Bank mergers usually mean a change in the rating of the entire banking sector as the market changes the valuations of the players according to the changes in the acquisition valuations.
However, the recent merger of ING Vyasa and Kotak banks would create more ripples in the sector than merely change the valuations. With the merger, Kotak Mahindra Bank has emerged as the fourth largest national player in the private sector, enjoying a pan India presence.
The merger has resulted in highlighting these stocks as well as boosting the stocks of other banks as well. As a result, the Bank Nifty index is noted to have increased by 2.22%. Consolidation is also poised to pick up as the RBI starts clearing new banks soon. While private sector players have the advantage of using inorganic means to grow their business, large public sector players like the State Bank of India have started merging with smaller banks to consolidate itself.
This merger has again raised questions about the statuses of small banks and big banks in the country. Some believe that having at least three or four big banks can help the latter compete domestically as well as compliment globally. They also believe that mergers like these could result in more than one global-sized bank in the country.
The problem with big banks however, is their size itself. If they fail, big banks can rock the entire economy of a country. Many argue that this scenario is rare owing to the large asset base of these banks. Smaller banks on the other hand are more prone to failure although they do not pose too much of a risk to the system.
The bigger the economy gets, the bigger the banks need to get in order to finance the former, some say. Reports suggest that a few large players would need to be present in order to cater to the growing infrastructure needs of the economy as well as the global needs. These reports also suggest that smaller banks can be responsible for supplying credit to various services in the under banked and un-banked regions.
India’s ambitious plans for the near future necessitates the rise of large sized banks in order to finance these projects. As being the front-runner to become one of the five largest economies in the world, India would definitely need at least 2-3 world-sized banks.
It can be concluded that while an economy can thrive with the help of both types of banks, the need of the hour is to create larger banks via consolidation. The government is yet to take up the initiative though and encourage consolidation of banks in the public sector as well.
The recent merger of Kotak Mahindra wiht ING Vyasa highlights the need for India to consolidate players on the private sector. This would encourage the growth of bigger banks that would help cater to the needs of the global clientele as well the local economy.