In the last one-and-a-half decade, there have been only a dozen bank mergers in India. But no deal involved two large banks; either two mid-sized banks would merge or one large lender acquire a much-smaller bank going through difficult times. For instance, state-run Oriental Bank of Commerce acquired Global Trust Bank in 2004 while HDFC Bank took over Centurion Bank of Punjab in 2008. The recent merger of Kotak Mahindra Bank, a new generation private-sector lender, and ING Vysya Bank, an old private-sector lender, follows the same pattern as both are of similar size. Like in previous occasions, the merger has revived talk of consolidation in India's banking sector.
The merger has made Kotak Mahindra Bank the fourth-largest private-sector lender in the country, after ICICI Bank, HDFC Bank and Axis Bank. Kotak has also taken a lead from YES Bank - both got the banking licence around the same time a decade ago - with a balance sheet of close to Rs 2,00,000 crore. YES Bank has total assets of Rs 1,09,016 crore. "The objective of this merger is growth," said Uday Kotak, Vice Chairman and MD of Kotak Mahindra Bank, while announcing the deal. The deal has helped Kotak meet his target of having 1,000 branches by 2016 earlier than planned. Also, the Kotak group, with interests in insurance, mutual fund and other financial services, will be able to better use the expanded branch network.
The number of commercial banks operating in the country has risen to 90 from 84 in 2005/06 thanks to the entry of some foreign lenders. In the past, foreign banks have shown interest in M&As but the RBI is not comfortable as these banks operate as a branch of their parent companies. The RBI has issued guidelines that allow foreign banks to operate or convert into wholly-owned subsidiaries of their parent companies in India, thereby opening the door for selective M&As.
Clearly, the only way Indian banks can expand rapidly and reach global size is by M&As. Another problem of the Indian banking system is that after SBI there is a huge drop in size; ICICI Bank, the second-largest lender, is one-third the size of SBI in terms of total assets.
The Kotak-ING Vysya deal has sparked speculation that some other old private-sector banks could be the target of large lenders. Old private-sector lenders, including Dhanlaxmi Bank, Lakshmi Vilas Bank, Karur Vysya Bank, and South India Bank have a share of around five per cent in deposits and advances. So even if one large private bank acquires half a dozen such lenders, it won't create a meaningful size for the acquirer. C. Jayaram, Joint MD at Kotak Mahindra Bank, says consolidation has been talked about for a long time. "Hopefully, this [Kotak-ING merger] will set off some thinking both in the private as well as the public sector," he saysIn fact, for more than a decade, there has been talk of encouraging consolidation to create a few banks of the size of SBI. But there has been little action on the ground. The only exception being IDBI, which was allowed to acquire United Western Bank in 2006. SBI, too, had made some progress in merging with itself two subsidiaries - State Bank of Saurashtra and State Bank of Indore - but there are still five units left to be merged.
There are expectations from the new government under Prime Minister Narendra Modi that bank consolidation will gather steam. Finance Minister Arun Jaitley, in the Union Budget in July, talked about the government being open to suggestions for consolidation of state-run banks. But merging large state-run banks is easier said than done. There are legacy issues; staff too old to adapt, overlapping of branches and products, and resistance from employee unions, among others.
There are some who question the merits of consolidation. The size and scale shouldn't be the sole criterion for M&As, and customers should be the focus of banking services. They say the RBI's differentiated licencing is the way forward. The RBI's decision to grant bank licences to infrastructure lender IDFC and Bandhan Financial, a microfinance institution, and the intention to set up payment banks and small banks will take banking services to a whole new customer set. RBI Governor Raghuram Rajan also recently cautioned on merging weak banks. "If two unhealthy banks were merged, then the created entity will also be unhealthy and could create a bigger problem in the economy," he said.