The Hindu Business Line : Merging into a mere circular

SETTING RULES FOR mergers of private and public sector banks makes little sense when banks cannot buy beyond 10 per cent of the paid-up capital without the nod of the Reserve Bank of India. To that extent the latest RBI Guidelines on merger of private and public sector banks may turn out to be yet another circular for bankers to file and forget. Only a week ago the Cabinet decision to free voting rights in private banks got spiked for identical reasons. For the record there is nothing to twitch over the Guidelines as they abide by conventions set by the community of accountants.

Seemingly, the RBI is uncomfortable with (if not hostile to) private sector banks and placing a 10 per cent limit on equity acquisition is seen as a discouragement to mergers. The central bank is in talks with private banks to get promoters to trim their majority stake to 10 per cent over a defined period of time to arrive at a diversified ownership; also, it wants private banks to lift their equity base to a minimum of Rs 300 crore. That could make it harder for bank boards to talk mergers for there might be none to lead the talks given that all holdings will be less than 10 per cent. It is fine and fashionable to argue for professionalising bank boards but quite another to deprive promoters of a locus standi, which is what the RBI is straining to get at. For quite a while now the RBI (at least, privately) has not been comfortable with the operations of the small, and mostly unviable, cluster of private sector banks in the South. These outfits will find it hard to continue in their old ways when they have to comply with Basel II norms. But the private banks, serving a niche population (a handy banking cliché), have not been thinking of change simply because quite a few are family run. They (especially the older breed) will bristle at any suggestion of becoming irrelevant having abiding faith in their marginal existence. In serving up a sheaf of unwelcome circulars, the RBI is denying the owners the chance to sit across the deal table for a business lunch. By rendering them hors de combat, the RBI can take the initiative to consolidate private banks though this can take time as promoters may not oblige by quickly unwinding their stake.

Not surprisingly, the queasy set of rules do not apply to the government banks with New Delhi holding 51 per cent stake as the RBI appears to have a fetching faith in the bureaucracy. It will be hard for the RBI to justify its disturbing bias as government banks have turned viable at a huge cost to the taxpayers apart from regulatory relaxations. Moreover, mergers of public sector banks have to abide by a tedious process that includes the mandatory nod of Parliament. The RBI's reason for turning overly intrusive is that banks are "special" in that they accept and deploy public deposits. That is not logical enough as corporates also accept fixed deposits from the public to fund investment plans. By continuing to be cold to banking reforms, the RBI is only making way for active intervention by New Delhi and that, indeed, may be a fair response.

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