Indian banking sector to witness new round of consolidation: Acuite Ratings

The rating agency said this consolidation is eminent because many small sized private banks continue to face chronic asset quality problems which constrain their capital availability

The Indian banking sector is set to witness a fresh round of consolidation over the medium term – spread over FY22-24 period - primarily driven by large private sector banks, according to Acuite Ratings and Research.

The sector has already seen the first round of consolidation involving public sector banks over the 2017-20 period.

There is buoyancy in the equity markets which provides a significant opportunity for large Indian private banks to explore the inorganic growth route through acquisition of smaller private banks. Especially those private banks that continue to face headwinds or even public sector banks where the government is considering a disinvestment.

The rating agency said this consolidation is eminent also because many small sized private banks continue to face chronic asset quality problems which constrain their capital availability. Hence there is uncertainty on their scalability and business sustainability over the short to medium term. In contrast, the larger banks have built a comfortable capital cushion which can insulate them from any asset quality stress, the rating agency said.

Also, the low return on assets (RoAA) for smaller private banks in FY19 and FY20 in the range of 0.2%-0.3% reflects their vulnerability to a challenging operating environment.

The signs of consolidation are there with private lender IDBI Bank, where the government is offloading its stake, on the block.

Global financial services major Citi group has also announced plans to exit its consumer banking business in India. Many large private banks have shown interest in acquiring this business.

While PSBs continue to dominate the Indian banking industry with majority market share in both deposits and advances, PVBs have been steadily gaining market share.

Over the last five years, PSBs’ market share has dropped by around 10 per cent in both deposits and advances, which has been largely taken over by PVBs.

Clearly, asset quality and the resultant profitability as well as capital challenges have been the key factor in the slowdown of the PSBs. This has been an opportunity for the large PVBs, who have cemented their market position in the domestic banking system, it added.

Acuite Ratings & Research Ltd is a credit rating agency registered with the Securities and Exchange Board of India (SEBI).