Competition in the overwhelmingly state-dominated industry is becoming increasingly cut-throat with a host of new private players since the government began its drive to liberalise the industry a decade ago, the analysts said.

"The Indian economy is opening up and they (the banks) will have to compete on an international scale and become competitive," Abhilash Lal, analyst at global consultancy firm A.T. Kearney, told AFP.

Last week, state-run Oriental Bank of Commerce, a leading north Indian-based bank, said it would merge with ailing private bank Global Trust Bank, based in the country's south, in what Oriental said was an ideal marriage thanks to their complimentary geographic bases.

While last week's merger announcement was a case of a weak bank combining with a strong one due to financial woes, many future hook-ups would be about gaining muscle to have enough clout to compete on a global scale, analysts say.

The critical factor in competing with international players would be banks' size and scope for offering cheap finance and they can only do that if they achieve "critical mass" in the sector, they say.

To do this, banks will need to widen their retail network, increasing their product portfolio, reducing costs and boosting assets.

Analysts also say cold commercial logic dictates mergers as India has too many banks chasing too few customers. There are about 100 commercial banks and 200 regional rural banks in the country.

"There are a host of banks since the market was opened to private players in 1994. The Indian financial system can't support so many banks. They will merge or become niche banks," said bank analyst Rajesh Malhani at Pranav Securities.

Competition will pick up further if the central bank allows foreign banks to operate 100 percent subsidiaries or pick up 74 percent equity in domestic banks, he said. Such a move is under active consideration, industry officials say.