Impact of Mergers and Acquisitions on Productivity of Indian Banks

In this paper, we examine how M&A affect Productivity in case of Indian banking sector. The sample of the study comprises of Indian banks merging from the period 2005-2010. Data Envelopment Analysis along with Malmquist Index approach is employed to test for the impact of Mergers and Acquisitions. We find that the average total factor productivity from 2005-2010 across the eight banks has shown a declining trend. The productivity has marginally increased for Bank of Baroda (0.3%) and Federal Bank (1.5%) but it has declined for all other banks. Overall the total factor productivity has decreased by 1.8%. As this change has not been substantial, it can be said that the merger and acquisition activity has not significantly impacted the total factor productivity of banks in India..We further observe that the decrease in total factor productivity was mainly due toto decrease in technological and pure technical efficiency whereas technical efficiency remain unchanged and scale efficiency increased marginally The study is extremely relevant for common shareholders, global fund managers as well as financial regulators as it gives insights on the relevance on Mergers & Acquisitions in Banking sector. The present research contributes to analysis of corporate restructuring in Indian banking sector.

Keywords

Mergers and Acquisitions Total Factor Productivity Efficiency, Banking JEL Codes: G14 C12 C13

References

Aditya, N. and Ghosh, S. (2001), Bank Supervisory Arrangements: International Evidence and Indian Perspective, Economic and Political Weekly, September 15, pp. 3543–3553.
Aslem, J.A., Scheraga, C.A. and Bedingfield, J.P. (1999), DEA efficiency profiles of U.S. banks operating internationally, International Review of Economics & Finance, Vol. 8, Issue 2.
Banker, R.D., Charnes, A. and Cooper, W.W. (1984), Some Models for Estimating Technical and Scale Inefficiencies in Data Envelopment Analysis, Management Science, Vol. 30(5), pp. 1078–1092.
Berger, A.N., Hassan, I. and Zhou, M. (2005), Ownership, Financial Liberalization, and Efficiency of Chinese Banks, FMA Working Paper Series.
Bhattacharya, A., Lovell, C.A.K. and Sahay, P. (1997), The Impact of Liberalisation on the Productive Efficiency of Indian Commercial Banks, European Journal of Operational Research, Vol. 96, pp. 332–345.
Bhide, M.G., Prasad, A. and Ghosh, S. (2002), Banking Sector Reforms: A Critical Overview, Economic and Political Weekly, February 2–8, pp. 399–408.
Brock, P.L. and Suarez, R.L. (2000), Understanding the Behavior of Bank Spreads in Latin America, Journal of Development Economics, Vol. 63, pp. 113–134.
Charnes, A., Cooper, W.W. and Rhodes, E. (1978), Measuring the Efficiency of Decision Making Units, European Journal of Operational Research, Vol. 2(6), pp. 429–444.
Claessens, S., Demirgüç-Kunt, A. and Huizinga, H. (2001), How Does Foreign Entry Affect the Domestic Banking Market?, Journal of Banking and Finance, Vol. 25.
Coelli, T., Rao, D.S.P. and Battese, G.E. (1998), An Introduction to Efficiency and Productivity Analysis, Kluwer Academic Publishers, Boston.
Das, A. (1997), Technical, Allocative and Scale Efficiency of Public Sector Banks in India, RBI Occasional Papers, June–September.
Das, A., Nag, A. and Ray, S.C. (2005), Liberalization, Ownership, and Efficiency in Indian Banking: A Nonparametric Approach, Economics Working Papers, University of Connecticut.
Gilbert, R.A. and Wilson, E.W. (1998), Effects of Deregulation on the Productivity of Korean Banks, Journal of Economics and Business.
Isik, I. and Hassan, M.K. (2003), Financial Deregulation and Total Factor Productivity Change, Journal of Banking & Finance, Vol. 27(8).
Jaliloville, E. and Kauko, K. (2001), The New Basel Accord: Some Potential Implications for Credit Risk, Bank of Finland Discussion Paper.
Jalan, B. (2001), Banking and Finance in the New Millennium, Lecture at Bank Economists Conference, New Delhi.
Jalan, B. (2002), Strengthening Indian Banking and Finance: Progress and Prospects, Bank Economists Conference, Bangalore.
Joshi, V. and Little, I.M.D. (1997), India: Reform on Hold, Asian Development Review, Vol. 15, pp. 1–42.
K.R. Shanmugam and A. Das (2004), Efficiency of Indian Commercial Banks during the Reform Period, Applied Financial Economics, Vol. 14.
Krishnasamy, G., Ridzwa, A.H. and Perumal, V. (2004), Malaysian Post-Merger Bank Productivity: Application of Malmquist Productivity Index, Managerial Finance, Vol. 30, No. 4, pp. 63–74.
Kumar, S. and Gulati, R. (2007), Evaluation of Technical Efficiency and Ranking of Public Sector Banks in India, International Journal of Productivity and Performance Management, Vol. 57.
Kumbhakar, S.C. and Sarkar, S. (2003), Deregulation, Ownership and Productivity Growth in Banking, Journal of Money, Credit and Banking, Vol. 35(3).
Nachane, D.M. (1999), Capital Adequacy Ratios: An Agnostic Viewpoint, Economic and Political Weekly, January 16–23.
Ram Mohan, T.T. (2002), Deregulation and Performance of Public Sector Banks, Economic and Political Weekly, Vol. 37(5).
Ram Mohan, T.T. and Ray, S.C. (2004), Comparing Performance of Public and Private Sector Banks, Economic and Political Weekly, Vol. 39(12).
RBI (1999a), Some Aspects and Issues Relating to NPAs in Commercial Banks, RBI Bulletin, July.
RBI (1999b), Report on Currency and Finance, Reserve Bank of India.
Saha, A. and Ravishankar, T.S. (2000), Rating of Indian Commercial Banks: A DEA Approach, European Journal of Operational Research, Vol. 124, pp. 187–200.
Sanjeev, G.M. (2006), DEA for Measuring Technical Efficiency of Banks, VISION – The Journal of Business Perspective, Vol. 10(1).
Sathye, M. (2001), Efficiency of Banks in a Developing Economy: The Case of India, University of Canberra.
Sink, D.S. and Tuttle, T. (1989), Productivity, Efficiency and Technical Progress, Analysis of Public and Corporate Economics, Vol. 60(1).
Starros (1997), Does Mergers Improve X-Efficiency of U.S. Banks?, Journal of Money, Credit and Banking, Vol. 28(3).

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Sanjiv Mittal, Monika Chopra . (2014). Impact of Mergers and Acquisitions on Productivity of Indian Banks. DIAS Technology Review, 10(2), 8-14.

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[1] Aditya, N. and Ghosh, S. (2001), Bank Supervisory Arrangements: International Evidence and Indian Perspective, Economic and Political Weekly, September 15, pp. 3543–3553.

[2] Aslem, J.A., Scheraga, C.A. and Bedingfield, J.P. (1999), DEA efficiency profiles of U.S. banks operating internationally, International Review of Economics & Finance, Vol. 8, Issue 2.

[3] Banker, R.D., Charnes, A. and Cooper, W.W. (1984), Some Models for Estimating Technical and Scale Inefficiencies in Data Envelopment Analysis, Management Science, Vol. 30(5), pp. 1078–1092.

[4] Berger, A.N., Hassan, I. and Zhou, M. (2005), Ownership, Financial Liberalization, and Efficiency of Chinese Banks, FMA Working Paper Series.

[5] Bhattacharya, A., Lovell, C.A.K. and Sahay, P. (1997), The Impact of Liberalisation on the Productive Efficiency of Indian Commercial Banks, European Journal of Operational Research, Vol. 96, pp. 332–345.

[6] Bhide, M.G., Prasad, A. and Ghosh, S. (2002), Banking Sector Reforms: A Critical Overview, Economic and Political Weekly, February 2–8, pp. 399–408.

[7] Brock, P.L. and Suarez, R.L. (2000), Understanding the Behavior of Bank Spreads in Latin America, Journal of Development Economics, Vol. 63, pp. 113–134.

[8] Charnes, A., Cooper, W.W. and Rhodes, E. (1978), Measuring the Efficiency of Decision Making Units, European Journal of Operational Research, Vol. 2(6), pp. 429–444.

[9] Claessens, S., Demirgüç-Kunt, A. and Huizinga, H. (2001), How Does Foreign Entry Affect the Domestic Banking Market?, Journal of Banking and Finance, Vol. 25.

[10] Coelli, T., Rao, D.S.P. and Battese, G.E. (1998), An Introduction to Efficiency and Productivity Analysis, Kluwer Academic Publishers, Boston.

[11] Das, A. (1997), Technical, Allocative and Scale Efficiency of Public Sector Banks in India, RBI Occasional Papers, June–September.

[12] Das, A., Nag, A. and Ray, S.C. (2005), Liberalization, Ownership, and Efficiency in Indian Banking: A Nonparametric Approach, Economics Working Papers, University of Connecticut.

[13] Gilbert, R.A. and Wilson, E.W. (1998), Effects of Deregulation on the Productivity of Korean Banks, Journal of Economics and Business.

[14] Isik, I. and Hassan, M.K. (2003), Financial Deregulation and Total Factor Productivity Change, Journal of Banking & Finance, Vol. 27(8).

[15] Jaliloville, E. and Kauko, K. (2001), The New Basel Accord: Some Potential Implications for Credit Risk, Bank of Finland Discussion Paper.

[16] Jalan, B. (2001), Banking and Finance in the New Millennium, Lecture at Bank Economists Conference, New Delhi.

[17] Jalan, B. (2002), Strengthening Indian Banking and Finance: Progress and Prospects, Bank Economists Conference, Bangalore.

[18] Joshi, V. and Little, I.M.D. (1997), India: Reform on Hold, Asian Development Review, Vol. 15, pp. 1–42.

[19] K.R. Shanmugam and A. Das (2004), Efficiency of Indian Commercial Banks during the Reform Period, Applied Financial Economics, Vol. 14.

[20] Krishnasamy, G., Ridzwa, A.H. and Perumal, V. (2004), Malaysian Post-Merger Bank Productivity: Application of Malmquist Productivity Index, Managerial Finance, Vol. 30, No. 4, pp. 63–74.

[21] Kumar, S. and Gulati, R. (2007), Evaluation of Technical Efficiency and Ranking of Public Sector Banks in India, International Journal of Productivity and Performance Management, Vol. 57.

[22] Kumbhakar, S.C. and Sarkar, S. (2003), Deregulation, Ownership and Productivity Growth in Banking, Journal of Money, Credit and Banking, Vol. 35(3).

[23] Nachane, D.M. (1999), Capital Adequacy Ratios: An Agnostic Viewpoint, Economic and Political Weekly, January 16–23.

[24] Ram Mohan, T.T. (2002), Deregulation and Performance of Public Sector Banks, Economic and Political Weekly, Vol. 37(5).

[25] Ram Mohan, T.T. and Ray, S.C. (2004), Comparing Performance of Public and Private Sector Banks, Economic and Political Weekly, Vol. 39(12).

[26] RBI (1999a), Some Aspects and Issues Relating to NPAs in Commercial Banks, RBI Bulletin, July.

[27] RBI (1999b), Report on Currency and Finance, Reserve Bank of India.

[28] Saha, A. and Ravishankar, T.S. (2000), Rating of Indian Commercial Banks: A DEA Approach, European Journal of Operational Research, Vol. 124, pp. 187–200.

[29] Sanjeev, G.M. (2006), DEA for Measuring Technical Efficiency of Banks, VISION – The Journal of Business Perspective, Vol. 10(1).

[30] Sathye, M. (2001), Efficiency of Banks in a Developing Economy: The Case of India, University of Canberra.

[31] Sink, D.S. and Tuttle, T. (1989), Productivity, Efficiency and Technical Progress, Analysis of Public and Corporate Economics, Vol. 60(1).

[32] Starros (1997), Does Mergers Improve X-Efficiency of U.S. Banks?, Journal of Money, Credit and Banking, Vol. 28(3).