The biggest financial sector takeover in the country – HDFC Bank’s decision to acquire Centurion Bank of Punjab – could only be a precursor to the events to unfold in the banking sector.
Boards of HDFC Bank, the third biggest bank in the country by share market value, and Centurion Bank of Punjab met on Saturday and agreed to pursue the merger. The boards of both the banks will meet again on Monday to decide the share swap ratio, HDFC Bank said in a release here.
So far, the Indian banking sector has not seen many marriages unless mandated by the banking regulator.
Global Trust Bank, a private bank was merged with state-owned Oriental Bank of Commerce in 2004, while United Western Bank was merged with the Industrial Development Bank of India in 2006.
Centurion Bank of Punjab itself had acquired the privately-owned Lord Krishna Bank in last year. With capital requirements for banks set to get more stringent next year onward as per the Reserve Bank of India's Basel II norms, more banks may be forced to follow suit. Further, consolidation in the banking industry seems to be an imperative to survive in a world of new-age lenders.
“Larger banks make stronger banks. Size and scale do matter in the banking space and this deal has not come as a surprise. Stricter capital adequacy norms with Basel II implementation could force more banks, especially several of them down south, to merge with bigger entities. Thus, consolidation in the banking sector should go on for a while,” said Kamlesh Gandhi, country head of Investment banking at Religare.
Basel II implementation could see banks’ operational costs shooting up and a consequent rise in charges levied from customers. Thus, bigger banks with a better scale of economies would be able to provide services at a lower cost and prevent customer attrition. Basel II mandates stricter capital requirements based on the banks’ own measures of risk that require comprehensive data collection and analysis, which will be expensive to implement. Further, the norm will require significant changes in internal systems and processes, which are expensive as well.