After years of hand-wringing, the great Indian banking consolidation kicked off in FY19 and experts predict there would be more action during the current financial year.

After years of hand-wringing, the great Indian banking consolidation kicked off in FY19 and experts predict there would be more action during the current financial year. Several government officials, including Finance Minister Arun Jaitley, have been repeatedly insisting that the country needs few large banks, and several small banks to pursue the path of financial inclusion and spur credit growth.

Finally, last year, taking a cue from the SBI and associate banks’ merger, three other public sector banks -- Bank of Baroda, Vijaya Bank and Dena Bank -- were amalgamated, transforming it into the country’s second largest state-run lender after SBI. With this, the number of PSBs is now down to 18 from 21. While critics questioned the rationale behind merging a strong bank with a weaker one, more such mergers aren’t completely ruled out, provided these banks exit RBI’s prompt corrective action framework.

Separately, the government also brought down its stake to below 52 per cent in IDBI Bank, which is now owned by state-run LIC of India, while last week saw the proposed merger of Lakshmi Vilas Bank Ltd with Indiabulls Housing Finance Ltd. According to Credit Suisse, more smaller banks may become acquisition targets, provided the regulator gives its blessings.

“This may be a catalyst for similar transactions with other small private banks, making them potential acquisition targets,” noted Ashish Gupta, analyst, Credit Suisse. He added that using mergers to convert to a bank could become the preferred route for many non-banks to overhaul their business models and resolve liquidity issues.

The room for mid and large private banks to acquire smaller financial players too is wide open. For instance, Kotak Mahindra Bank, whose promoters locked horns with the banking regulator, may consider exploring the mergers and acquisition route, should it get an unfavourable verdict at the Bombay High Court.

In the past, Kotak did take this route to lower the promoter shareholding by acquiring ING Vysya Bank. Last year also saw newest lender Bandhan Bank, which acquired HDFC-promoted Gruh Finance in an all share-swap deal, pare its promoter’s stake from 82.28 per cent to 40 per cent. The year gone by also saw the merger of IDFC Bank and Capital First, giving the combined entity — IDFC First — a loan book of `1.02 lakh crore.

One could expect more action during the current fiscal, with the market ripe with speculation on more such deals. Federal Bank, for instance, has been rumoured to be in the market for more than an year scouting for potential targets, while unsuspecting players can spring a surprise keeping the consolidation buzz afloat.

Meanwhile, the government’s nod for BoB’s three-way merger came nearly two years after it gave an in-principle approval for bank mergers. On the face of it, it appears that consolidation holds magical powers to cure all ills ailing our banks that are fire-fighting bad loans, and struggling to maintain credit growth, particularly, industrial credit, which stood at a pedestrian 5 per cent.It’s possible that consolidation will nurse banks’ balance sheets back to health and boost their capital raising ability, but experts warn that mergers should be pursued to gain synergies, efficiency, cost-saving and economies of scale, and not for administrative purposes.