Chapters 1: Introduction

1. Introduction and Relevance of the Topic

Mergers and acquisitions are corporate restructuring activities dealing on aspects of strategic
management in corporate finance and dealing with the buying, selling, dividing and combining of
different companies and similar entities to reach specific objectives.

This study is to examine the pre and post merger and acquisition bank performance. The
profitability ratios were adopted as proxies for bank’s performance. The study employs convenient
sampling technique and covers a period of two years before and two year after the
2017banksrecapitalization exercise. The study therefore concludes that mergers and acquisitions
have insignificant impact on banking performance considering 2 years pre and post observation
period. The short term observation and analysis may not absolutely leads to reveals the success
rate of mergers and acquisition. The study recommend that due diligence should adopted in the
identification and selection of compatible partners in order to achieve desired synergy

1.1 State Bank of India –Brief History

The banking sector of India is considered as a booming sector and the soundness of the banking
system has been vital for the development of the country's economy. A corporation has diverse
options to choose from when it comes to growth strategies. Growth is an important aspect for any
organization. Various challenges and problems faced by the Indian banking sector and the
economy have made mergers and acquisitions activity not an unknown phenomenon in Indian
banking industry.
The origin of the State Bank of India goes back to the first decade of the nineteenth century with
the establishment of the Bank of Calcutta in Calcutta on 2 June 1806. Three years later the bank
received its charter and was re-designed as the Bank of Bengal (2 January 1809). A unique
institution, it was the first joint-stock bank of British India sponsored by the Government of
Bengal. The Bank of Bombay (15 April 1840) and the Bank of Madras (1 July 1843) followed the
Bank of Bengal. These three banks remained at the apex of modern banking in India till their
amalgamation as the Imperial Bank of India on 27 January 1921. Primarily Anglo-Indian creations,
the three presidency banks came into existence either as a result of the compulsions of imperial
finance or by the felt needs of local European commerce and were not imposed from outside in an
arbitrary manner to modernize India's economy. Their evolution was, however, shaped by ideas
culled from similar developments in Europe and England, and was influenced by changes
occurring in the structure of both the local trading environment and those in the relations of the
Indian economy to the economy of Europe and the global economic framework. Establishment of
State Bank of India: The establishment of the Bank of Bengal marked the advent of limited
liability, joint-stock banking in India. So was the associated innovation in banking, viz. the
decision to allow the Bank of Bengal to issue notes, which would be accepted for payment of
public revenues within a restricted geographical area. This right of note issue was very valuable
not only for the Bank of Bengal but also its two siblings, the Banks of Bombay and Madras. It
meant an accretion to the capital of the banks, a capital on which the proprietors did not have to
pay any interest. The concept of deposit banking was also an innovation because the practice of
accepting money for safekeeping (and in some cases, even investment on behalf of the clients) by
the indigenous bankers had not spread as a general habit in most parts of India. But, for a long
time, and especially up to the time that the three presidency banks had a right of note issue, bank
notes and government balances made up the bulk of the investible resources of the banks. The
three banks were governed by royal charters, which were revised from time to time. Each charter
provided for a share capital, four-fifth of which were privately subscribed and the rest owned by
the provincial government. The members of the board of directors, which managed the affairs of
each bank, were mostly proprietary directors representing the large European managing agency
houses in India. The rest were government nominees, invariably civil servants, one of whom was
elected as the president of the board. A major change in the conditions of operation of the Banks
of Bengal, Bombay and Madras occurred after 1860. With the passing of the Paper Currency Act
of 1861, the right of note issue of the presidency banks was abolished and the Government of India
assumed from 1 March 1862 the sole power of issuing paper currency within British India. The
task of management and circulation of the new currency notes was conferred on the presidency
banks and the Government undertook to transfer the Treasury balances to the banks at places where
the banks would open branches. None of the three banks had till then any branches (except the
sole attempt and that too a short-lived one by the Bank of Bengal at Mirzapore in 1839) although
the charters had given them such authority. But as soon as the three presidency bands were assured
of the free use of government Treasury balances at places where they would open branches, they
embarked on branch expansion at a rapid pace. By 1876, the branches, agencies and sub agencies
of the three presidency banks covered most of the major parts and many of the inland trade centers
in India. While the Bank of Bengal had eighteen branches including its head office, seasonal
branches and sub agencies, the Banks of Bombay and Madras had fifteen each.
On 15 February 2017, the Union Cabinet approved the merger of five associate banks with
SBI.What was overlooked, however, were different pension liability provisions and accounting
policies for bad loans, based on regional risks. The State Bank of Bikaner & Jaipur, State Bank of
Hyderabad, State Bank of Mysore, State Bank of Patiala and State Bank of Travancore, and
Bharatiya Mahila Bank were merged with State Bank of India with effect from 1 April 2017.
 Chapter – 2: Literature Review
2.1 Why Literature review ?
A general review of literature has been carried out in order to get a good understanding in the subject of
Mergers and Acquisitions. Literature review has been done from books, journal, published papers etc.
The issues covered comprise Motives, Share value creation, financial performance, operating
performance. These studies have been reviewed and presented in the following manner. Literature
review has been composed from both within India and outside India.
Research Questions

To identify the financial performance of the

State Bank of India

To ascertain the changes in pre and post

profitability performance by analyzing ratios

To know what matters the big size of SBI (post-

merger) to Indian Banking System.

2.2 Literature based on “To identify the financial performance of the State Bank of India”
1. Nayana, N . (2018): The analysis reveals that there is no significant difference between
Deposits, Investment, Advances, Borrowing, Net Profit etc., there is growing evidence of concern
by the SBI group on the declining profitability of the banking system due to unsecured loans and
advances. It has becomes extremely over and finds remedial measures to reduce the profitability
in the value of new banking philosophy.

2. Rani, J. (2017): SBI’s reach and network will multiply, efficiency will likely increase with the
rationalisation of branches, there will be a common treasury pooling and there will be proper
deployment of skilled resources. Besides, the associate banks and their customers will also
benefit. An enhanced scale of operations and the rationalization of common costs will result in big
savings. Bhattacharya also claimed that the pooling of synergies at one place would be a huge
positive.
3. Mondal , G. C. (2017):the results of the study reveal that average financial ratios of sampled
banks in Indian banking sector showed a remarkable and significant improvement in terms of
liquidity and leverage parameters, profitability, and shareholders wealth. While dealing with
mergers and acquisitions, synergy can be generated in long run with the cautious usage of the
resources, exact valuation of the target and estimating the future prospects.

4. Krishnamurthy Naidu (2018):The union cabinet has approved the merger of SBI, the
country’s largest lender, and its associate banks- a move which is expected to bring the state-
owned entity at paer with global lender. The merged entity will have an asset base of about Rs. 37
lakh crore, with nearly 24,000 branches and about 58,700 ATMs across the country. The merger is
seen as win-win for both SBI and its associate banks. There are several economic and strategic
advantage to the merged entity. However, the new entity is not free from challenges. It must gear
up to face new challenges that are to come.

5. Sanjay Sharma, Sahil sidana: Those areas where SBI is not having branches but its associate
banks are having, upon the merger being effected, the customer confidence and good report will
be created because SBI is having a good report for all its customers. the bigger the bank, the
better is the diversification of its assets portfolio and lesser chances that the bank will fail in the
system.

6. Swathi M.S1 , Reshma Reji: SBI merger had a major impact on its customers. SBI merging into
one of the largest banking service provider in India did have its positive as well as negative impacts
to customers. Through digitalization and proper implementation of policies by the management
the process of merger undoubtedly had been implemented successfully with minimum glitches
and grievances

7. Mr. Biplab mandal (2018):In view that profitability of SBI was going down, and it needed
reconstruction, this step of merger seems to be a smart step. It has brought SBI in list of top 50
banks in the world which is a big deal. However, profitability of the bank after merger has fallen by
approximately Rs. 3000 crores. This was mainly because of accumulated losses of associate banks
which were shown in balance sheet of the amalgamated entity and it reduced the enthusiasm of
investors
8. Bharat Khurana (2017):In view that profitability of SBI was going down, and it needed
reconstruction, this step of merger seems to be a smart step. It has This was mainly because of
accumulated losses of associate banks which were shown in balance sheet of the amalgamated
entity and it reduced the enthusiasm of investors. Still, investors should not lose hopes as such
bold steps have effects in long run and they take time to become visible.

9. Dangwal and kapoor (2010) also undertook the study on financial performance of nationalized
banks in India and assessed the growth index value of various parameters through overall
profitability indices. They found that out of 19 banks, four banks had excellent performance, five
banks had good performance and six banks had poor performance. Thus the performance of
nationalized banks differ widely.

10. Ravinder Kaur (2012): A comparative study of SBI and ICICI Bank, the author has written an
International Multidisciplinary Research Journal. Due to globalization, banking sector has
 developed a lot. The banking sector in India has very large network. One of the popular banks is
the State Bank of India. The SBI has over 16,000 branches over a wide range of banking. The main
objective of study is to examine the financial performance of SBI and ICICI Bank.

2.3 Literature based on “To ascertain the changes in pre and post profitability performance by
analyzing ratios.”

1. Jayashree , K. (2016): This study shows the impact of Mergers and Acquisitions in the Indian
Banking sector and two cases have been taken for the study as sample to examine the as to
whether the merger has led to a profitable situation or not. For this purpose, a comparison
between pre and post-merger performance in terms of Net Profit Margin, Return on Assets,
Return on Equity, Earning per Share, Debt Equity Ratio of SBI.
2. Singh, G., & gupta, S. (2015):The significance for this research has come from the gap identified in
literature review. The motive behind such deals was to capitalize the potential synergy in the after
such event period. The study examined the productivity and profitability above fourteen ratios
which compare between the pre and post-merger of selected public and private sector bank. The
statistical tools analysis the financial pyramid of banks before and after merger and suggested that
the financial performance of banks has increased

3. Edward, A., & Manoj , J. (2019):The financial performance of SBI during pre and post-merger
period did not result in any notable changes in its liquidity position and profitability as well as in
operational performance. With regard to reactions to the announcement of merger, the market
has initially tried to react negatively to the most of the banks’ acquisition announcement. ‘

4. Reshma (2016): The public sector banks are the heart and soul of Indian banking system. It
operates more than 70 per cent of money circulation in India. However, the public sector banks
should focus on improving the liquidity position in order to meet out its current obligations. The
failure of having sufficient liquidity will result in the loss of creditor’s confidence. The earning
quality of the bank can be improved by increasing the net and operating profits through their
efficient technology.

5. Manish Mittal and Arunna Dhademade (2005) they found that higher profitability is the
only major parameter for evaluating banking sector performance from the shareholders point of
view. It is for the banks to strike a balance between commercial and social objectives. They found
that public sector banks are less profitable than private sector banks. Foreign banks top the list in
terms of net profitability.
.
6. Medhat Tarawneh (2006) financial performance is a dependent variable and measured by
Return on Assets (ROA) and the intent income size. The independent variables are the size of
banks as measured by total assets of banks, assets management measured by asset utilization
ratio (Operating income divided by total assets) operational efficiency measured by the operating
efficiency ratio (total operating expenses divided.

7. Garimachoudhary(2014): used network of banks, productivity of banks, capital adequacy

ratio, growth of banks as an indicator of measuring banks performance. The study related that
private sector banks have expanded faster than public sector banks. The capital adequacy of new
 private sector banks is above RBI minimum requirements. However the assets base of public
sector banks raise faster than private sector banks.

8. Farman Ali, Anshul Sharma (2019): It is concluded that after merger somehow the overall
financial performance of the bank has been improved but this change is not good enough to be a
benchmark until the SBI would not recover the bad loan otherwise the SBI will remain in the losses
as long as it does not minimize operating cost.
.
9. Mital Menapara: evaluated the impact of mergers and acquisitions on financial Performance of
Indian Corporate Sectors and examined the impact of merger and acquisitions on Return on
Investment, Profitability and Liquidity position of selected companies.

10. Nisarg A Joshi and Jay M Desai:in their study measured the operating performance and
shareholder value of acquiring companies and comparing their performance before and after the
merger. They used Operating Profit Margin, Gross Operating Margin, Net Profit Margin, Return on
Capital Employed, Return on Net Worth, Debt-Equity Ratio, and EPS P/E for studying the impact.

2.4 Literature based on “To know what matters the big size of SBI (post-merger) to Indian
Banking System.”

1. CMA Jai Bansal (2018): Despite all the factors taken into consideration and analysis, consolidation
through M&A is a boon for the industry in the times of need. However, the journey to
„international banks‟ is still far as there had been a few mergers in the Indian banking space, it
had happened due to „exigencies‟ and were rather „forced consolidation‟.

2. Tamragundi & Devarajappa (2016): the impact of mergers on performance of selected

commercial banks in India. The impact of mergers on performance of the banks has been
evaluated from three prospective i) Physical Performance of merged banks, ii) Financial
Performance of Merged Banks and iii) Share price performance
.
3. Dutta and Dawn (2012): in a paper investigates the performance of merged banks in terms of its
growth of total assets, profits, revenue, deposits, and number of employees. The performance of
merged banks is compared taking four years of prior-merger and four years of post-merger. The
study findings indicate that the post-merger periods were successful and saw a significant increase
in total assets, profits, revenue, deposits, and in the number of employees of the acquiring firms
of the banking industry in India.

4. Goyal & Joshi (2011) in their paper, gave an overview on Indian banking industry and highlighted
the changes occurred in the banking sector after post liberalization and defined the Merger and
Acquisitions as per AS-14. The need of Merger and Acquisition in India has been examined under
this study. It also gave the idea of changes that occurred after M&As in the banking sector in
terms of financial, human resource & legal aspects.
5. Saloni Shukla (2017): The history of SBI and its associates has been complicated, which also included a
dispute between the Reserve Bank of India and the Nehru administration. When the question of the fate of
these regional banks came up, some including the then RBI Governor B Rama Rau said they should be part of
the RBI to start with.

6. Sowmya Ramanathan(2014): This brings in substantial cost reduction and synergy in treasury
functions, thus enhancing the productivity across the dimensions of the State Bank of India. We
need to look at the positives more than the negatives where the former will outweigh the latter.
SBI will no doubt become a global bank with far reaching magnitude with the spread of 17000
branches and combined account base of over 75000 accounts.

7. Sharma,M(2017):The five associate banks will cease to exist as legal entities and become a part of
SBI from April 1, but the various merger processes will start only after April 24, once the balance
sheets of the five entities are audited and added. The associate banks have also offered a
Voluntary Retirement Scheme (VRS) to employees who do not wish to relocate.
8. Gupta, A (2017) : Those areas where SBI is not having branches but its associate banks are having,
upon the merger being effected, the customer confidence and good report will be created
because SBI is having a good report for all its customers. the bigger the bank, the better is the
diversification of its assets portfolio and lesser chances that the bank will fail in the system.

9. Panayiotis Liargovas and Spyridon Repousis (2011) examined the impact of Greek mergers and
acquisitions on the performance of the Greek Banking Sector during the period 1996-2009. With
the use of event study methodology, we reject the “semi-strong form” of Efficient Market
Hypothesis (EMH) of the Athens Stock Exchange. The overall results indicate that bank mergers
and acquisitions have no impact and do not create wealth.

10. Jianyu Ma (2009) investigated abnormal returns to shareholders of bidder firms around the day of
M&A announcement for ten emerging Asian markets: China, India, Hong Kong, Indonesia,
Malaysia, the Philippines, Singapore, South Korea, Taiwan, and Thailand. Using a sample of 1,477
M&A deals in the ten emerging Asian markets, It was found that the stock markets have expected
positive cumulative abnormal returns in three different event windows.
 Chapter 3: Research Methodology

3.1 Introduction
This chapter discussed about the methodology used for conducting a research and the application of
various statistical tools and methods to test the hypothesis. Most of the studies on merger scheme of
banks in India have been carried out in different sectors, but a very few studies have been conducted on
interpersonal impact of merger scheme on employees of banks. No study has been conducted in Indore
region regarding the impact of merger on interpersonal behavior of employees of banks. Due to this
reason the researcher have chosen the topic “Analysis of Pre and Post SBI Merger & its impact on
financial performance of SBI with respect to Indian Banking System.”

Research Methodology is a way to find out the result of a given problem on a specific matter or
problem that is also referred as research problem. In Methodology, researcher uses different criteria for
solving/searching the given research problem. Different sources use different type of methods for
solving the problem. If we think about the word “Methodology”, it is the way of searching or solving the
research problem. (Industrial Research Institute, 2010). It explains the various steps that are adopted by
a researcher in studying thee research problem along with the logic behind them .this chapter explains
the methodology adopted in the study for conducting the research. Steps followed for conducting a
research:-

1. Identification of research problem

2. Formulation of research hypotheses
3. Data collection
4. Analyzing and interpreting the data
5. Reporting and evaluating research
6. Communicating the research findings and, possibly, recommendations

3.2 Research Design

Research design is a detailed outline of how an investigation has been taken place. A research design
will typically include how data is to be collected, what instruments will be employed, how the
instruments will be used and the intended means for analyzing data collected.

The study undertaken is of exploratory in nature. Exploratory research is a type of research conducted for
a problem that has not been clearly defined. Exploratory research helps determine the best research
design, data collection method and selection of subjects. Exploratory research often relies on secondary
research such as reviewing available literature and/or data, or qualitative approaches such as informal
discussions with consumers, employees, management or competitors, and more.
Since the past and existing facts are used to analyze, the study period of 4years from 2015 to 2018 with
the use of selected financial performance ratios. The year 2017 is considered as transaction year.
Henceforth, the study considers 2015&2016 as pre and 2017 &2018 considered as post-acquisition period
for the data analysis.

3.3 Data Collection

The study is primarily based on Secondary data which has been collected with the help of various journals,
books, newspapers clipping, articles on merger has been reviewed and studied. The Government
approved merger scheme has been studied in depth too.

3.4 period of Study

The study covers three years annual data to compare the pre and post merger performance of the
bank.Thus, pre-merger period of 2015-16 and 2016-17 and post-merger period of 2017-18 are taken
into consideration. The year of merger is considered as base year.

3.5 Description of the Research Tool:

TOOLS OF ANALYSIS: Descriptive and inferential statistics are the statistical tools applied for analysis of
data wherein the hypothesis formed for analysis have been tested by considering pre and post M & A
financial ratios. For the purpose of analyzing the financial parameters of the bank (such as Investment,
management efficiency, debt coverage, leverage and profitability), mean, standard deviation, p-value
and percentage are the tools used

3.6 Research Hypothesis

H1: There is no significant difference between pre and post merger investment standards of State Bank
of India.

H2: There is significant difference between pre and post merger management efficiency standards of
State Bank of India.

H3: There is no significant difference between pre and post merger debt coverage ratios of State Bank of
India.

H4: There is no significant difference between pre and post merger Profitability standards of State Bank
of India.

H5: There is no significant difference between pre and post merger Profit and loss ratios of State Bank of
India.