Roadblocks to banking amalgamations in India

The cut-throat competition in India’s banking industry, together with the cocktail of systemic difficulties that the industry faces, present stiff challenges to stabilized and sustained growth. The issues being faced by the banking industry include: (i) sus-tained pressure on asset quality due to continued economic slowdown; (ii) capital inadequacy to support business; (iii) human resource imbalances, specifically at a mid-management level; and (iv) absence of a sound risk management framework.

To address these issues, the Reserve Bank of India (RBI) has, from time to time, prescribed remedial measures with pan-industry application. A recurring recommendation of the RBI and industry experts is the amalgamation of banks with other banks or non-banking financial companies, or vice versa.

Since the onset of economic reforms in early-1990s, a score of banks, including Bank of Punjab, IDBI Bank and United Western Bank, have been involved in amalgamations. In the past 10 years alone, the industry has seen many bank amalgamations, e.g. Centurion Bank of Punjab with HDFC Bank, State Bank of Indore with State Bank of India, Bank of Rajasthan with ICICI Bank, and ING Vysya Bank with Kotak Mahindra Bank.

Historically, bank amalgamations were primarily a way of bailing out financially weaker banks. However, in the past 20 years, there have also been amalgamations between healthy banks driven by commercial considerations.

Jay Parikh is a partner and Aastha Khurana is an associate at Shardul Amarchand Mangaldas & Co. The views expressed in this article are those of the authors and do not reflect the position of the firm.