The Hindu Business Line : Banding banks

THE FINANCE MINISTRY and the Reserve Bank of India may be looking at setting up a committee to pan issues stalling consolidation of the banking system. With the RBI allowing foreign banks up to 74 per cent stake in private banks, the Government is keen on preparing a template for merger of nationalised banks to help them stand up to the fierce competition ahead. An easier WTO regime, tougher Basel norms and the imperative to upscale the net worth of banks are a few important issues forcing the Ministry and the RBI to take up bank consolidation more seriously.

For any new panel the starting point will be the Narasimham Committee recommendation for fewer banks. Decidedly, numerous banks offering more of the same have not helped anyone, least of all agriculture. Banking laws do not explicitly provide for merger of nationalised banks;law-makers cannot be blamed as in the 1970s no one could have even imagined the technological changes that now have swept the banking system. Merger of public sector banks and marriages with those in the private sector could result in these entities adopting practices of a much higher efficiency. Foreign banks have the option of setting up 100 per cent subsidiaries but the market reckons there will not be many takers as the policy also allows foreign banks directly to pick up 74 per cent stake in a new or old private bank. Further, private Indian companies can, with the RBI's permission, hold stakes in private banks.

Quietly, various players are working on strategies for the day the government knocks away the 10 per cap on voting rights that would make stake-holding meaningful. This could cut down the number of private banks, old and new, as most will find it hard to raise funds for core banking solutions or open ATMs. Players on Mint Street believe the State Bank of India and its seven associates need to be merged quickly as the SBI alone is the face of Indian banking to the world. By the same logic, the few nationalised banks such as Bank of Baroda, Bank of India, Union Bank and Dena Bank can be clubbed together to reduce transaction costs — a point frequently made by the RBI Governor, Dr Y. V. Reddy. With Government deciding to lower its stake to 33 per cent in nationalised banks (one hopes a new government will not change this), nothing can prevent Indian and foreign private players from taking majority stake, except if legally barred. It may be appropriate for the Government to facilitate mergers before leading the consolidated entities to the market as otherwise the banking system will continue to function as it does now.

Not long ago, the Citibank chief showed a passing interest in acquiring Indian banks and if this happens, government banks may flaunt some of the world's famous names. That fear explains a Standing Committee of the last Parliament arguing for keeping SBI with the government, as an important exception. With government holding critical 33 per cent stake, there is little chance of the development agenda getting hijacked by private managers; moreover, the RBI will continue to have the final word. Remember, ING Vysya Bank and ICICI Bank are two instances of Indian banks that have turned foreign, as the majority of their share capital is held by foreigners.