Post-Merger Cost-Effectiveness and Financial Performance in the Indian Banking Sector: An In-Depth Assessment

Abstract

The Indian banking sector has experienced dramatic structural changes because of consolidation initiatives brought into effect, especially in the case of the State Bank of India consolidation in 2017, the merger of Bank of Baroda in 2019, and the consolidation of ten Public Sector Banks (PSBs) into four anchor banks in 2020. This manuscript reports an in-depth evaluation of empirical research analysing post-merger operating cost efficiency and financial performance of Indian banks that have undergone this transformation. We highlight the previously deployed approaches used in two groups of frameworks: (i) accounting-based ratios analysis using CAMELS technique and (ii) frontier efficiency methods, including Data Envelopment Analysis (DEA) and Stochastic Frontier Analysis (SFA). The combination of both approaches indicates a similar trend of “integration lag” or “digestive period” of three to five years in which a significant level of cost efficiency can be demonstrated. Thus, while the integration process helped to optimize the asset quality due to reductions in the amount of net NPAs and improvement of capital adequacy, the profit indicators after the merger (ROA and ROE) remained mixed and were negative due to the impact of hidden costs of integration. Moreover, it was discovered that market-based voluntary mergers are generally more successful in terms of the speed of cost improvement and effectiveness of technical efficiencies than those initiated due to government policies. This review identifies significant future avenues of investigation, focusing on assessing the costs of digital transformation and long-term sustainability of performance.