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Saturday, Jan 31, 2004

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RBI paving the way for PSBs' shake-out

P. Devarajan

THE Reserve Bank of India has facilitated the entry of Indian corporates into owning private banks. Corporates and investors have been placed on par with foreign outfits, which have the freedom to own 74 per cent or even 100 per cent in extant private banks in the country.

Till now corporates were unsure of RBI if they approached it with a stake of five per cent acquired in private banks. That goes.

Some time ago, the Finance Minister, Mr Jaswant Singh, promised to offer banking licences to corporates.

But then the guidelines on entry of new banks in the private sector, issued on January 3, 2000, did not permit the move.

The guidelines said: "The new bank should not be permitted by a large industrial house. However, individual companies, directly or indirectly connected with large industrial houses may be permitted to participate in the equity of a new private sector bank up to a maximum of 10 per cent but will not have controlling interest in the bank.

The 10 per cent limit would apply to all inter-connected companies belonging to the concerned large industrial houses.

In taking a view on whether the companies, either as promoters or investors, belong to a large industrial house or to a company connected to a large industrial house, the decision of the RBI will be final."

With the January 29, 2004 circular, this disability goes with domestic and foreign investors being allowed to hold majority stake in extant private banks and a clear policy is in place.

The RBI has laid numerous conditions and a committee to scrutinise applications and seemingly the circular will have prospective and not retrospective effect.

Some believe the circular will not hold in the case of old disputes haunting a few private banks based in Tamil Nadu and Kerala.

It is going to be hard for the RBI to keep a tab "on the source of funds for the acquisition" as no central bank world over has anything of a track record on the flow of funds across borders.

The RBI has set out three stages of acquisition: five per cent, 30 per cent and above 30 per cent apart from approvals from the Securities and Exchange Board of India, Department of Company Affairs and the Insurance Regulatory and Development Authority.

But are the big corporates now keen on owning and running small community-based banks in Kerala or Tamil Nadu when their business interests are well served by Government banks?

Some time from now, the RBI will have to work on a policy defining the legal status of corporates bidding for public sector banks.

Foreign Direct Investment and portfolio investments in nationalised banks are subject to an overall statutory limit of 20 per cent as provided under Section 3 (2D) of the Banking Companies (Acquisition & Transfer of Undertakings) Acts, 1970/80, going by the RBI circular, FDI in the Banking Sector, dated February 16, 2002.

Even today, technically, an Indian corporate can pick up five per cent stake in listed Government banks such as Bank of Baroda and Bank of India even with the Government holding 51 per cent. Will RBI allow the buy and what about raising the stake with an open offer?

When and if the Government brings down its stake to 33 per cent in Government banks, what will be the status of foreign and Indian bidders and will they be allowed majority stakes?

It is assumed that the Government stake at 33 per cent will stall any major disturbances, but that is taking a virtuous view of the Government. It may be misplaced, as the economy has not benefited much during the pre-and post- nationalisation eras. If Government ownership has been beneficial, one will have to explain the huge quantum of non-performing assets and the about Rs 30,000-crore of public money sunk into reviving public sector banks except State Bank of India, owned by RBI.

In the coming years, pressure will be on RBI to update its market information procedures to help keeping a tab on the banking system irrespective of the colour of equity tags. It will have to think of building a few strong banks to match the sumo-size players from across the seas.

The Narasimham Committee had worked on the idea and as a first step, SBI and its associates need to be made one entity to be the biggest player in the banking system followed by merger of at least the top banks based in Mumbai into one conglomerate.

It could form a part of the strategy when financial sector reforms get under way with a new Government in power at New Delhi by May.

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