Consolidation to begin in earnest

While calendar 2004 sowed the seeds of consolidation in the banking industry; 2005 will witness structural changes in the banking landscape.

Bank of India and Union Bank India are expected to take the plunge first and more such mergers in the public sector banking space are likely in the course of the year.

Even the leader State Bank of India (SBI) is planning to jump into the acquisition fray. Foreign banks are likely to be "liberated" from some of the Reserve Bank of India's restrictive clauses, which could cause an outbreak of "raids" on private banks.

Nobody knows whether SBI's plan of acquiring a "strong regional bank" or a bank overseas (in Africa or Asia) will translate into action but it is certainly adding to excitement in the sector. IDBI chairman M Damodaran has generated similar excitement sometime back by announcing that his bank would "give SBI a run for its money".

The merger of IDBI Bank with IDBI will be formalised soon; the swap ratio for the merger is expected to be announced in January.

The finance ministry itself is pushing for a consolidation in the sector.

The "push" might see the likes of Bank of Baroda and Punjab National Bank Dena shifting into the merger and acquisition mode and relatively weaker entities such as Punjab & Sind Bank, Dena Bank, et al being acquired by stronger peers.

The finance ministry's another "push" for letting foreign banks acquire private sector banks will see a parallel merger and acquisition spree.

The RBI's second draft on norms for ownership of private sector banks is to be released soon. It is expected to allow a "greater play" for foreign banks.

The July 2004 draft norms had proposed allowing only foreign banks present in India to hold up to a 5 per cent stake in private sector banks. Finance minister P Chidambaram had said foreign banks will be allowed to buy stakes in private banks up to 10 per cent every year.

The intentions of HSBC and ING are well known. HSBC is eyeing UTI Bank, while ING wants to further broaden its grip on ING Vysya Bank.

The chase for UTI Bank is brewing to become the mother of all acquisition battles. HSBC has made its intentions very clear acquiring a little over 14 per cent stake.

Anoher UK-based bank, Barclays, has bought a 4.3 per cent in UTI Bank. The UTI-I, however, holds the ace in the battle for UTI Bank as it has 33 per cent stake.

Meanwhile, UTI Bank is planning an American Depository Share (ADS) issue to raise capital to support its asset growth. Post issue, UTI-I's stake will come down.

While foreign banks want to enlarge their operations, a few Indian banks are keen on spreading their reach abroad. SBI, with a $1 billion kitty, is scouting for acquisitions in Africa and Asia.

It has identified an acquisition target in Africa. It has already moved into Russia. ICICI Bank too has its own international plans and also wants to open a branch in the United States.

As the consolidation game is played on, banks will be grappling to align their banking operations with wide expectations of a rise in interest rates.

The forecast for manufacturing inflation is not so good. Globally, commodity prices have firmed up, thanks to the fall of dollar. The domestic prices of commodities and other manufactured goods are widely expected to start rising, although rupee's appreciation is likely to help moderate the pass through effect.

The fall in oil prices and the rupee appreciation has had the benefit of lowering near-term inflation expectations. The rupee is already in overvalued territory and RBI may have no option but to limit the pace of appreciation by absorbing part of the capital inflows.

As ICICI Securities put it, the likely delay in a rate hike and the possible rise in the pace of accretion in foreign exchange reserves would prove conducive to fresh build up of inflationary pressures. RBI is expected to wait till April monetary policy to send another signal for a rise in interest rates.