The announcement of the merger of >ING Vysya Bank with Kotak Mahindra Bank could not have come at a better time. With a pro-reform BJP government at the Centre, expectations are running high. Coming as it did at a time when reform talk is getting louder, the proposal to amalgamate these two not-so-big but fairly well-run private banks has raised expectations of a wider consolidation in the Indian banking field. Does this merger plan signal the shape of things to come in the highly fragmented banking industry? No doubt, the convergence of self-interest was the initial trigger in this instance for the eventual decision to merge. Nevertheless, the two banks are also acutely aware of their limitations given their size and restricted geographical presence. Once it fructifies, the merger will push the resultant bank to the fourth slot in the private banks category. The merger instantly offers the consolidated entity a larger customer and client base. Also, the larger entity will be in a position to provide enhanced product offerings to its constituents. This merger initiative is no less due to the market dynamics which demand a large enough scale to drive business efficiency in an intensely competitive global environment. Viewed from this point of view, the merger sets a whole new trend. The M&As (mergers and acquisitions) that had occurred in this sphere since 2000 were mostly among unequal players, and were not voluntary, to say the least. These two banks would do well now to quickly resolve issues arising out of their technological and cultural diversities to make the merger a meaningful value-creation exercise.
If consolidation is to be truly meaningful, public sector banks (PSBs) must wake up to the reality now. More often than not, they echo their political masters’ preferences of the moment. Given that they dominate the Indian banking field, much of the NPA (non-performing assets) woes of the industry are the direct consequence of the inherent inefficiency that seeps across the entire PSB canvas. Not surprisingly, the PSBs are under tremendous stress in terms of cost, governance and efficiency. Business and practical prudence suggest that they should focus on service efficiency. They have constraints aplenty in terms of cost structure, scale and governance culture. Since the government is the major shareholder, it requires more than mere statement of intent from the political masters to drive a larger consolidation in the Indian banking field. The unfolding scene on the global stage, increased regulatory requirements, stringent governance stipulations, tighter provisioning norms and fresh competition have all combined to force Indian banks to think of mergers.