Kotak-Vysya merger, good augury

The takeover of ING Vysya Bank by Kotak Mahindra Bank is a win-win deal for both and a good augury for the entire banking sector. Both are private banks and are not very big. They are well-run banks and the merger has come about for positive reasons.

Private banks have merged in the past but this is the first merger in the last four years. The two largest private banks in the country, HDFC Bank and ICICI Bank, have taken over small banks in the past.

The Reserve Bank of India has also had to prescribe and direct mergers of banks to ensure that one of the merging entities do not collapse. But the Kotak-Vysya marriage is completely voluntary and has been made for strategic reasons. It will help both banks, their shareholders and customers and the industry in general.

Both banks have different geographical bases and customer segments. The limited reach in terms of presence and profiles had constrained both of them. The merger will enable them to complement each other and make a good business fit.

The new entity will be the fourth largest private bank in the country. It would not have been easy for even the bigger of the two banks to reach that size through organic growth in a field which is witnessing intense competition, where two more entirely new banks will soon start operations. Size is very important in the banking sector and a national spread is necessary to boost business and cultivate image. With a larger customer and client base, more financial resources and ability to offer more products and services, the new bank will be able to compete better with the larger banks in the field.

The different work styles, practices and technologies which exist in the two banks now will have to be integrated for the best results. But this may not pose a big challenge.

The banking sector in India needs consolidation of capacity as seen in the Kotak-Vysya merger. It is likely that there will be more such unions in the private sector. But consolidation is more needed in the public sector banking space. Their problems are well-known: political interference, inefficiency, poor work culture, high costs etc.

The result is lack of dynamism, slow growth and high non-performing assets. Smaller public sector banks will find it increasingly difficult to face competition and grow or even to stay afloat without government support. There have been occasional announcements of mergers of some PSBs, but there is need for early action now.