Towards defragmentation

The acquisition of ING Vysya Bank by Kotak Mahindra Bank, the first such move in the domestic banking sector in four years, is another episodic event in the journey towards consolidation of capacity in the fragmented domestic banking industry. Both banks are relatively small, so while the deal may place the new entity at fourth place in the private sector table, it is not likely to substantially alter the market share structure. However, what makes this deal different and positive for market sentiment and industry dynamics is that this is not one of those shotgun weddings brokered by the regulator. The deal is between two reasonably well run banks and a strategic acquisition by the relatively stronger player at what is considered by the market to be a good price. There are certain complementarities to the geographical spread as well as customer segments that both banks cater to. Consolidation of capacity makes business sense for both banks in terms of being able to handle competition from larger players. Size is an important factor in this fragmented industry, but organic growth takes time, more so in the face of stiff and tightening regulations. Of course, for the merged entity, there will be cultural integration issues to handle in order to make the deal truly value accretive.

It is worth noting that most bank mergers that have taken place over the past decade and a half have involved the gradual absorption of old private banks (those in existence before 1994) by the new private banks group (which came in after 1994). This is not to say that the disappearance of old private banks is inevitable. They have their strengths and their niches. Nevertheless, unless they continuously strengthen themselves by beefing up technology, products and manpower, they could get swept away by the changing tide. This is a message for other banks.

Public sector banks must take the cue from this and begin looking at mergers seriously. The feeble attempts at consolidating public sector banks with occasional promptings from past finance ministers have not taken off. The few in-house mergers proposed in the State Bank group over the last couple of years are still works in progress. Given the changing banking landscape in terms of regulatory pressures, tightening capital standards, the impending arrival of new players in the arena, and a new reformist government, there is potential for a wave of consolidation. We need fewer but larger players in both the private and public sector space.

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