Banks could see a spate of mergers and acquisitions after India freed up rules on foreign investment in a step that could spur consolidation analysts say is crucial to ensure long-term survival and profitability.

"The budget moves on private banks open up the potential for merger and acquisition activities and takeovers in the sector," said U R Bhat, director at J P Morgan India Pvt Ltd.

"Both the caps on foreign investments and voting control were factors holding back foreign investment earlier."

Analysts believe last week's budget move to raise the ceiling on foreign direct investment in private banks to 74 per cent from 49 per cent and to remove a 10 per cent cap on voting rights in banks may be just the beginning of an overhaul.

Foreign banks have been waiting in the wings to expand their operations in this vast country of more than a billion people, with the world's 12th largest economy.

The budget moves give them the chance to buy into a private bank, which already has set up a nationwide network.

Central bank data shows there were 27 public sector banks, 30 banks in the private sector and 40 foreign banks at the end of March 2002.

Among the banks that have been looking at acquisitions in India is ABN AMRO. Another Netherlands-based bank ING has a 44 per cent stake in Vysya Bank and has said it is open to hiking this stake.

Standard Chartered, which sees India and China as its biggest growth opportunities, recently said it would open 23 new branches by the end of the year to expand its network to 81.

Its main rivals in Asia, HSBC and Citigroup, also operate in India.

M&A activity by state-run banks, which dominate the industry, could get a boost from another budget measure which extended tax breaks to them on losses incurred on taking over other banks.

"There is a need for consolidation in the banking sector," said S.S. Kohli, chairman and managing director of state-run Punjab National Bank. "You may see some now."

Kohli's bank has been one of the more active state-run banks in M&A activity. In January, the cabinet approved the acquisition of privately-owned Nedungadi Bank.

Eight years ago, it took over another bank, state-run New Bank of India.

State banks

Government-run banks account for three-fourths of total deposits and loans, and the world's largest network of branches.

State Bank of India, the country's No. 1 bank, in which the foreign investment cap is only 20 per cent, has more than 9,000 branches across India.

The ceiling on foreign holdings in other state-run banks is 24 per cent.

Finance Minister Jaswant Singh did not ease the foreign holding limits in government banks, which analysts said was to avoid political opposition ahead of state polls this year and a general election next year.

The government has said in the past it aims to cut its stake in state-run banks to 33 per cent.

Reuters