The Hindu Business Line : Plan to identify `weak' private banks dropped

THE Reserve Bank of India's proposal to draw up a list of `weak' Indian private sector banks in which foreign banks could be allowed to have a controlling stake has been dropped.

The RBI and the Ministry of Finance have now concurred that drawing up such a list might not be in the best interest of the banks figuring in the list. It is felt that putting a tag of `weak' could create panic among depositors leading to a run on the bank.

"We are in agreement with the RBI that coming out with such a list might be detrimental to the interest of the banks that are identified. The depositors might take a wrong cue from such a move. Hence, the idea has been dropped," a senior official of the Finance Ministry said.

In its guidelines on ownership and governance in private sector banks released earlier this year, the RBI had said it would identify banks that need restructuring and would allow foreign banks to acquire controlling stake in them.

The guideline said, "In order to allow Indian banks sufficient time to prepare themselves for global competition, initially, entry of foreign banks will be permitted only in private sector banks that are identified by the RBI for restructuring. In such banks, foreign banks would be allowed to acquire a controlling stake in a phased manner."

Official sources said the RBI had started harbouring doubts over the sagacity of such a move soon after it came out with the guidelines.

It was felt that foreign banks interested in takeovers in the Indian market had enough expertise to identify potentially weak banks.

"People who are in the sector have their own mechanism to identify the weaker banks," the official said.

He said the banking regulator and the Government would like to limit its role towards ensuring that an acquisition of a bank considered `weak' should be in the interest of all the stakeholders of the target bank.

In its ownership guidelines, the RBI said the programme for increased presence of foreign banks in the country would be split into two phases - the first one being March 2005-March 2009 and the second one being the period post-March 2009.

It said that during the first phase, acquisition of controlling stake by a foreign bank in an Indian private bank would be limited to those that are identified for restructuring. For other banks, the threshold limit of 5 per cent would hold during the period, beyond which specific regulatory approval would be required.

After March 2009, foreign banks would be allowed greater play in the banking sector.

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