The relative efficiency of the banks in the sector is a crucial point ofreference. It is the inefficient banks versus the efficient ones. The HDFCBank-TimesBank merger threw up this point-that the TimesBank balance sheetwas so much worse with larger NPAs, lower employee productivity and reliancemore on vanilla banking than anything else for revenues. But yet the mergermade sense if looked at the possibility of HDFC Bank squeezing more out ofTimesBank's assets as it does out of its own and improving efficiency anddiversifying the sources of income.

HDFC Bank operated with spreads of 3.38 per cent, while TimesBank's spreadswere 1.66 per cent. Secondly, HDFC Bank had business per employee of Rs 5.2crore while profit per employee was Rs 10 lakh. Against this TimesBankgenerated a profit of just Rs 5 lakh per employee from Rs 7.22 crore ofbusiness per employee. As regards return on average assets, the figure was1.89 for HDFC Bank and 0.95 for TimesBank, indicating the scope forimprovement in the latter. In general higher NPAs and lower return onaverage assets of takeover targets need not be a serious issue as it canalways be priced into the deal.

The second reason is the enhanced access to the retail market. All thesebanks have a strong retail presence on the liabilities side, which make themattractive to buyers. The NBFCs failed in trying to create retail assets dueto the high cost of funds and lack of a network. Nationalised banks alsofailed due to their lethargic functioning. The private sector banks have aunique window of opportunity since they score on all counts. And this can beseized by the banks best suited for this purpose-the efficient ones whichalready have significant non-interest (treasury and fee based) income.

However, this opportunity exists solely within the precincts of the privatesector banks, both new generation as well as the older ones. It is unlikelythat there would be any interest in the PSU banks. The number of banks thatfit into the above category are few. Besides HDFC Bank, probably ICICI Bankwould qualify. Banks with strong promoters such as IDBI Bank and UTI Bankalso could be potential buyers. Other older private sector banks such asBank of Madura (with a size half of that of ICICI Bank) and with a lowerefficiency could seek critical mass through takeovers.

The banks with relatively weaker promoters-those who are not part of a welldefined financial services group such as Centurion Bank and Global TrustBank or promoters of banks such as IndusInd Bank with other overwhelmingcorporate interests-could be possible sellers. Other older private sectorbanks which have been floundering or trying to restructure could also seekbuyers, such as the Bank of Punjab and Bank of Rajasthan. Other banks thatcould involve themselves in mergers are Federal Bank, which has been pushingthe pace of growth as well as Vysya Bank. However, the desire for rapidexpansion of assets and access to low cost liabilities is fine, but bankscannot escape the possibility that banking might shift largely to theInternet; and no amount of branch network can provide an adequatesubstitute.