The marriage between Kotak Mahindra Bank and ING Vysya Bank has opened up the potential for more consolidation, especially of smaller banks in the private segment, which at present constitute a miniscule percentage in the banking sector.

The merger saves the cost of setting up infrastructure, gives enhanced suite of products, and paves the way for technology to play a role in providing the financial services. “Public sector institutions still dominate the banking sector in India. Most private sector banks, barring a few exceptions, do not really have coverage across India and are regional players at best. Consolidation, especially amongst the private sector players, is probably the quickest and most efficient way to attain the size and geographical coverage to compete for retail customers in a growing India,” said Aman Bhargava, Director – Financial Services Advisory, Grant Thornton India. According to Bhargava, “There are 2 or 3 private banks which have a fair presence in the country. The rest need more scale and coverage to make an impact in the banking sector. Further, demand for credit coupled with capital requirement going forward will necessitate more inorganic growth within private banks.”

Among the public sector banks, State Bank of India has been merging its associate banks to itself.

The RBI too favours consolidation of banks and building more globalised banking system that caters to growing corporate and infrastructure funding requirements.

According to an RBI discussion paper, ‘Banking Structure in India – The way forward’: “There is a need for creation of three or four global sized banks to have global presence through consolidation among large public sector banks and private sector banks, keeping in view the need for competition within the domestic banking sector and avoiding complex structures.” The ING Vysya deal has made Kotak richer by $750 million in just one day, according to a Forbes report.

The article appeared in the Business Line. The article can be found here.