India is set for more banking acquisitions after a record $2.4 billion takeover last week ended four years of a deals drought, as lenders fight for market share and wider reach amid looming competition from a new breed of players.
Kotak Mahindra Bank agreed last week to buy ING Vysya in India's biggest bank deal.
"Deals will happen in the banking sector, but relatively fewer compared to mergers in other non-regulated sectors," said Sanjay Doshi, a partner at consultancy KPMG, referring to segments such as industrials and consumer where there is no sector-specific regulator.
Any deals, though, will be subject to close regulatory scrutiny and may face other hurdles, meaning they are expected at a steady clip rather than in a torrent.
A banking sector consolidation should support an expected recovery in Asia's third-largest economy through creation of stronger lenders that will control the growth of bad loans and make credit availability easier.
The Indian banking sector is fragmented, with 46 commercial banks jostling for business with dozens of foreign banks as well as rural and co-operative lenders. State banks control 80 percent of the market, leaving relatively small shares for private rivals.
The state-run banks are unlikely to be part of any takeovers involving private sector rivals as the government has not been keen to bless such transactions. But the private sector, which accounts for nearly half the total number of commercial banks, could see deal activity.
New private players were earlier this year allowed to enter the sector for the first time in a decade, and the central bank plans to grant more bank licences. As a result, some large conglomerates are expected to jump in the fray.
With the incumbents keen to fortify themselves against the new competition and as the new players try to scale-up quickly, takeovers are clearly on the cards, say financial industry executives.
Among the conglomerates, the Aditya Birla group and billionaire Anil Ambani's Reliance Capital are keen on the banking sector and will be eyeing deals to expand quickly after they get permits, say investment bankers. The central bank's stance on allowing conglomerates into banking is unclear.
Some of the bigger private sector players - No. 3 private sector lender Axis Bank, IndusInd Bank and Yes Bank - are also potential acquirers, dealmakers say.
Axis, IndusInd, Yes Bank, Reliance and Birla Group did not respond to requests for comment.
Targets include smaller banks that are localised, but with a high number of urban branches, like western India's DCB Bank and Karnataka Bank, investment bankers said.
DCB's Chief Executive Murali Natrajan said the bank had no plan to merge with any bank, adding they aimed to double the balance sheet size in 36-42 months. Karnataka Bank did not respond to a request for comment.
The central bank is also facilitating the setting up of 'payments banks' , which take deposits and facilitate transactions but do not lend, and which could eat into the banks' margins.
While the economic rationale for the deals is growing, they face practical hurdles. Pricing of deals is one such. Many founders of small banks see their licenses as prized assets for which they will demand a high price, even though most private sector banks are already trading at significant premiums to their book values.
Bank employee unions also can pose problems, if they fear major job losses in a takeover.
"The banking sector needs consolidation, but ... consolidation will move at a moderate pace in India in the near to medium term," said the head of M&A for India at a large European bank in Mumbai.
(Additional reporting by Suvashree Choudhury in Mumbai and Shilpa Murthy in Bangalore)