Editorial Board

A Refereed Monthly International Journal of Management

Measuring Post Merger NPA’s of Indian Public Sector Banks

Dr Sneha Babel

Assistant Professor ABST

Gov. M.G. College, Udaipur Rajasthan

Email id sneha.babel@gmail.com

Dr. Himanshu Sanghavi

Assistant Professor,

1. Z. Patel Institute of Business and Management,

The Charutar Vidya Mandal (CVM) University.

Vallabh Vidhyanagar – 388120. Gujarat. India.

Email: himanshu.sanghavi@cvmu.edu.in

Dr. Manisha Patawari

Assistant Professor,

Institute of Law,

Nirma University, Ahmedabad, Gujarat-India

Email: manisha.patawari@nirmauni.ac.in

Abstract

This research aimed to evaluate how Mergers and Acquisitions (M&A) activity impact in relation to performance of Indian Banks. The study examines the law and patterns in M&A in the Indian public sector banks (PSBs) and their influence on Indian PSBs. The research focuses on evaluating the banking system's performance prior to and following a merger in India. The research analysed the performance of banks following their merger examining the structure of NPA. The data for this study is obtained from 2014-15 to 2018-19 for pre-merger and 2019-20 to 2022-23 as post-merger period. Using independent sample t test, it was found that the situation regarding NPA’s in Indian public sector banks has not shown substantial improvement after merger for PSB’s in India.

Keywords: Gross Non-Performing assets (GNPA), Net NPAs (NNPA), pre-merger, post-merger, Indian banks, Public Sector Banks (PSBs).

Introduction

Banking was one such industry that was open for private investment after Independence. Then comes the second phase of reforms that has led to Bank Nationalisation in India in 1969 where around 14 banks were Nationalised by the Government of India and next 10 years other 6 banks were also nationalised with the intention of financial inclusion and controlling private monopoly in the sector. The third phase comes after LPG reforms when the banking sector was again open for private investment. After LPG reforms banking became a sector where public and private sector co-exist. After various statutory changes that have been brought in the banking industry now the government has come up with another phase of banking reforms where the government has started merging the small public financial Institution with one another with the aim to consolidate the public financial institution and to tackle the problem of NPA. After M&A the strength of Public Sector banks have been reduced to 12 from 21. The financial sector in India has achieved noteworthy milestones, reflecting the progress made by the global democracy that is both the broadest and most diversified within a relatively short period. The strategy plan put forth by the government seeks to reform and Integrating Indian banking within the global financial system. The evolution of the Indian banking sector has been shaped by various transformations and successful M&A. The M&A have become a key method of corporate reorganisation across the world and for financial services sector. In India M&A of banks are governed by section 44A of Banking regulation Act, 1949, the provision states that “Banking companies may not merge with one another unless a draft scheme outlining the terms of the amalgamation has been presented to the shareholders of each involved banking company. This scheme must receive approval through a resolving by a mainstream, representing two-thirds of the amount of the shareholders from each company, who are present either in person or by proxy at a specially convened meeting.” Once the shareholders pass the scheme then it will be tabled to RBI for sanction and only after the approval from the RBI the merger can take place. This provision of law doesn’t apply in PSB mergers absolutely. There is a provision u/s. 237 of the Companies Act, 2013 This provision empowers the Central Government to consolidate two or more companies for the sake of public interest but in case of Banking companies this power coincides with Banking Regulation Act, 1949 which lays down if Central Government uses its power under 237 then it has to take prior consultation of RBI.

Intense competition exists among companies within the same industry, emphasizing the importance of achieving economies of scale, enhancing cost efficiency, and maximizing profitability, is the primary driving factor behind merger activity. These studies have used one of the two contrasting approaches to merger-related benefits in banking. The preliminary method entails evaluating the enduring success of mergers by examining accounting data, including return on assets, operational expenses, and efficiency ratios. When the performance changes based on accounting metrics surpass those of similar banks that have not participated in merger activities, it is expected that a merger will enhance overall performance.

The RBI has indicated that the frauds reported by Public Sector Banks from 1April, 2018, to 30 September, 2019, reached to total amount of INR 95,760.49 crores. Public Sector Banks command a substantial 85 percent share, a figure that exceeds their relative share of business activities. A preliminary examination of these occurrences has uncovered the participation of both mid-level staff and senior management, in addition to political factors and a dominant 'pro-corporate' attitude among those making decisions. The financial sector is presently encountering considerable difficulties as a result of high levels of NPAs, which warrants attention and concern. This highlights the financial challenges faced by borrower customers, including notable cases such as Mallya, Modi and Dewan, with the inadequacies present in communication systems. In 2018, India was positioned as the tenth largest economy globally, exhibiting the highest rate of non-performing loans, second only to Italy, according to available data. This expectation arises from the understanding that lenders under government control are likely to hold approximately 90% of these non-performing assets. In the fiscal year concluding on March 31, 2018, four PSBs i.e., BoB, IDBI, OBC, and CBI are reported combined losses totalling INR 21,646.38 crores. This significant financial setback prompted the government to initiate their mergers. The dire circumstances required bank mergers as advocated by the Centre. Studies show that Public Sector Banks (PSBs) achieved net revenue for the past five years during the fiscal year 2021. Out of India's 12 PSB’s, only Punjab & Sind Bank and the CBI reported negative profit during financial year. Closure of their historical bad loan crisis was the primary cause for PSBs' combined profit of Rs. 31,817 crores. Other advantages include cheaper fund costs, fewer operational expenditures, and larger profits on bond portfolios despite falling bond rates. Moreover, Public sector banks have maintained a steady loan growth rate of 3-4 percent annually. Due to improved asset quality and profitability, these banks are well-equipped to support further development in case credit growth rises. Asset quality showed considerable improvement in September 2020 compared to March 2020 across industrial, agricultural, and services sectors, with a decrease in GNPA and stressed advances ratios. Yet, the GNPA ratio for retail advances decreased somewhat, whereas stressed advances were constant. The GNPA ratio decreased significantly in all major industrial sub-sectors. The baseline scenario suggests that the GNPA ratio for PSBs could rise from 9.7 percent in September 2020 to 16.2 percent by September 2021. In a high-stress scenario, the GNPA ratios of Public Sector Banks could potentially rise to 17.6 percent by September 2021. Despite an increase in reported GNPA to 9.4% in March 2021 from 10.7% in March 2020, and a rise in NNPA to 3.1% from 3.8% in FY21, the volume of overdue loans within banks remains significantly elevated(the new Indian express, 2021)[1]. Hence it is important in the new regime that the performance of the Indian banks needs to be relooked after the Amalgamation of the Banks and especially in respect of the NPA’s perspective. 

Literature Review

Shah & Hasan (2022)[2] revealed that the economy of world is struggling with a variability of difficult challenges, including bank and financial institution failures, debt problems in important nations worldwide, and the eurozone crisis. Nonperforming assets (NPAs) are now the primary cause of the financial difficulties faced by banks. Concrete actions need to be implemented to enhance recovery performance. Two main activities are required including banks must aim to avoid new NPAs by conducting thorough review of loan applications, and thereafter gather funds from accounts that have previously failed to meet their obligations.

Bhasin & Rajesh (2022)[3]analyses the significant dangers the challenges faced by Indian banks, along with the various underlying factors of rising NPAs and bank frauds. They explore the potential of new digital banking technology combined with better risk and lending practices, to effectively manage and reduce risks, thereby addressing the issues of non-performing assets and fraudulent activities. Indian financial institutions are obligated to enhance their internal controls pertaining to loan approval processes, including credit assessment, by using cutting-edge technology, data analytics, and management information system reports. Given the necessity for experts to effectively informed decisions within the banking and technology sectors and can avoid risk, it is advisable for bank employees to engage in ongoing training and skill enhancement. There has to be better early warning signal cyber security, firewalls, and technology risk management.

Goswami & Gulati (2021)^[4]found that, looking into the years 1999–2017, analyzed the productivity of Indian banks when NPAs were there. The study's overarching goal is to ascertain whether or not Indian financial institutions were resilient enough to weather the global financial crisis during 2007–2009 and have been able to maintain their overall productivity levels during the subsequent period of economic uncertainty. To provide reliable estimations of TFP and its constituents, technological and efficiency changes, the unique sequential Malmquist-Luenberger productivity index (SMLPI) method is used. There is no longer any chance of misleading technical regression, and this strategy's primary advantage lies in its explicit allowance for the production of undesirable outputs (NPAs, in this context) alongside acceptable inputs and outputs within the manufacturing process. According to the data analysed, efficiency loss was the only reason for a 1% drop in TFP in the banking industry of India throughout the study's defined time frame. The Indian banking industry in has seen a slowdown in total factor productivity growth since the GFC. Out of all the types of bank ownership, PSB’s were the ones hit most by the global financial crisis.

Haralayya (2021)[5] explained India's banking system has been undergoing reforms since 1991, with the primary goal of creating a more dynamic, robust, steady, and effective business. The enhancement of asset quality and the decrease in NPA were identified as key goals of the reform initiatives. This research aims to evaluate the effectiveness of nonperforming asset management in India's public sector banks by providing an impartial analysis of the trend in the movement of these assets from 2000-01 to 2011-12. Many factors, including loan/advance activity, various measures of bank performance, and macroeconomic conditions, contribute to the accumulation of NPA’s. A number of macroeconomic and banking performance variables were found to moderate or mediate the relationship between the incidence of nonperforming loans (NPAs) and the trend in their movement, as outlined in this research.

Kanoujiya et al., (2021)[6] revealed that Banks throughout the globe are dealing with a variety of difficulties. The present collection of bank performance measurements lacks an unified and determined strategy for effective goal fulfilment. This research presents a comprehensive picture of bank performance, including the relationship between profit and regulatory frameworks. They were fully unsuccessful in this litmus test of thorough recital measurement. The notion that NPAs should be influenced by the regulatory framework is unexpectedly absent among Indian banks. Because the previous studies have not taken a comprehensive perspective of presentation of bank, this study results give sufficient motivation for all bank stakeholders to react. Bank governance and regulation may be redirected by policymakers and regulatory agencies. As a result, the study's main premise of comprehensive bank performance expectations is satisfied fairly.

Swarnalathaet al., (2021)[7] revealed that India has seen significant changes in the latter decade of the twentieth century in terms of financial progress and liberalisation. In light of this transition, the banking sector needed to assume a crucial role in fostering the growth and creation of new business opportunities throughout the nation to keep pace with the expanding economy. The bank’s availability for negligible holding of the client's assets has resulted in the loaning asset. Purchasing assets and shops has no risks, however lending credits consistently involves significant risk elements. NPA’s constitute is found significant for segment of a bank's portfolio and, consequently, represent an inescapable challenge for the banking sector. At the conclusion of the fiscal year 2015-2016, 20 PSB had a net loss of Rs.16272.34 crore. Non-performing assets or bad advances have sometimes breached the Reserve Bank of India's resilience dimension, resulting in temporary restorative action. The research study investigates the origins of NPA in terms of importance, causes, and corrective actions and strategy exercises that should be undertaken to minimise Non-Performing Assets in Indian banks.

Jayaraman &Bhuyan (2020)[8] shown a dramatic increase in the amount of money that Indian banks have lost due to loan write-offs and gross non-performing assets. This study may be the first of its kind in India to use a Nerlovian approach to assess the effect of these two unfavourable outputs on the efficiency of bank profitability. The significant drop in profit efficiency suggests that the inclusion of these two undesirable outputs profoundly impacts the profitability of Indian banks compared to their exclusion. Moreover, research indicates that the inefficiency in resource allocation by banks was the main contributor to their lack of profitability. Moreover, loan write-offs ought not to be viewed merely as a strategy for tidying up the banks' balance sheets, since they have a notable influence on their profit efficiency.

Meher et al., (2020)[9] revealed that there are two types of non-performing asset management strategies: curative and preventative. The purpose of this research is to concentrate on the usefulness of different preventative methods in the future management of NPA. Primary data for this research were acquired from 82 of the 138 branches in the Sagar District of Madhya Pradesh, India. The responses from each branch are provided by the branch managers or recovery officers. The primary considerations involve the underlying causes of NPA, the implementation of preventive measures, and the effectiveness of each method employed to avert such occurrences. It focuses on a few novel reasons that have received little attention in previous studies. The research also depicts the actual use of different preventative measures, as well as the efficiency of strategies to avert the occurrence of NPA in the future. The findings of this research might give important information on which technique is more successful in preventing stressed assets. Furthermore, it might alert banking regulators to the difficulties encountered by managers while implementing preventative measures.

Hafsal et al., (2020)[10] addressed concerns about the viability of India's banking industry, stimulated by a rather high quantity of nonperforming assets. It provides a thorough efficiency profile of the Indian banking sector by evaluating bank efficiency with NPAs included, therefore exploring the link between the two. Our empirical results reveal that in 2016, the Indian banking sector had a 16.2% efficiency gap as a result of NPAs, as determined by using Kao's (2017) standard two-stage data envelopment analysis incorporating non-performing assets as an external output from the initial stage. The findings indicate that the efficiency gap or loss has grown over time and varies among banks based on their ownership structures.

Kashyap & Bansal (2020)[11]highlighted the importance of the banking industry to the nation's economic growth and financial performance, while highlighting the challenges faced by India's banking sector from NPAs. These days, nonperforming assets are considered a big problem. Finding out how much non-performing debt there is in India's banking sector and how it affects banks' bottom lines and overall performance is the primary motivation for this research. This study indicates that the increasing prevalence of non-performing assets is adversely impacting the profitability of public sector banks in India, which are experiencing greater challenges compared to their private sector counterparts.

Tyagi et al., (2020)[12] revealed the banking industry in India has several issues and worries connected to non-performing assets, which are a major drag on the financial performance and economic growth of a nation. NPAs are now considered a big problem. The purpose of this research is to ascertain how widespread non-performing assets are in India's banking sector and how they impact the efficiency and success of the country's financial institutions. The increasing amount of NPA’s has a negative impact on bank profitability, and this research claims that public sector banks in India have been hurt more than private sector banks by NPAs.

Research Methodology

The study analysis covers just selected PSBs’ being merged i.e., from 20 nationalised banks currently merged (till March 2022) to 12 banks with “BoI, Bank of Maharashtra, Canara Bank, CBI, Indian Bank, IOB, P & B, Punjab & Sind Bank, UBI, and UCO Bank with SBI and after further merging, in future the 6 banks working that is going to work as PSB’s are included in the study”. This research is mainly based on Secondary data of Indian banking system before and after the merger of the banks. the secondary data regarding final accounts of banks will be gathered from the annual reports of banks, Various sources, including journals, research papers. This research evaluates the performance post-merger for consolidated banks by analysing the structure of NPAs. The data utilized for this analysis spans from the years 2014-15 to 2018-19, representing the pre-merger phase, while the period from 2019-20 to 2022-23 is considered as the post-merger phase.

Data was analysed by using statistical tools as well as financial techniques. For analysis and interpretation of data various techniques like statistical and financial models with independent sample t test were used.

Data Analysis

The NNPA of the banks are categorized as follows:

Table-1: Net NPA of the PSB’s

The BoB has merged the Vijaya and Dena bank thus their Net NPA has increased from the 1510 crore to 21,577 crore from 2019 to 2020.  For Canara Bank, it merged the Syndicate bank and thus its Net NPA has increased from 18,251 to 24,442 INR from 2020 to 2021, same for the “Indian bank with the Allahabad Bank’s merger” Net NPA increased from 6,184 to 12,271 INR in the period of 2020 to 2021, PNB with the merger of OBC and UBI Net NPA increased from 27,219 to 38,576 INR in the period of 2020 to 2021, further the “Union Bank of India merged Andhra Bank and Corporation Bank” and thereafter their Net NPA increased from 17,303 to 27,281INR in the period of 2020 to 2021.

Measuring pre and post NPA’s change

The selected banks Net NPA, as presented in table 2, indicates the increasing change in Net NPA for all banks following the merger. Subsequently, the merged banks have experienced a gradual reduction in their Net NPA, whereas the banks that did not undergo a merger have seen a steady decline in their Gross NPA.

The reduction in Net NPA necessitates an assessment of whether a consistent change occurred before and after the merger or if it followed a sequential pattern of reduction. To achieve this objective, a hypothesis for measuring Net NPA has been formulated.

H₀: NPA’s have not significantly improved in PSB’s after merger for public sector banks in India.

H₁: NPA’s have significantly improved in PSB’s after merger for public sector banks in India.

To measure the same the data gathered is divided into 2 parts, before merger Net NPA and After merger Net NPA. The analysis is conducted using a one-sample t-test to examine the differences in data before and after the merger across all 12 PSBs. The findings are presented as follows:

Table-2: NNPA Test results

Assuming that the variances for the two groups, namely Net NPA before merger and Net NPA after merger, are equal, Levene's Test for EoV has been used. Statistical analysis demonstrates no significant difference amongstthe Net NPA before merger and Net NPA after merger groups on the Net NPA construct, as there is no gap between the two established categories (F =.449, p=0.504>.05). Therefore, in order to run the independent T-Test, the row with the presumed equal variance is chosen. With 106 degrees of freedom, the results of the independent sample test are t106 = 0.697 and p = 0.488>0.05.

Conclusion

As a result of the mergers that public sector banks have experienced with other financial institutions throughout the course of the year 2020-21, the Net Non-Performing Assets (NPA) of these institutions have grown. This is a consequence of the mergers that have taken place. In terms of statistical significance, the difference between the group that had Net NPA before to the merger and the group that had Net NPA after the merger is statistically negligible at the 5% level of significance. This is because the difference does not meet the criteria for statistical significance. Following the merger of PSBs’ in India, we are able to state that the nonperforming assets (NPAs) of Indian public sector banks have not greatly improved since the merger. This is something that we are able to say. As a consequence of this, the null hypothesis is accepted, and we are allowed to make this statement and we can assert that PSB’s NPAs have not improved appreciably following merger.

References

[1]The New Indian Express. (2021). Post-merger, little to cheer for public sector banks, 25th July 2021, from https://www.newindianexpress.com/ business/2021/jul/25/post-merger-little-to-cheer-for-public-sector-banks-2334934.html

[2]Shah, R., & Hasan, H. A. (2022). Study on NPA of selected Indian banks. Gap Gyan-a global journal of social sciences, 5(1), 58-61.

[3]Bhasin, N. K., & Rajesh, A. (2022). The role of emerging banking technologies for risk management and mitigation to reduce non-performing assets and bank Frauds in the Indian Banking System. International Journal of e-Collaboration (IJeC), 18(1), 1-25.

[4]Goswami, A., & Gulati, R. (2021). Economic slowdown, NPA crisis and productivity behavior of Indian banks. International Journal of Productivity and Performance Management. In press, https://doi.org/10.1108/IJPPM-01-2020-0010

[5]Haralayya, D. (2021). Study on Non Performing Assets of Public Sector Banks. Iconic Research And Engineering Journals (IRE), 4(12), 52-61.

[6]Kanoujiya, J., Bhimavarapu, V. M., & Rastogi, S. (2021). Banks in India: A Balancing Act Between Profitability, Regulation and NPA. Vision, 09722629211034417.

[7] Swarnalatha, C., Vetrivel, T., & Vijayalakshmi, P. (2021). Wide analysis of causes and remedies for Non-Performing Assets in Indian banks. Journal of Electrical Engineering, 21(2 (2)), 139-147.

[8]Jayaraman, A. R., & Bhuyan, P. (2020). Impact of NPA and loan write-offs on the profit efficiency of Indian banks. Decision, 47(1), 35-48.

[9]Meher, B. K., Puntambekar, G. L., Hawaldar, I. T., Spulbar, C., Birau, R., & Rebegea, C. (2020). An Effectiveness Assessment of Preventive Management Strategies in order to Manage Non Performing Assets in Indian banks: A Case Study. Scientific Annals of Economics and Business, 67(2), 235-258.

[10]Hafsal, K., Suvvari, A., & Durai, S. R. S. (2020). Efficiency of Indian banks with non-performing assets: evidence from two-stage network DEA. Future Business Journal, 6(1), 1-9.

[11]Kashyap, S. K., & Bansal, R. (2020). Non Performing Assets and Profitability of Indian Banks: A Review. Solid State Technology, 63(6), 20701-20706.

[12]Tyagi, A., Rai, K., & Sharma, M. (2020). Impact of NPA on the Profitability of Banks–with special references to Indian Banks. International Journal of Advanced Science and Technology, 29(9s), 2520-2526