India's biggest bank takeover is expected to be unveiled today, as the country's local banks begin what is expected to be a scramble to consolidate ahead of market liberalisation in 2009.

HDFC, India's third-largest bank, is expected to confirm that it has reached agreement to buy the much smaller Centurion Bank of Punjab in an all-share deal that is expected to value the target at more than £1.3billion.

The tie-up will create the first bank in India to have more than 1,000 branches, in a country where branch licences, particularly for foreign-owned banks, are difficult to obtain.

India's largest retail banks are racing to consolidate a fragmented domestic market before foreign rivals are allowed to step in and buy up Indian businesses - something that could happen as soon as next year, when the country's financial regulator has said that it will reconsider its protectionist stance.

Under existing rules, foreign banks are limited to holding small minority stakes in Indian banks and then only with the permission of the Reserve Bank of India (RBI).

A handful of branch licences are granted each year to overseas companies in a country of more than onebillion people and one of the most underbanked places in the world. Without a branch licence, a bank cannot take deposits. There are widespread expectations that regulators will liberalise the market in 2009, when a new policy for the sector is due.

Local players are tapping the capital markets in readiness for what some expect will be a foreign onslaught, led by the likes of HSBC and Citibank, both of which have a limited Indian presence, when the RBI outlines a new four-year regulatory system next April.

State Bank of India, the nation's biggest bank by assets, is raising more than £2billion through a rights issue to finance growth. In June, ICICI Bank, the second-largest bank, raised about £2.5billion by issuing new equity to local and foreign investors. HDFC is expected to raise about £500million through a bond sale to fund expansion overseas.

However, Indian bankers say that their Western peers are being too optimistic. “India works at its own pace,” one said. “That is not always understood in London and New York.”

The boards of HDFC, which has almost 10 million customers, and Centurion, which has 2.5million, will meet today to consider the share swap ratio and later in the week to finalise the deal.

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