India's second-largest lender, ICICI Bank, said on Monday its board had approved a bid for struggling United Western Bank, whose rural network could help boost ICICI's operations.
But it will face stiff competition from state-run lenders such as Canara Bank and Andhra Bank that also plan to bid for United, which was placed under moratorium till December 1 by India's central bank on Saturday.
Private-sector Federal Bank is also bidding for the ailing bank.
The central bank said its move was aimed to protect United's depositors and help merge it with a stronger bank, as United's capital to risk weighted assets was negative.
"ICICI Bank believes that UWB's network can be leveraged to grow its rural and small and medium enterprise banking operations in particular and its overall distribution franchise in general," ICICI said in a statement.
About two-thirds of India's more than a billion people live in villages or small towns, where a rapidly expanding economy has raised incomes and spending.
Shares in ICICI rose 1.5 per cent to Rs 618 as it could benefit from the branch network of United, analysts said.
Although United is struggling with a bad loan ratio running at 5.66 per cent, compared with its peers' 1.97 per cent, it has 230 branches in nine states to fuel strong growth for ICICI Bank, they said.
United shares plunged 33 per cent to Rs 15.15 as a takeover is unlikely to give its shareholders a good deal, traders said.
India has a history of ailing banks being merged with state-run banks to save depositors, but shareholders usually got nothing since the net worth of the banks were negative.
The central bank merged Global Trust Bank with state-run Oriental Bank of Commerce a few years back and Nedungadi Bank with state-run Punjab National Bank.
United has deposits of Rs 64.8 billion ($1.39 billion) and outstanding loans worth Rs 40.06 billion, the central bank said.
Shares in Canara Bank rose 3.9 per cent to Rs 236.30 and Federal Bank gained 4.2 per cent to Rs 206.50, while Andhra Bank dropped 0.23 per cent to Rs 88.
"Generally, preference is given to public sector banks (for merger)," Anand Sinha, executive director at the central bank, said on Saturday.
This could make it hard for ICICI to take over United, but if it succeeds the acquisition will help expand its reach.
New York-listed ICICI, which has a market value of $11.7 billion, has about 614 branches and extension counters. In comparison, state-run Bank of Baroda, with a market value of about $2 billion, has 2,737 branches.
ICICI had bought Bank of Madura a few years ago, helping it expand in southern India.