The latest marriage that is expected to get solemnized in Indian banking space is that of one of the oldest with the country's largest private sector bank. We are referring to the proposed merger of ICICI Bank with Bank of Rajasthan. The last union was that of HDFC Bank with Centurion Bank of Punjab. The latter turned out to be reasonably successful and benign for shareholders. But the rationale and cost of merger are best evaluated on a case to case basis.
In the case of Bank of Rajasthan, the RBI's mandate to the promoters to dilute their stake in the entity was a one off. But more such cases cannot be ruled out. Particularly if the managements of the bank fail to live up to the central bank's guidance. Building up a robust financial structure is the RBI's key objective. And to fulfill the same, the central bank needs to ensure that all players in the sector are equally well placed. Both in terms of risk averseness and profitability.
Such merger serves the purpose of fortifying Indian banking sector in two ways. One it offers the larger banks extended franchise and client base. Two it takes off risk from the smaller banks and puts it in the balance sheets of larger and well capitalized entities. It also makes the RBI's job that much easier in terms of risk surveillance.
The reluctance of Indian PSU banking entities to participate in this exercise may stand to be detrimental to them. While their interests lie in reducing excess franchise and employee base, these entities exert the pressure of their labour unions. This may serve their short term interests but over the longer term competition with private and foreign sector will only get intense.
The private sector will, however, have to be realistic in terms of the cost of the inorganic growth. Overpaying for franchise or deposit base could again paralyse the future growth potential of these banks. Also they need to ensure that the merged entity has a good mix of assets. Furthermore, that the basic risk assessment procedure for the combined loan book is in place.
The merger of ICICI Bank and Bank of Rajasthan could once again kick start the consolidation process. Both in private sector as also (hopefully) in PSUs. The pace of integration and extent to which they make the players competitive, would determine their imminence to evolution of Indian banking.