Chennai: Gartner Inc, the US-based research and analysis organisation has predicted merges and acquisitions among nationalised banks. Gartner forecasts significant consolidation in the ownership structure of Indian public sector banks with the Indian government poised to increase the level of foreign ownership while reducing its own direct ownership.

Consequent to the new shareholding, the financial services sector will go through two major periods of consolidation and rationalisation. As a result, the nationalised banks will be more exposed to foreign and domestic market forces, possibly under even tighter regulatory and fiduciary control but with minimal ownership control.

Gartner also envisages government reducing its shareholding in all public sector banks to zero and refocus the capital into a specialised bank focused on the development of the Indian economy, particularly the emerging small-to-medium enterprises and rural-based industries.

Opining on this trend, John Weste, managing vice president, consulting, at Gartner says, "It is highly desirable for the Indian economy to maintain at least 60 per cent of loans and advances within Indian hands while going through the consolidation phase".

According to Gartner some of the key drivers for consolidation are:
Key Drivers

• Weak Capital Position
  
• Government's commitment to banking sector reforms and market forces
  
• Continuously building strategic alliances and partnerships
• NPA's

Weak capital position

The weak capital position of the Indian banking system is largely a reflection of growing asset-quality problems stemming from weak underwriting and credit management systems, and the vulnerabilities of the Indian banking sector to the impact of globalisation. The asset-quality position of India's banking system also suffers from regulations in the area of priority sectors lending.

However, India's new private-sector banks are stronger, and have a superior asset quality. While foreign banks, which maintain the highest capital ratios in India, both in terms of published ratios and after adjusting for the loan-loss reserve shortfall, are in a significantly stronger position as compared to their Indian counterparts.

Government's commitment and market forces

While the Indian government is committed to major financial sector reforms, it still needs to recognise its own financial limitations and the likely impact of these reforms. The government may need to consider opening up its market to enable foreigners to acquire local banks outright in order to allow Indian banks to raise additional capital resources and raise the capitalisation of Indian banks to international standards.

Continuously building strategic alliances and partnerships

As the financial services sector undergoes major changes, many of the local banking groups have cemented strategic partnerships / alliances in order to pursue specific market niches and / or to expand their core offerings to a wider market. Banks will continuously need to align with domestic and global players to offer new products and services to their customers.

Non performing assets (NPA)

The old private-sector banks are slightly better placed than the public sector banks with respect to capitalisation. The government banks' cumulative capital base is almost wiped out when more conservative NPA and loan loss estimates are adopted.