The Hindu Business Line : UWB and issues of bank rescue

An index of financial and non-financial criteria should be developed to identify banks that are capable of acquiring sick banks and resurrecting them in the larger interests of the public.

After giving it a long rope, the Reserve Bank of India has placed United Western Bank (UWB) under moratorium up to December 1 for safeguarding the interests of the depositors. The bank has been under monthly monitoring since June .

The moratorium came after UWB reported total losses of Rs 6.08 crore for the quarter ended June 2006. Its capital adequacy ratio was at -0.3 per cent, whereas its non-performing assets (NPAs) stood at 6.16 per cent. The action that followed the moratorium was mainly in the form of expressions of interest by some 14 banks, which include foreign outfits such as Citibank, for acquiring UWB.

Financially it may be weak, but UWB has a strong presence in Maharashtra. With 230 branches in the State and over 20 in Mumbai, taking it over would mean access to quite a few rural centres. This should be especially attractive for both private and foreign banks, many of which were recently refused permission to expand further. Public sector banks such as Canara Bank, which do not have a large network in the State, would also be interested. ICICI, Canara Bank, Federal Bank and SICOM (State Industrial and Investment Corporation of Maharashtra) have also expressed interest in taking over UWB.

Norms for acquiring banks

Any shareholding entity that has had a say in the governance of the ailing bank should not be allowed to bid for it. Take, for instance, the stance taken by the Maharashtra Government. The State Finance Minister has been arguing that takeover of UWB by a bank from another region would mean dilution of the "Maharashtrian" character of the bank. And, hence, it would be better that the State Government infused capital into the bank through SICOM. SICOM, the State's premier body for attracting FDI, is a major shareholder with a 10 per cent stake in UWB. This argument is flawed. A bank has no other character than a financial one. Would a depositor or a shareholder really worry about which region his bank belonged to if it were performing well?

Raising the "Maharashtrian" bogey simply befuddles the issue and gives moral and social overtones to what is purely a financial problem. As SICOM has been involved in UWB's governance, it should steer clear of taking it over. There has been no time so far to look into which loans have gone bad, and why and how they were sanctioned in the first place. It also cannot be assumed that nationalised banks are a better bet when it comes to acquisition. As there is government stake in the PSBs, it is assumed that the interest of depositors will be protected if a PSB acquired an ailing bank. The Finance Ministry has also been hinting at consolidation of PSBs with smaller entities.

Chance to others

However, acquisition decisions should be made purely on financial considerations. If a small, private sector or a foreign bank betters PSBs in terms of capital adequacy ratios, credit growth, etc., there is no reason why it should not be given a chance at acquiring an ailing bank. An index of financial and non-financial criteria should be developed to identify banks that are capable of acquiring sick banks and resurrecting them in the larger interests of the public. Whereas the financial criteria will focus on the usual parameters such as CAR, etc., the non-financial parameters should include productivity, HR policies, adherence to corporate governance, and so on.

The RBI should not shy away from such a reform move even if it means side-stepping certain norms. It is time the deserving got a chance, rather than merely go by the rules and be overcautious.

(The author is Economic Advisor to the Mahratta Chamber of Commerce, Industries and Agriculture, Pune. E-mail: manasip@mcciapune.com.)

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