Do Bank Mergers Improve Efficiency? The Indian Experience

Snehal S. Herwadkar, Shubham Gupta and Vaishnavi Chavan of RBI evaluate bank mergers in India since 1997:

The findings of the paper suggest that mergers have been beneficial to the banking sector as the financial performance and efficiency of acquirers improved post-merger. Findings of data envelopment analysis (DEA) for the period 1997-2017 suggest that the mean technical efficiency of acquirers increased from 90.88 in the pre-merger period to 93.80 three years post-merger, and 94.24 five years post-merger.

The results are valid for both public and private sector banks, even after controlling for industry-wide impact. Relatively low managerial and organisational competencies in acquiree banks were not a hindrance for preserving efficiency of the merged entity and the benefits to acquirers from mergers on account of increased scale of productive capacity were statistically significant.

A deep dive into factors that may have led to efficiency gains identifies post-merger geographical diversification and increased reliance on interest income as the significant contributors to the improvement. DEA and financial ratio analysis confirm that even the recent mergers during 2019-20 led to improvement in acquirers’ efficiency. The event study analysis on these mergers indicates an increase in acquiree banks’ shareholder wealth.

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