Review of Literature
2.4.1 Growing Trend of Globalization in Banking Sector
According to Arasu (2008), increasing economic growth has facilitated the development of banking sector and this development in the banking sector is due to growing trend of globalization in the sector (Uppal, 2008). Numbers of forces motivate globalization of banking sector and to understand those motivations, it is important to define the meaning of globalization of the financial sector. According to Siddaiah (2010), globalization of financial services such as banking sector refers to integration of banks throughout the world into an international provider of banking services. Thus, the integration of banks to become international service provider may include the activities of the banks that are not limited to the service in their own country (Siddaiah, 2010).
It is found that underlying motivational forces of globalization of banking sector are the advancement in the communication and telecommunication technology that ease the process of banking service in reaching the customers without any geographical barriers (Arasu, 2008). However, these principles of globalization are regarded as the common attributes that is possible by the globalization, but there are other active forces that lead the banking sector to become integrated. According to Siddaiah (2010), even though the attributes of globalization cater the strength to banking sector to improve the service level and increase the profitability of the sector eventually, the forces behind the growing trend of globalization of banking or financial sector is not only the attributes presented in the result of convenient and easy service delivery (Siddaiah, 2010). Hire professional assignment writing service from Writer Support UK.
According to Shrivastava (2007), one of the most sifnificant motivaltional froce for becoming globalized in the banking sector is the strength and consolidation requires by the banks to withstand the financial storm and shocks caused by the financial crisis and liberalization of banking sector in developed economies (Shrivastava et al., 2007). It is further pointed out that banking sector if not respond to such changes may experience shiver from global market forces (Prasad, 2003). Moreover, banking sectors in different countries has been identified with the core objective to grow as good bank and make enough profit (Kapila, 2006). In the venture to achieve new demands of globalized market forces, resulting in new objectives of the banking sector, banking sectors are growing by integrating and consolidating with other international banks and expanding their branch networks through investing in technologies and enlarging their business operations (Uppal, 2008).
According to Shrivastava (2007), banks may struggle to expand on their own using existing resouces but the resources available are not enough to achieve the objectives therefore lack of resources in the banking sector is another motivational force directing the banking sector towards globalization through integration and consolidation with other either national or international banks (Sreenivas, 2006). However, lack of resources cannot be considered as the motivational forces behind the globalization because there is focused reason for the resources and that is to expand the business network and business operations. (Busch, 2009).
It is found that the Indian banking sector is tended to become globalized with the motivational forces such as strategic aliances, global competitiveness, availability to advanced techniology, systematic financial stabiltiy, motivation by government after the launching of Economic Reform 1991, forcible merger for survival against the finanical or economic crises and desire to become monopolistic (Shrivastava et al., 2007). However, existence of numbers of motivational force in the market for becoming globalized have been observed throughout consolidation and integration of banks in the country, there are numbers of integral forces amonst them such as seeking creation of strong bloc against the tough competition because Indian banking sector after the launching of Economic Reform 1991 has provided the banks witht the opportunity to grow by integrating and becoming more expnded (Kapila, 2006). Thus, growing numbers of mergers and acquisitions among different large and medium size banks occurred due to strong desire of banking sector to create strong competition against competitors (Blanpain et al., 2007).
According to Shrivastava (2007), the way adopted by the banking sector to integrat and consolidate to become globalized affect the post glboalization performance and mergers and acquisitions have been observed as the most growing trend in the sector in relation to becoming globalized (Shrivastava et al., 2007). Since globalization of banking sector is the growing trend and to assess the impact of globalization of banking sector on the global and local levels, it is esential to identify the ways banks are becoming globalized. However, it is found that integration and consolidation are some form of globalization there is need to identify and assess different ways that are being adopted as trend in the financial industry to become globalized.
2.4.2 Ways Adopted to Become Globalized by the Banking Sector
According to Boulle (2009), the trend of globalization in the banking sector is led by the desire to increase the size of the business operations by expanding the networks and worldwide availability of services. It is found that banks with desire to increase the size are tended to adopt merger and acquisition as tool because it is considered as fast track for incresing the size of the business and eventually leading to process of globalization (Kose, 2006). In this regard, Shrivastava et al. (2009) argue that between merger and acquisition, merger is the preferred choice of banking sector to grow and becoming bigger. There are different arguments about why banks get into merger as preferred choice and how merger can be effective in terms of globalization.
According to Dymski (1999), merger is the desirable option for banking sector to become globalized if they are anticipated to increase the acquiring banks’ capacity to upgrade the profts (Dymski, 1999). Moreover, independent of the effects they can have if there is any operational efficiency (Walter, 2004). Miller (1998) argued the hypothesis in the context of market power and profits in the banking market, furthermore he explained that merger in the banking sector is with the aim to find the market power concerning increasing the potential of banking sector to generate more net profits (Miller, 1998). According to Kaplan (2000), the only rational behind the merger of banks is to increase the efficiency levels and have enhanced shareholders value (Kaplan, 2000).
Walter (2004) has defined the deregulation and liberalization of financal markets, and economic reforms as the important players to motivate the banks to enter into merger and acquisition (Walter, 2004). It has been explained that these reasons are active force in determining the banking sector to have benefis from econmies of scale. With the objective to achieve maximum market share and benefits from econmies of scale, banking sector is enering into merger and acquisition so that they can achieve consdierable growth in their operations and minimize their expenses to a significant extent (Boulle, 2009).
Moreover, the reasons behind choosing merger and acquisition as to become globalized are the advantages behind such merger as it proposes reduced competition by eliminating the competitors from the industry (Gupta, 2008 ). According to Sreenivas (2006), through mergers and acquisitions in the banking sector, banks seek strategic benefits by enhnacing the customer base.
According to Busch (2009), to assess the impacts of globalization on the global and local levels, it is important to evaluate the degree to which banking sector is becoming globalized. However, Blanpain et al., (2007) argued that the mergers and acquisitions occuring in the banking sector are the form of horizontal mergers as mergers parties are invovled in the same business and one bank is merging with other bank (Blanpain et al., 2007). Since merger and acquisition occuring in the banking sector is leading to the process of globalization, it is significant to analyze what degree to which banking sector is becoming globalized to understand its impact, as level of merger and acquisition can affect the intensity of impact of globalization.
2.4.3 Level of Globalization of Banking Sector
According to Sreenivas (2006), there are different types of merger and acquisition and evaluation of type of merger and acquisition is effective in terms of identifying the impact of globalization of banking sector on the global and local level. According to Schubert (2010), merger and acquisition is used to define the consolidation and uses interchangably (Schubert, 2010) therefore there are vertain levels of differences between them. However, it is found that banking sector is more tended to adopt merger to intergate and consolidate, merger is defined as combination and integration of two or more than two organizations or businesses into one large organization (Busch, 2009). Thus, such merger often results in new organization. Acquisition, on the other hand, is the purchase of one company by other company and such acquisitioncan be both hostile or friendly because acquirer possesses full control over the company (Nayak, 2008). Thus, level of differences between merger and acquisition that is based on combination of businesses where two or more than two businesses join to form one new company (Busch, 2009).
With regard to determine the level of globalization by considering the type of consolidation such as mergers and acquisitions in banking sector, it is found that merger provides the banking sector with opportunity to strive through econmic crisis by merging rather than selling the business entity (Sharma, 2008). Moreover, there are two types of mergers vertical and horizontal, vertical merger refers to purchasing of a suppliers by buyers while horzontal merger refers to purchasing of company by its competitor (Berger et al., 2002). Banking sector is tended to have horizontal merger in which two competitors are merged to perform together (Arasu, 2008). According to Sreenivas (2006), size of the merger in the banking sector is important as to determine the achieivng economic growth.
In different coutnries, banking sector is becoming globalized as it has been observing merging of mutlinational global banks extending their operations across the border with regional banks called cross-border merger and acquisition (Kumar, 2008). The advantage of cross-border merger and acquisition has been named to provide dominant position in the banking sector, as it is more effective in terms of achieving economic scale and maximum market share (Boulle, 2009).
In the context of globalization of Indian banking sector, it is found that there is increased integration and consolidation in the industry after economic reform was introduced in 1991 (Busch, 2009). The processof integration started in 1991 continues to occur till the globalization wave entered into india (Kose, 2006). Considering the ways to become globalized, it is found that the banking sector in India employs consolidation through merger and acquisition but along with merger and acquisition, the sector invovles other ways of globalization such as globalization of operations without any merger and acquisition, universality of banking services with the help of developed and advanced technology (Blanpain et al., 2007). However, there are different ways adopted in the country to become globalized, according to Gupta (2008), merger and acquisition in the banking sector is widely adopted to become globalized through which Indian banks merge with other banks with international appearance (Gupta, 2008 )
It has been found that globalization led by motivational forces in the banking sector has significant impact on the procedure and regulation of the banking sector while the impact is further extented to decreased competition level in the result of creating strong protective wall against the competitors (Dymski, 1999). Sinceidentifying the impact ofglobalization of banking on the global and local level is the fundamental of the research paper, the next section of the chapter assesses the literature for the impact of globalization of banking and evaluates it in the context of Indian banking sector.
2.4.4 Impact of Globalization of Banking Sector on the Banking Procedures and Regulations
It is found that globalization in the banking sector motivates the banking sector to restructure the banking service resulting in change regulations and banking procedures (Kose, 2006). One of the significant changes observed in the banking sector after globalization is associated with their level of services such as numbers of banks after evolving through globalization tend to shift from commercial to universal banks (Busch, 2009). According to Gupta (2008), this change is although part of their diversification that is required to strive through the globalization yet such change is led by process of globalization and has certain level of impact on the banking regulations and procedures.
According to Busch (2009), due to increased globalization of the banking sector, the role of banking has been diversifying and the way in which banks are regulated and supervised are widely changing with the process of globalization. Moreover, globalization of banking has brought up the issues regarding banking regulations and supervision that vary from one country to another coutnry (Arasu, 2008). It is found that banking industry is supervised and regulated in every country but there are huge differences present in regard to the activities for which banks are allowed to be engaged (Busch, 2009). According to Arasu (2008), there are some countries that restrict the banks to limited area of activities while other permit them to engaged in wider area. Thus, regulatory authority determines the exrtent to which the banks’ activities vary across border ventures. It is found that globalization of banking specifically cross border globalization affect the banking system and ultimately affect the procedure and regulations of the banking system not only in the global level but also in local level (Walter, 2004).
There are numbers of evidences concerning the area that affect the regualtions and procedure o fbanking system as a result of clobalization, as it is found that interest is the fundamental element of banking system and banks after globalization may face conflict of interest (Kaplan, 2000). Kose (2006) argues that conflict of interest in globalized banks arises due to engagement of banks in diverse activities thus interest of conflict cannot largely be associated with impact on the globalization of banking system. Besides, the globalization provides the banking industry to have more opportunity regarding risks if they are engaged in the diverse activities (Porter, 2005). However, when banks are engaged in wide range of activities, there is possibility of carrying out the activities through forming the financial conglomerates that are considered difficult for banks to supervise (Boulle, 2009).
In the context of globalization of Indian banking sector, the impact of globalization of the sector has been observed in the procedure and regulation of the banks both in global and local levels (Arasu, 2008). It is found that change in te banking regulations that was proposed in the economic reform 1991 has greatly affected the structure and procedure of the banking system (Goldberg& Pavcnik, 2007). As a result, integration and consolidation was led by the privitization of banking in the country and the banking sector was moved from regulated to de-regulated market (Gupta, 2008 ). However, the process of liberalization and de-regulation has started since economic reform was launched in 1991, actual change in regulations and prcedure of banking was observed after growing trend of globalization of banking (Berger et al., 2002).
2.4.5 Impact of Globalization of Banking Sector on the Perfect Competition
As identified that banking sector is more tended to become globalized for gaining global competitiveness, strategic alliances, financial stability and monopolistic motivations, as a result, the globalization of banking may cause to have impact on the perfect market competition both global as well as local level (Uppal, 2008). According to Blanpain et al., (2007), globalization in the banking sector ocurring in the result of merger and acquisition strengthens the bank entering into merger and acquisition while enabling it to withstand the financial crises and strong competition (Gupta, 2008 ). However, Kapila (2006) has argued that globalization of banking sector has impact on the perfect competition in global and local level depending on the size of the merger and acquisition.
According to Kose (2006), market perfect competition that is described as market with no large participant to influence the price setting of similar product the globalization of banking sector is likely to lead to monopolistic environment in the market resulting in the lack of perfect competition (Siddaiah, 2010). However, as defined by Kose (2006), globalization led by expanded global operation causes the global compatitive adavantge for banking sector rather than impacting the perfect compeittion negatively and creating lack of competition (Kose, 2006).
In the context of globalization of Indian banking sector, the expereince of banking sector concerning merger and acquisition is similar as the sector is becoming polarized based on size of banks from the segmentations such as private and publci sector (Shrivastava et al., 2007). The impact of the globalization of banking sector on the situatio of perfect competition, it is observed that large banks are tended to merge with small banks such as State Bank of India, Bank of Baroda and ICICI have merged strategically to balance their size resulting in the creation of monopolistic power in the market (Gupta, 2008 ). However, large banks are engaged in the merging, medium and small size banks are also invovled in ramping up their operations such as Bank of India and Punjab National Bank (Shrivastava et al., 2007). It is found that the Indian banking sector that is increasingly becoming globalized by merging with other banks and expanding their operational networks offers the consolidation with the reduced credit risk and further consolidation through mering proposes creating largebehemoths (Busch, 2009).