) as an undesirable output for banks. The paper then revises the efficiency measures after considering the mega mergers that are taking place among 10 PSU banks, converting them into four merged banks, and then examines whether these mergers result in any significant change in the technical efficiency, pure technical efficiency and scale efficiency in the Indian PSU banks. Such a study will help us to understand the rationale of these bank mega mergers.


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