Both M Narasimham, the architect of financial sector reforms, and SH Khan, former IDBI chairman and the author of the report on universal banking, have spoken about merger between banks as well as banks and financial institutions. Reserve Bank of India deputy governor SP Talwar has recently said that old private sector banks would be the first to witness mergers and amalgamations.

The idea behind earlier mergers was to strengthen the banking system. Small, weak and inefficient non-scheduled banks which could hardly have become viable and eligible for licence, were merged with other scheduled banks. This was done in order to check the failure of banks and to save them from facing crises and also for maintaining public confidence. However, the latest round of mergers and amalgamations in the Indian financial sector, starting from the ICICI-SCICI merger, stem purely from bottom-line considerations. The return on investments (RoI) savvy private sector banks will now look at cost-effective ways of spreading their operations and gaining access to depositor and client base, analysts said.

The strategic considerations driving future merger and amalgamations would be no different than those behind HDFC Bank-TimesBank merger. Financial intermediaries with declining spreads and stagnant depositor and customer growth will either have to shape-up or ship-out.

Faced with the option of infusing significant capital to spruce their operations, reduce the level of non-performing assets (NPA) and match the infrastructural and product development expertise of the leaders, closing shop might sound an easier option. However, very few existing or new players will like to associate with the laggards. This brings such players at a very piquant situation.

They have to spruce-up their act, establish niche leadership and become reasonably strong even if they want to opt out (instead of collecting just a rummage value). The stronger and well-established players are not likely to touch the laggards and decelerate their growth. Apart from strategic advantages like economies of scale, financial strengths, adequate net worth and a branch network, which will immediately establish the acquiring bank's presence in virgin territories, manpower quality will also hold the key in future merger strategies.

Merging banks will look at synergies in the areas of technology, complementing markets/asset base, retail deposit base (especially current and savings deposits) and branch network. In this sense, banking analysts feel that Centurion Bank is likely to emerge as an M&A target on account of good deposit and client base, comfortable level of infrastructure and technology and significant treasury and product development expertise on one hand and high NPAs and low net profit to total asset ratio on the other hand. New private sector banks like Global Trust bank, IndusInd bank and Bank of Punjab have a long way to go to become eligible takeover targets, analysts pointed out.