The Indian banking sector would see a fresh phase of consolidation over the medium term, primarily driven by large private sector banks, rating agency Acuité said on October 27.
"Given the current buoyancy in the equity markets, there is a significant opportunity for large Indian private banks to explore the inorganic growth route through the acquisition of smaller private banks that continue to face headwinds or even public sector banks where the government is considering disinvestment," the agency said in a report.
This consolidation was also eminent because many small-sized private banks continued to face asset quality problems, constraining their capital availability, Acuite said.
There was uncertainty about their scalability and business sustainability over the short to medium term. Larger banks, on the other hand, had a comfortable capital cushion, insulating them from asset-quality stress, the agency said.
The low return on assets (RoAA) for smaller private banks in FY19 and FY20 in the range of 0.2-0.3 percent reflected their vulnerability to a challenging operating environment, Acuite said.
Any consolidation, however, would be influenced by various factors like strategic fitment, expansion plan in a particular region, compelling valuations, deposit franchise and technological compatibility, the agency said.
The Indian banking sector has already seen the first round of consolidation involving public sector banks (PSBs) over 2017-20 period. The government recently merged 10 PSBs into four, kicking off a mega privatisation drive.