Private sector banking ripe for consolidation: Yes Bank ready for inorganic growth but not merger, says CEO Prashant Kumar

• Yes Bank is open to acquisitions after its turnaround is complete and may acquire a microfinance institution to build its portfolio of high yielding assets.
  
• Yes Bank is no longer a candidate for any acquisition and will evaluate inorganic opportunities only if they add value.
  
• Optimum size of a bank should be in the region of ₹5 lakh crore. Banks with a smaller balance sheet size would be more vulnerable to uncertainties or shocks.
  

The private banking space is ripe for consolidation, as rising technology and compliance costs are making it harder for smaller banks to compete. In conversation with Business Insider, the CEO of Yes Bank, Prashant Kumar, says, “I am of the firm belief that consolidation is required. There is a huge fixed cost in banks, be it compliance or IT costs. There is a need for large banks. We have already seen the advantages of consolidation in the public sector.”

The government has already set a precedent by merging several public sector banks, or PSBs, to create behemoths. In 2020, the government merged several banks to create seven large PSBs with a balance sheet of over ₹8 lakh crore. The mega consolidation was undertaken to create banks which would have a scale that would be comparable to other global banks. The ultimate objective was to create greater scale and synergy, which would lead to cost benefits.

Kumar believes that the time is ripe for the same to play out in the private sector too. He reasons that as the sector needs players with a balance sheet size of over ₹5 lakh crore to feel relatively safe when dealing with unforeseen circumstances. The pandemic has demonstrated the kind of stress and risks that banks may have to face. Scale and diversified business models can enable these lenders to combat risks more effectively.

According to Kumar, “Banks with a smaller balance sheet size would be more vulnerable to uncertainties or shocks. There is a need for consolidation, which would make the private banking sector stronger. Consolidation as such in the private banking sector will help strengthen the private banking sector. Smaller banks would not be able to upgrade themselves, as the costs are huge.”

Yes Bank too is open to acquisitions, now that the turnaround is complete and it is focused on growth. To begin with the bank is looking at building a portfolio of reasonably high yielding assets, which it currently lacks. First up on its agenda is the acquisition of a microfinance institution.

According to reports, the bank is in talks with Kedaara Capital to acquire a stake in Spandana Sphoorty. While a balance sheet of ₹3 lakh crore is not too small, Yes Bank is working towards becoming bigger.

Explains Kumar: “We have a balance sheet of ₹3.5 lakh crore. I think our immediate pain point is private sector lending (PSL) and not having any high-yielding assets. Microfinance takes care of both issues. It would help meet PSL needs and give us a high-yielding asset. Once everything is fine then you look at inorganic growth.”

While Yes Bank is open to inorganic growth, it is not yet ready to merge with a larger bank yet. Kumar says that he would look at inorganic opportunities if it adds value. However, he does not believe that Yes Bank is a candidate for a potential acquisition anymore. He says: “The strength of this bank is its strong franchise. Otherwise, coming back to normalcy cannot be done in three years. It does not make sense to become a target for acquisition. If you have a strong franchise, then you have strong capabilities on the management side or on the digital side. If you are lacking in some of these areas, then you can look at a merger to build strength in these areas.”