A trendsetter bank merger?

There is a definite need for banks to be strong and have adequate capital base

November 23, 2014 10:29 pm | Updated November 16, 2021 04:44 pm IST

It was in the air for long. When it finally happened, it proved a win-win situation. And, the deal should bless both. In the process, it has set off a sense of excitement in the banking field. People have already begun to wonder if this mega amalgamation deal will re-define the playing field in the banking space.

Is the Kotak Mahindra Bank-ING Vysya Bank merger announcement last week the beginning of a much-talked about and advocated consolidation in Indian banking space? Or, is it just a one-off aberration?

It is a little premature to read in this amalgamation move a much larger trend in the industry. Nevertheless, the deal has yet again brought the focus firmly on the need for consolidation in the banking field in the context of happenings in the global arena.

Also, the inevitability of consolidation has to be understood in the light of stricter policy, regulatory and governance requirements.

Different opinions

There are different opinions on consolidation among banks. For a growing economy like India, however, there is a definite need for banks to be strong and have adequate capital base to meet the funding needs of several large infrastructure projects, which is so very crucial to shrug off the current inertia in the economy and push it into a higher growth orbit.

There are only a few banks such as State Bank of India (in the public sector), ICICI Bank, Axis Bank and HDFC Bank (in the private sector) which figure in the list of global banks in terms of asset size.

There have been M&As (mergers and acquisitions) in the past in the banking sector. Just consider these:

In 2000, Times Bank was merged with HDFC Bank

In 2001, ICICI Bank took over Bank of Madura in a share swap deal, which envisaged two shares of ICICI Bank for every equity share of Bank of Madura.

In 2002, Benares State Bank, a weak private sector bank, was merged with public sector Bank of Baroda.

In 2003, Kozhikode-based Nedungadi Bank was amalgamated with Punjab National Bank after the Reserve Bank of India ordered a moratorium on Nedungadi Bank in December 2002.

In 2004, Global Trust Bank (GTB), a private sector bank, which came under scrutiny for alleged financial discrepancies, was merged with public sector Oriental Bank of Commerce.

In 2005, Bank of Punjab (BoP) and Centurion Bank had been merged to form Centurion Bank of Punjab in a share swap ratio of 9:4 (Bank of Punjab shareholders received nine shares in Centurion Bank (Re.1 face value) for every four shares held by them in Bank of Punjab (Rs.10 face value).

In 2008, HDFC Bank took over Centurion Bank of Punjab (CBoP) and the shareholders of CBoP were allotted equity shares in HDFC Bank in the ratio one share of HDFC Bank (Rs.10 face value at that time) for every 29 equity shares of Bank of Punjab (Re.1 face value).

Different prism

While these were indeed significant happenings in the banking sector since the beginning of the new millennium, the latest merger move of Kotak Mahindra Bank and ING Vysya Bank in a Rs.15,000-crore share-swap deal must be viewed from a totally different prism.

This one merger is different, especially if one views the context, interest and approach. It is happening when the consolidation cry is gathering momentum.

It is the result of convergence of interests. While ING has been ever so keen to quit ING Vysya, promoters of Kotak Mahindra Bank have been under regulation-mandated pressure to pare their holdings in the bank.

More than anything else, synergy of interests appears to have finally clinched the deal despite some early hiccups at the discussion stage. The merger deal between these two is significant since both are fairly strong players in their respective territories.

One plus one, it is often argued, will make it more than two in the world of M&As.

Enhancing competitiveness

Not surprisingly, many analysts have welcomed the merger move on the ground that this will enhance the competitiveness of the enlarged entity.

The biggest merger proposal in the Indian banking space yet, it is considered a huge step forward especially in the context of an acute need for world-sized banks for a growing economy such as India. Size has become important — more so in the wake of global financial meltdown and following the emergence of a unified European Union.

With many Asian nations pushing through structural reforms, big has become a new mantra for competitiveness.

Size also gives one the leeway to mobilise least-cost resources both domestically and globally to fund business opportunities efficiently. The revenue synergies, complementarities, growth potential, cost effectiveness over time, enhanced product suite to serve customers and wider distribution network are all cited as main benefits of a merger.

Business mix

A cursory perusal of the business mix (advance plus deposits) of India’s biggest bank, State Bank of India, will reveal the predicament of the Indian banks as a whole.

The business mix of SBI is around Rs.27 lakh crore. And, such a big Indian bank is not appearing among the top banks in the world!

Among the private sector banks, HDFC Bank is the largest one. The business mix of ICICI Bank and HDFC Bank is around Rs.7 lakh crore each.

Axis Bank is having a business mix of Rs.5 lakh crore plus. Total business size of ING Vysya is around Rs. 84,000 crore while Kotak Mahindra Bank’s business mix is Rs. 1.29 lakh crore. As a merged entity, they will have more than Rs.2.10 lakh crore business-mix.

The Kotak Bank-ING Vysya amalgamation will give improved geographical reach for the merged entity.

While ING Vysya has strong presence in the South, Kotak has strong visibility in the West and the North. ING Vysya’s portfolio has a strong bias toward retail and SMB (small and medium business). Kotak Bank, however, has a stronger presence in corporate and investment banking arena. The combined entity will have a wider portfolio.

Looking from this perspective, the merger can result in lot of synergy in product offerings under one-roof. The cultural fit could yet prove a big stumbling block. Sources concede that the two banks have contrasting decision-making structures. How to make the structure workable in a larger entity? That will remain a huge challenge for the merger managers.

Big role of smaller banks

There are a large number of smaller banks, mostly in the private and co-operative sectors. They also serve, and play a big role in the supply of credit to small enterprises and agriculture.

They are a useful and important clog in the banking wheel. They provide banking services in un-banked and under-banked areas. The increasing emphasis on size in the name of consolidation will perpetually keep the proverbial sword hanging over their heads.

Who will be well-positioned to implement the social inclusion call, which every party is embracing in one way or other? The issues relating to their size, capital requirements, exposure norms and regulatory prescriptions need to be suitably addressed taking into account the role played by them in furthering the cause of social inclusion.

Though both types of banks — big and small — are required for the economy and must co-exist, there is an urgent need for creating bigger banks. And, the fastest way to do this is through consolidation.

The moot point, however, is: Are we talking of consolidation of private banks only?

If the benefits of consolidation — such as scale, competitiveness, et al — have to be reaped and percolate down the line, there is an urgent need to take a hard look at public sector banks.

Time they did some voluntary initiatives before it becomes too late for them.

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