The amalgamation of all presidency banks started the emergence of modern banking in India (Bank of Calcutta, Bank of Bombay, and Bank of Madras) in 1921 to form the Imperial Bank of India, which was run by European Shareholders. They set reserve Bank of India up in 1935 to address the irregularities in the Joint Stock Company. Post-independence, they nationalized the RBI in 1949 as per the Transfer to Public Ownership Act. In 1955, State Bank was nationalized under the State Bank of India Act in Parliament. In 1959, seven subsidiaries of State Bank were nationalized.

In 1969, Indira Gandhi presented a paper entitled “Stray Thoughts on Bank Nationalization” at the annual conference meeting of the Government of India. The paper emphasized on nationalization of Banks. 

There were factors that led to the nationalization of banks. It was told that banks must play a social role in the economy and maintain social balance. They assumed capitalists to be imperialists. Indian freedom battles were against imperialism. Hence, people and government were conservative and influenced by the alternative to socialism. East India Company was a product of monopoly. There were few business people and rich authorities who used to dominate the banking sector and make a profit. The government of India wanted to stop this practice. Banks were set up in cities and also targeted the urban people who were very few at that time. It did not provide people living in rural areas with banking facilities. The banks before nationalization were focusing to perform transactions in the Corporate and Business sectors. They gave not much emphasis on infrastructure sectors. Despite being a country dependent on agriculture for its income and livelihood, they did not give farmers loans because of their poor economic condition.

In response to these factors, the major nationalization of Indian Banks was implemented within a month of the proposal. After this acquisition, the government-controlled around 91% of banking business in India.  

Post Nationalization Reforms:

Indian Banking System experienced a good turn after nationalization. With nationalization, the government focused on components that led to this event. In 1975, the first regional rural bank was set up. Branches of banks were set up in the rural areas of the country. In 2013, the number of branches reached 109,811. Loans to farmers were granted. People, according to their economic status, were given subsidies. In 1975, the first regional rural bank was set up. 

Nariman Committee:

In 1969, under the chairmanship of Shri F.K.F Nariman, new objectives were put forward to discharge social responsibilities and to implement Lead Bank Scheme (At least one bank should have a lead branch in one district).

Narasimhan Committee:

In 1975 and 1991, the Narshimha Committee (also known as Committee on Financial System) brought reforms in the banking sector by introducing the concept of big banks, three-tier system of banks, mega-banks, and more control.

In 1980, six more banks were nationalized. In 1993, Punjab National Bank was merged with the New Bank of India, which reduced the numbers of nationalized banks from 20 to 19. In 2018, Bank of Baroda was merged with Vijaya Bank and Dena Bank. In 2019, 10 more banks were merged into 4 major banks.

Need and Advantages of Mergers (Implementation of 4Rs: Regulate, Recapitalise, Resolution and Reform)

The number of PSBs is high. 27 Public sector banks in India were targeting the same potential customers. It made little sense for the government to compete to gain the same customers. Recapitalization will reduce if the mergers become successful. The government is facing fiscal constraints. Hence, a reduction in recapitalization is needed. The non-performing assets are very high in some banks. A proper check is required to reduce it. By merging, the regulatory burden on banks will reduce. Except for SBI, there is no big bank in India to compete on International Level. Merging banks will cause the formation of big banks with more total business and deposits.

Issues of Mergers

It is difficult for one bank to sync with a bank with higher NPAs. This might create complexities further and can have side effects. Different banks have their unique mission and visions. Merging the two different banks will need time to settle with the new system. If banks after merging are not assessed and controlled well can result in higher NPAs.

Why back to privatization?

 To solve these issues, a new agenda is required. With Globalization and competencies in the Economy, the Government of India is gradually shifting to the Libertarian side of the economy. The business of government is not to run a business. As per the RBI Financial Stability Report, the Gross NPA ratio is likely to increase. Also, because of financial limits, it is proposing private players come forward and invest in banking. Market capitalization in Public Sector Banks is less than the private sector banks. The money used to recapitalize the banks to recover the stressed assets should be used in development projects and the improvement of infrastructure. The budget presented in 2021 states Rs. 1.75 Lakh Crore worth revenue will be generated by Private Sector. There was much emphasis on disinvestment, too. The budget also says two banks will be privatized in this financial year. The government will have a bare minimum presence in running them. 

Privatisation is expected to decrease the recapitalization burden on government as India is already a capital starved country. Considering the business angle of the banking industry, PSBs are more leveraged than PVBs, making the former one risky. On the business expansion front, they have fallen way behind: their (y-o-y) CASA growth in September 2021 was 11.6 percent compared to 22.8 percent for PVBs and 17.2 percent for FBs.


Although much has been talked about privatization, the proper implementation and regulation is demanded so that banking reforms do not shift back to square one. In a country like where people expect populist reforms, we might not well appreciate this move. Also, bitter memories of private imperialism still haunt people. People can easily lose money in private banks if the employees of banks indulge them in malpractices. There is equal risk in public sector banks and the value of frauds in these banks is much higher than in private banks. The solution to every problem is better asset liability management and efficient use of capital, as well as policies. 

Country post-pandemic is facing issues of rising inequality and inflation. Privatisation at this point in time would be very stricter move as people are unsure about the policy changes. How these banks will try to cater to people from different income group and different sectors, is still a question?


  1. Banking In India –Wikipedia (
  2. Data and image- Bloomberg Quint(
  3. Draft Reports- RBI (

Merger & Acquisitions – Decoding the Jargon

By TJEF Editor Ishan Kekre



Today mergers and acquisitions are in their fifth generation. Over the years, in order to adapt to the dynamic economic changes, firms have often taken decisions to merge, acquire or takeover in order to develop a competitive advantage and ultimately increase shareholder’s wealth. Companies can mutually agree to merge or one firm can acquire another firm by making an offer. In case of the latter, if the target is unwilling to get acquired it can plan to foil the takeover attempt by the acquirer. The target can employ several defence mechanisms which have become a source of a lot of fancy jargons and buzzwords that are used in the M&A parlance. Some of the frequently used jargons are listed below:

Hostile Takeover Strategies by Acquirer Firm

  • Dawn Raid – The acquirer firm instructs the stockbrokers to buy the shares at the current market price, early in the morning as soon as the market opens. The target firm remains uninformed of these actions until it is too late as the acquirer masks its identity and its takeover intent.
  • Saturday Night Special – This tactic was used by the acquirer by making a tender offer to the target suddenly over the weekend and hence the name.

Defense Strategies Employed by the Target Firm

  • Golden Parachute – This strategy involves giving incentives like bonuses and stock options to the top management by the target firm which makes of the takeover attempt a lot costlier for the acquirer and hence acts as a strong deterrent.
  • Greenmail – In this case, a substantial block of stock is held by a raider, who then forces the target firm to repurchase the stock at a premium to foil any takeover attempt.
  • Macaroni Defense – In this strategy, target firm issues a large number of bonds with the guarantee that they will be redeemed at a higher price if the company is taken over. It can be a double-edged sword because if a lot of debt is issued the target can default on interest payments.
  • People Pill – In this defence mechanism, the management team threatens to resign if the takeover is successful. The efficacy of this strategy depends on how good is the management.
  • Poison Pill – In this strategy, the target firm makes its stock less attractive to the acquiring firm. There are forms of the poison pill. First is the ‘flip-in’ poison pill where shares that are held by the bidder are diluted to make the takeover more expensive. Second is the ‘flip-over’ in which shareholders buy the acquirer’s stock at a discounted price in the event of a merger. The third form is the ‘suicide pill’ whereby the target company takes decisions that ultimately lead to its own destruction.
  • Sandbag – In this case, the target firm stalls and delays the takeover attempt that another favourable company will make a takeover attempt.
  • White Knight – It is that firm that comes in to save the day for the target company that is on the radar of corporate raider (Black Knight) by offering a way out with a better deal.


Thus mergers and acquisitions have an extensive jargon of their own and have some rather fancy and interesting strategies listed above. The next time if you read about an M&A that is going to happen, you can make an informed buying decision to purchase more shares at a cheap price.

#Fincabulary 25 – Fat Man Strategy

Meaning – A takeover defense tactic that involves the acquisition of a business or assets by a target company. The strategy is based on the premise that the bulked-up company – the “fat man” – would have reduced appeal to a hostile bidder, especially if the acquisition increases the acquirer’s debt load or decreases available cash.

This is a type of “kamikaze” defense tactic, which inflicts potentially irreversible damage on a company to prevent it from falling into hostile hands. However, it involves adding assets rather than divesting them as is the case with other kamikaze defense strategies. A disadvantage of this tactic is that acquisition candidates need to be identified well in advance of a hostile bid, otherwise there may be insufficient time to complete a fat man transaction.