In 2025, merger and acquisition (M&A) transactions across much of the world are taking longer to finalize, particularly in financial services. While global geopolitical and macroeconomic uncertainty persists, artificial intelligence (AI) is emerging as a disruptive force that financial institutions, including banks and non-banking financial companies (NBFCs) must navigate. The disruption could also potentially impact dealmaking in the sector.

Despite global uncertainties, India remains fundamentally strong with long-term potential. To explore emerging M&A trends in Indian financial services, VCCircle caught up with Bhavik Hathi, managing director at Alvarez & Marsal's Global Transaction Advisory Group. In the interview, Hathi shared insights on private equity activity in the banking, financial services and insurance (BFSI) sector, the firm’s expansion strategy, and more.

Edited excerpts:

What areas do you cover in your work, and are you domain-agnostic?

I’ve been with A&M for 11 years after 15 years at another consulting firm, where I spent a decade in transaction practice. Since joining A&M in 2014, I’ve helped build the financial due diligence practice, as well as the overall financial services consulting practice, supporting private equity and corporate clients in domestic and cross-border deals and value creation. My work in financial due diligence is sector-agnostic, spanning financial services, logistics, consumer and retail, industrial and infrastructure. Within financial services, I cover commercial and operational due diligence, post-deal integration, and carve out support and value creation. We’re also deepening subsegment expertise, with recent hires focusing on lending and insurance.

Why has A&M seen a spurt in top-level hires recently? Is it due to business expansion, attrition, or both?

The hirings are part of A&M’s expansion across Asia and Australia, not just India. We have low senior-level attrition and have more than doubled our managing director count in Asia and India over the past couple of years. This reflects both deepening existing capabilities and expanding into new sectors and services.

What trends have you observed in private equity deal activity in BFSI over the past year? What’s the outlook for the next 12-15 months?

In the past 12 months, India’s lending-driven market has fuelled significant deal activity in NBFCs and MFIs (microfinance institutions). Post-Covid, investors have regained confidence after assessing delinquencies, leading to substantial capital deployment. PE firms, with long-term lending exposure, are diversifying into fintech, insurance, and wealth management to diversify risks due to overindexing on the lending sub-segment. We’re seeing more control transactions, with PE firms taking majority stakes in sizable BFSI companies, reflecting comfort in driving operations. Newer funds and those exiting earlier BFSI investments are now focusing on lending, with buyout funds targeting scaled businesses. In the next 12-15 months, we’ll see more platform plays, consolidating smaller companies in lending, insurance, or wealth management into larger entities. PE firms will back experienced management for greenfield ventures in insurance, distribution, and fintech. Diversification beyond lending will continue, driven by India’s underpenetrated market, though macroeconomic uncertainties may impact valuations.

Will AI be a significant disruptor in Indian banking? How will its adoption differ from developed markets like the US or Europe? Will PSU banks, private banks, small finance banks, and NBFCs adopt AI differently?

AI adoption depends on bank type and customer segment. Forward-looking private banks with tech-savvy customers will use AI for customer-facing applications like apps, customer servicing and internet banking. PSUs and smaller banks, serving mass-market or senior citizen segments, will focus AI on back-end efficiencies like reconciliations and vendor payments to reduce high operating expenses, to begin with. Small finance banks, often focused on microfinance, may find AI less relevant for frontend customers, but useful for back-end cost management. The key is the willingness and ability to adopt AI, driven by customer profiles and operational needs. AI is only useful if you have good-quality data and, hence, will be useful for only banks that have a robust long-term historical data lake.

There have been several pain points in the MFI space, with many deals being stalled. Have these pain points hindered dealmaking?

The MFI sector has been stress-tested enough. At the same time, there have been cycles of exuberance, then a more mature way of doing business, then exuberance, and so on. When there is a serious influx of funding, and supported by demand from customers, one tends to overlook certain basic fundamentals of risk and underwriting, and focus on growth not factoring in that there may be a pitfall very soon. Enough has been written about overleveraging in this sector, which is a reality. One needs to be disciplined in this customer category to build a long-term sustainable portfolio.

Do you see consolidation ahead in BFSI?

Consolidation in banks, absolutely, with some of the bigger banks taking over smaller ones or regional players. On the government bank side, we have seen the SBI sisters merging with it. That sort of consolidation will keep happening. On the NBFC side, I would say less of it, given that there is still scope for significant organic expansion. Secondly, high valuation expectations may not make economic sense for larger NBFCs to acquire smaller ones.

Are distress sales likely to continue?

Yes, absolutely. Ups and downs in the economic cycles will continue to impact certain players, leading to distressed opportunities.

This article is an Intellectual Property of VCCircle