The United Progressive Alliance (UPA) in its previous stint among other issues had an important unfinished agenda: Of banking consolidation with multi-dimensional objectives. The other issues that need be addressed include passage of the Insurance – Amendments Act and bills seeking to increase the voting rights in the banking sector which is currently restricted to 10% .

Although articulated by the former finance minister P Chidambaram as early as 2004, the much-talked about consolidation in the Indian banking industry could not be implemented through out the five years of the UPA regime, primarily because of lack of broader political support as the government was being supported by the Communist parties except for the last few months.

It is not very clear who will be the new finance minister in the new government formed by the UPA coalition led by Manmohan Singh without Communist support, but it is a foregone conclusion that the government would sort out the pending issues on a priority basis.

According to the policy makers, the consolidation strategy in the domestic banking sector is necessary to facilitate creation of five or six big banks through merger and acquisitions among the 28 public sector banks, which like some of their Chinese counterparts, can have global standing and fund big-time domestic growth.

The last one decade has seen the transformation of the Indian banking industry, which has experienced both high growth and technological transformation.

Currently, when major global banks are shrinking after being impacted by the global financial crisis, most Indian public sector banks, despite experiencing effects of the economic slowdown, are charting out expansion plans aggressively not just in domestic markets, but also across the globe.

Next to ICICI Bank, which had built up a successful international banking strategies (of late the bank is maintaining a status quo on its growth strategies in foreign countries), SBI?s overseas strategies seem to be paying dividend. It would be good idea to build couple of big banks which will be in a position not only to compete, but also take over some banks where governments have picked up stakes and would be divesting afterwards.

Globalisation coupled with technological development has shrunk the boundaries by which financial services and products are being provided to customers residing across the globe. Further, due to innovations and improvements in service delivery channels, the trend of global banking has now been marked by the twin phenomena of consolidation and convergence.

The trend towards consolidation has been driven by the need to attain meaningful balance-sheet size and market share in the face of intensified competition, whereas the trend towards convergence is driven across the industry to provide most of the financial services such as banking, insurance, investment, cash management, etc., to the customers under one roof.

Bank consolidation assumes significance from the point of view of making Indian banking strong and sound, apart from its growth and development to become sustainable. The geographical and regional spread would widen when banks with different strongholds merge. Based on the principles of synergy, the business volume and geographical reach of a consolidated entity automatically increases manifold.

C Rangarajan, former chairman, Economic Advisory Council, and former RBI governor, said that consolidation in the Indian banking sector was likely to gain prominence in the near future. Despite the liberalisation process, state- owned banks dominate the industry, accounting for three- quarter of bank assets. The consolidation process in recent years has primarily been confined to a few mergers in the private sector segment, although some recent consolidation in the state-owned segment is evident as well.

These mergers have been based on the need to attain meaningful synergies, driven largely by synergies, location and business. Earlier, efforts were initiated to iron out the legal impediments inherent in the consolidation process. As the bottom lines of domestic banks come under increasing pressure and the options for organic growth exhaust themselves, banks in India will need to explore ways for inorganic expansion. This, in turn, is is likely to unleash the forces of consolidation in Indian banking.

However, according to Rangarajan, there are two caveats. First, any process of consolidation must come out of a need felt for a merger rather than as an imposition from outside. The synergic benefits must be felt by the entities themselves.

The process of consolidation that is driven by fiat is much less likely to be successful, particularly if the decision by fiat is accompanied by restrictions on the normal avenues for reducing costs in the merged entity. Thus, any meaningful consolidation among the public sector banks must be driven by commercial motivation by individual banks, with the government and the regulator playing at best, a facilitating role.

Second, the process of consolidation does not mean that small- or medium-sized banks have no future. Many Indian banks are of appropriate size in relation to the Indian situation. Actual experience shows that small- and medium-sized banks, even in advanced countries, have been able to survive and remain profitable. These banks have survived along with very large financial conglomerates. Small banks may be the more natural lenders to small business.

The State Bank of India (SBI) will be the first test case after ongoing plans to merge rest of its six associates (Bank of Saurashtra has already merged) are completed. Going by the statement of OP Bhatt, chairman, SBI, the bank is keenly waiting for the new government to be in place to receive final approval for the merger. The bank, however, has already gone in for a virtual merger and has immensely benefited by the move.

Kalpana Morparia , CEO and MD, JP Morgan India,said, ?Given the way the regulation is currently, the only opportunity of consolidation is amongst the government banks or amongst private sector banks, unless government banks decide to acquire private sector banks, which I see no reason for them to. So, there will be some amount of consolidation, but it will be restricted within these segments.? Morparia pointed out, ?You cannot privatise government banks. You also can?t allow foreign banks to buy Indian banks. It could happen within state-owned banks, it could also happen within the smaller private-sector banks.??

DK Joshi, economist, Crisil, said, ?We will first have to wait for the Budget to watch out for the fiscal strategy. The probability of the passing of the pending bills has now increased. However, there is a need of some reforms to boost the economy and keep the expenditure under control.?

There is a crying need of capital by the banks to fund their expansion plans to spur growth in the economy. From where these capital would come? The new government is expected to announce more fiscal stimulus and at the same time has to manage the fiscal deficit. So any large capital infusion from government to the bank may not be possible.

Nikhilesh Bhattacharyya, associate economist, Moody?s Economy.com said, ?The next government will be constrained by the country?s large fiscal deficit. Despite official rate cuts, borrowing costs remain steep and the overnment would risk driving lending rates even higher, if it were to stimulate the economy through more public spending. Reforms and a fresh mix of spending priorities are India?s route to recovery.??

Along with a new government , surely the banking may not remain same in next few years.

?(With inputs from Mahalakshmi Hariharan & Hemang Palan)