Wed, Aug 04, 2004 page12

• India's myriad of banks have to grow or perish

  DINOSAURS With the liberalization of foreign investment and increased mergers in the offing, Indian customers will get better service and more competitive services

  • AFP
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  India's banking sector is facing a wave of consolidation needed to achieve global clout and contend with fierce local competition, starting with the merger of two high-profile lenders last week, analysts say.

  Competition in the overwhelmingly state-dominated industry is becoming increasingly cutthroat with a host of new private players since the government began its drive to liberalize the industry a decade ago, the experts said.

  "The Indian economy is opening up and they [the banks] will have to compete on an international scale and become competitive," said Abhilash Lal, an analyst at the global consultancy firm AT Kearney.

  Last week, the state-run Oriental Bank of Commerce, a leading north Indian-based bank, said it would merge with ailing private Global Trust Bank, based in the country's south, in what Oriental said was an ideal marriage thanks to complimentary geographic bases.

  While the merger announcement was a case of a weak bank combining with a strong one due to financial woes, many future hook-ups will be about gaining enough clout to compete on a global scale, analysts said.

  The critical factor in competing with international players would be banks' size and scope for offering cheap finance, and they can only do that if they achieve "critical mass" in the sector.

  To do this, banks will need to widen their retail networks, increase their product portfolios, reduce costs and boost assets.

  Analysts also say commercial logic dictates mergers, as India has too many banks chasing too few customers, with about 100 commercial banks and 200 regional rural banks.

  "There are a host of banks since the market was opened to private players in 1994. The Indian financial system can't support so many banks. They will merge or become niche banks," said analyst Rajesh Malhani at Pranav Securities.

  Competition will pick up further if the central bank allows foreign banks to operate 100 percent subsidiaries or pick up 74 percent equity in domestic banks, he said. Such moves are under consideration, industry officials say.

  "The primary reason for mergers is going to be purely commercial, whether it's a footprint need or because of complimentary products," Lal said. "One's definitely going to see greater consolidation."

  But the process could be slowed by opposition from unions, which dislike mergers due to fears they could spell job losses. Banks represent India's second-biggest group of employers with around 800,000 workers.

  Political change also may be needed, as many of India's states own banks to fund regional development. Until legislators ease rules obliging public-sector banks to be 51 percent government-owned, a large slice of the activity is likely to be in the state bank arena.

  Two prime state-run Indian retail candidates that may be seeking domestic takeover targets are the Bank of Baroda and the Bank of India, which are both looking to expand overseas, analysts said.

  Another leading state-run development finance bank, IFCI, is expected to announce this year its merger with state-run Punjab National Bank, a retail bank, banking officials said. Two state-owned banks, Union Bank and Syndicate Bank, are also mentioned as likely merger candidates.

  But even without consolidation, change is afoot. Private banks have gnawed into the monopoly of state-run banks and have cornered an estimated 20 percent to 25 percent of the domestic market.

  This has had the effect of forcing state-run bank monoliths to abandon their earlier ways, where customers had to stand in long lines just to cash a check.

  Competition has seen a handful of banks emerging at the top in three separate segments of state-run banks, private banks and foreign banks operating in India. These are the ones that will try to gain greater market share through mergers and acquisitions, they said.

  "Banks have to clearly identify how they are going and where they are going. If they do not perform, they will be takeover targets," Lal said.
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