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| A Comparative Study of The Effectiveness of Risk Management Practises in the Pre and Post Merger and Acquisition (M and A) of The Selected Public Sector Bank | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Paper Id :
17995 Submission Date :
2023-08-12 Acceptance Date :
2023-08-22 Publication Date :
2023-08-25
This is an open-access research paper/article distributed under the terms of the Creative Commons Attribution 4.0 International, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited. DOI:10.5281/zenodo.8341614 For verification of this paper, please visit on
http://www.socialresearchfoundation.com/remarking.php#8
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| Abstract |
The credit risk, which is defined as a lender failure to repay a loan including interest, poses a danger to the trustworthiness of commercial banks. In the year 2020, it was the alarming situation for the Government of India as NPA mushrooming at a very higher rate which instigate to introduce mega merger in the year 2020 as the M&A is the only viable option to reduce the credit risk of banks. The main objective of the study is to comparative analyse the credit risk management practices in pre and post M&A of selected public sector banks. The study further concluded that no statistically significant difference observed in pre and post M&A in relation to risk management capabilities, but still positive changes has been observed after initiation of M&A in the selected banking sector.
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| Keywords | Merger & Acquisition(M&A), Risk Management, NPA, Financial Performance, Commercial Banks | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Introduction | The procedure of recognition, quantification, administering,
and keeping track of probable perils that may adversely affect the performance
of an organization can be described as risk management. The term risk
management can also be used to describe an array of financial and operational
procedures designed to mitigate the negative effects of cash flow volatility.
Information gathering, analysis, risk quantification, and risk monitoring
leading to risk control, risk transfer, risk reduction, risk avoidance, and
risk elimination are all components of effective risk management. Risk
management can also be termed as the fulfillment of different initiatives to
control the undesirable aftermath of a loss or uncertainty. The banking
industry has grown enormously throughout the years. Growth has brought with it
a plethora of financial and non-financial risks. The banking business has
expanded tremendously throughout the years. Growth has brought with it a slew
of financial and non-financial hazards. Commercial banks confront risks such as
credit risk, liquidity risk, operational risk, market risk, interest rate risk,
transaction risk, and legal risk. This risk may have an adverse impact on a
bank's bottom line. Banks' negligence for risk management was a major
contributor to the Asian financial crisis of 1997, when banks were lending
without collateral based on client connections. As a result, borrowers were
unable to repay their debts, thus weakening the banking system. The success of
business is determined by its ability to effectively it handle operational and
non-operational risks. Poor risk management relates to poor financial
performance. Credit risk is the most important risk in banks. Credit risk is
defined as the borrower's failure, inability, or refusal to honour credit
service terms and conditions. When a borrower fails to return the principle and
interest, this is referred to as poor financial performance. The depositor
withdrawals may jeopardise the bank's liquidity. As a result, the bank will be
unable to meet its targets. Liquidity risk management is critical since it
influences a bank's solvency as well as how it tackles other risks like market
and credit risk. The liquid ratio is the most often used gauge of liquidity
risk. The recommendations, pronouncements, and systems that banks are bound by
make some commercial banks unable to comply and, as a result, look for
strategies where mergers and acquisitions become the most solemn way to enhance
compliance and competitiveness. Mergers and acquisitions methods promote the
formation of companies with a big capital base and an appropriate liquidity
ratio. It also helps companies to find a soft landing for development and
diversification, tax savings, market dominance, and overall enhanced financial
performance. Due to the merging of homogeneous resources, the synergies created
by mergers and acquisitions strategies also enable appropriate risk management |
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| Objective of study | After getting through several studies associated with the
subject, it has been figured out that though many researchers have concentrated
on various issues connected with the risk management but still there is a
considerable scope for the present study. The focal point of many researchers
is to make a comparative analysis of risk management practices of selected
public sector and private sector banks. None of the studies has made an effort
in relation to comparatively analyse the risk management practises adopted by
bank in pre and post M&A of banks. Thus, the present study is an important
venture for studying, measuring, and comparing the effectiveness of risk management
practices in the pre and post M&A of banks. Objectives of Study The main
objective of the study is to comparative analyse the risk management practices
in pre and post M&A of selected public sector banks. In this broader
framework, the following are the specific objectives of the study: 1. To study
the risk management practices adopted by the selected banks. 2. To evaluate the
NPA positions in pre and post M&A of the selected banks. 3. To identify the
areas where there is scope for improvement and offer suggestions which are
based on findings of the study. |
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| Review of Literature | 2023 Gachigo, J., Ondigo, H.,
Aduda, J., & Onsomu,
Z. titled “Intervening role of Risk Management on the relationship between
Mergers and Acquisitions and Financial Performance of Commercial Banks in Kenya”
The study explored the intervening role of risk management on
the relationship among mergers and acquisitions strategies and commercial bank
financial performance. The study's findings revealed that risk management
failed to mediate the relationship between mergers and acquisitions strategies
and commercial bank financial performance. 2022
titled
Dahlberg, C.,
& Lundberg, M. “The Impact of Mergers & Acquisitions on credit- and investment
risk. -Evidence from Sweden” observed that M&A increases the credit risk
and inversely decreases the investment risk of the acquiring firm. Our results
indicate that firm credit risk however is positively correlated with investment
risk. The findings suggest that managerial hubris decreases the level of credit
risk and increases the level of investment risk in acquiring firms. It is also observed from the study that
acquirers with high pre-deal credit risk undertake acquisitions that decrease
credit risk and increase investment risk. 2014 Oluwaremi
Feyitimi titled “Merger
and Acquisition as consolidation instruments for correcting the deficiencies in
the banking sector” viewed that development of a sound financial system requires the collaborative
efforts of the government, the monetary authorities, the operators in the
industry and the general public. The study also explains that macroeconomic
stability is required for the financial system to evolve and play its expected
roles. enforce the confidence of all stakeholders in the banking system. 2019 Gadzo, S. G., Kportorgbi, H.
K., & Gatsi, J. G. titled “Credit risk
and operational risk on financial performance of universal banks in Ghana: A
partial least squared structural equation model (PLS SEM) approach” This study
aims to analyse the effect of credit and operational risk on the financial
performance of universal banks in the context of the structural equation model
(SEM) and the study showed that credit risk influences financial performance
negatively contrary to the empirical study. It was also found that operational
risk influences the financial performance of the universal banks in Ghana
negatively. 2011Owojori, A. A., Akintoye, I. R., & Adidu,
F. A. “The
challenge of risk management in Nigerian banks in the post consolidation era.”
This paper provide an overview
of risk management practices in insured banks in Nigeria and evidenced that
there is much concern in banks for return (profitability) without as much
concern for risk. A better understanding and appreciation of risk are desirable
in banking business where one transaction or series of transactions can put the
bank out of business. |
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| Methodology |
The study is purely based upon empirical research design. |
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| Sampling |
The sample
comprises the following set of banks that has undergone M&A in the year
2020 which are as follows: 1. Syndicate
bank merged into Canara Bank 2. Oriental
bank of Commerce (OBC) & United Bank of India (UBI) merged into Punjab
National Bank (PNB). 3. Andhra Bank & Corporation Bank merged into Union Bank. 4. Allahabad bank merge into Indian Bank. |
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| Tools Used | The secondary sources of data collection i.e., RBI bulletins, Annual report, manual, websites and official records of the selected banks are taken into consideration for the present study. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Statistics Used in the Study | The
study employed the paired t-test to evaluate the statistically differences in
relation to the effectiveness of risk management practises in pre and psot M&A of the selected bank. |
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| Analysis | The major
components of the sample banks taken for the comparatively in-depth analysis of
risk management in pre and post M&A on the bank performance are Capital
Adequacy Ratio (CAR), Net NPA to Net Advance Ratio, Return on Asset (ROA) and
Debt Recovery Ratio which are analysed as follows: Table 1.
Comparative Analysis of Capital Adequacy Ratio (CAR) in Pre and Post M&A of
the Selected Bank
Source: Compiled various Annual Reports of the Selected
bank (Amount in %) The comparative
Capital Adequacy Ratio (CAR) of selected banks in the pre and post M&A has
been summarized in Table1. Capital Adequacy Ratio (CAR) is the ratio of a
bank’s capital in relation to its risk weighted assets and current liabilities.
As per RBI (Reserve Bank of India) norms, Indian scheduled commercial banks are
required to maintain a CAR of 9% while Indian public sector banks are
emphasized to maintain a CAR of 12%. The above table exhibits that the Capital
Adequacy Ratio was better in post M&A than pre-M&A of the selected
bank. Table 2. Comparative Analysis
of Net NPA to Net
Advance Ratio in the Pre and Post M&A of the Selected Bank
Source:
Compiled various Annual Reports of the Selected bank (Amount in %) Net NPA amount
and Net NPA to Advance Ratio of the selected banks for the year 2011 to 2021
has been outlined in Table no. 4. The Net NPA to Advance ratio is
considered, the lower the ratio, the better it is since lower net NPA ratio is
a symptom of higher recovery rate. The above table explains that before M&A
of banks, there was exponential growth of NPA but after M&A, the banks able
to reduce NPA. Table 3. Comparative Analysis of
Return on Asset (ROA) in the Pre and Post M&A of the Selected Bank
Source: Compiled from various Annual Reports of the
Selected Bank (Amount in %) |
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| Result and Discussion |
As finding the statistically significant variations
of risk management practises in pre and post M&A of the selected bank,
paired t-test have been employed. The hypothesis have been formulated as under: H0: There is no
significant difference of risk management practises in the pre and post M&A
of the Selected Bank H1: There is a
significant difference of risk management practises in the pre and post M&A
of the Selected Bank Table 5. Paired
Sample t-test of risk management in the pre and post M&A of the Selected
Bank
(Computed by
the author with the help of SPSS tool version 21) The Table 5
represents the paired t-test of the comparative pre and post M&A of the
selected Bank in relation to risk management. The paired t-test was used to see
if there was a significant difference in the pre and post M&A of the
selected Bank. The two-tail p-value is found to be 0.815, and the two-tail t
value 0.237. It indicates that there are no considerable differences found in
the pre and post M&A of the selected Bank since the set alpha value is 0.05
and the p-value is more than 0.05 which reveals that the difference is
non-statistically significant. Therefore, insufficient evidence
found to reject null hypothesis. Thus, it is concluded that null hypothesis
accepted and alternate hypothesis rejected. The Table 3
explores the Return on Assets (ROA) of the selected banks was comparatively
analyse in the pre and post M&A of the selected banks. The Return on Assets
(ROA) is an indicator of profitability that reveals how efficiently a business
can use its assets to produce more net profit ROA is a useful metric for
evaluating the performance of a particular business. When a company's ROA
increases over time, it suggests that the company is extracting more earnings
from each dollar of assets it possesses. A falling ROA, on the other hand,
indicates that a business has made poor investments, is overspending, and is
likely to fail. It has been noticed from the above Table No.3 that Return on Asset
was substantially improved in Post M&A than Pre-M&A of the selected
Banks Table 4. Comparative Analysis of
Debt Recovery Ratio in the Pre and Post M&A of the Selected Bank
Source: Compiled from various annual reports of selected
banks (Amount in %)
The Table 4 explains the comparative Debt Recovery
Ratio in the pre and post M&A of the banks which was announced in the year
2020 by the government of India. The Debt Recovery Ratio is the ratio at which
repayment of loan made by the borrower. The Recovery ratio determined from
difference between the total advances made by the bank and Net NPA declared by
the bank which is multiply with hundred. The higher ratio is preferable than
lower ratio as the higher ratio indicates that bank’s efficiency to recover the
larger proportion of the advances from the borrowers. The Debt Recovery Ratio
was significantly more favourable in Post M&A than Pre-M&A
of the selected Banks. |
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| Findings |
Capital Adequacy Ratio (CAR): The Capital Adsequacy Ratio
(CAR) has been bloomed in post M&A of the selected bank which may be
resulted due to improved market capitalisation and asset quality, high level
cost efficiency, reduction of the cost of operation, better business portfolio.
Net NPA to Advance Ratio: The Net NPA to Net Advance ratio was better in post
M&A of the selected bank which may be resulted due to to timely assessment,
quality review, assistance from the rehabilitation agency, effective appraisal
of the credit worthiness of borrowers, early detection of the sign of distress
assets, post credit monitoring Return on Asset (ROA): The Return on Asset ratio
was strengthen in post M&A of the selected bank which may be resulted due
to the broadening capital base, security investment, improve operational
efficiency, enhanced portfolio of banks, economically funding of operation,
incorporation of effective and creative financial products. Debt Recovery
Ratio: The debt recovery ratio was improved in post M&A of the selected
bank which may be resulted due to the transforming role of the implementation
of customer interaction model, modification in the function of debt recovery,
restructuring bank loan, improving asset quality base and assistance of debt
collection through broaden base of expertise. |
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| Conclusion |
Thus, on the basis of above detailed discussion it has been
figured out that M&A has improve the risk management capabilities in
relation to Capital Adequacy Ratio (CAR), Net NPA to Net Advance Ratio, Return
on Asset and Debt Recovery Ratio. But such improvement was statistically
insignificant to prove that significant variation of risk management practises
found in pre and post M&A of the selected banks. |
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| Suggestions for the future Study | 1. Initiative must be made to improve the quality of advances and recovery process for broadening bank’s credit. 2. The evaluation of credit assessment through training and counselling of employees which may resulted to lower NPA declaration made by bank. 3. The Reserve Bank of India (RBI), a central regulating bank in India, should devise the policies, measure and practises that help to bank’s NPA should not exceed more than the tolerable limit. 4. Before taking any strategic decision regarding merger, the Government should consider the bank risk which reduces the integrated financial performance of merged entity. 5. The banks which have high credit risk should be merge with low credit risk as low credit risk faced by banks have efficient techniques to reduce the risk. |
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| Limitation of the Study | 1. The study based on secondary data derived from RBI bulletin, websites and annual reports of selected banks. 2. There are many approaches and parameters to evaluate the efficiency of selected banks which may result in the variation of findings. 3. The present study takes into consideration four years viz. 2 years prior to M&A and two-year post M&A as the M&A took place in the year 2020. |
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| Acknowledgement | Researcher is expressing the heartfelt gratitude to her supervisor Prof. Arvind Kumar for the continous support. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| References | 1. Burki, Abid A., and G. S. K. Niazi. "Impact of
financial reforms on efficiency of state-owned, private and foreign banks in
Pakistan." Applied Economics 42.24 (2010): 3147-3160. https://doi.org/10.1080/00036840802112315 |
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