The Hindu Business Line : Many old banks have only one option: Join hands or sink

THE Finance Ministry and the RBI have in principle agreed to take consolidation of Indian banking on the agenda for financial sector reforms. Not that anything will take place immediately; rather, top officials in rounds of discussion have found merit in trying to seed the idea by mulling over the strategy before specifying the ground rules.

Consolidation of the banking system into a few dominant players could become the driving idea when the third phase of financial sector reforms takes place hopefully after a new government comes into power. For long, revamping of the banking system as suggested by the Narasimham Committee (first edition) has only been a talking point and now could become a working point.

Going by the little information trickling out of the banking system, the Finance Ministry and the RBI could be looking into not only merger of public sector banks or SBI and its associates; it could flow over into integration of old and private sector banks or public sector banks with private sector players as the conviction is gaining ground that a crowd of banks is most unwelcome on Mint Street.

Apart from various laws governing public sector banks and the recent rules on takeover of private banks, the government will be looking into the risk management capacity of various players to make sensible mergers. Most banks are early players in the adoption of risk management rules adopted by international giants and the RBI will be looking at other risk profiles of each bank like interest rate risk, liquidity risk and the rest.

The very idea having clinched a place in the minds of government managers is being looked at with some surprise, as there could be many hurdles. The Narasimham Committee in 1991 had said, "There should be 3-4 large bank including the SBI which could become international in character, 8-10 national banks with a network of branches throughout the country engaged in universal banking, local banks whose operation would be generally confined to a specific region and rural banks whose operations will be confined to rural areas only."

In coming days, working groups could be formed to study the 1991 bookmark on Indian banking and officials admit there could be deviations. Even after amendments to banking Acts, the government with a 33 per cent holding in nationalised banks, could push for regrouping of entities with the SBI and its associates forming a single entity.

There is a bleak chance of government or RBI parting with its majority stake in SBI. There are too many small players in the private sector (old and new) and most will have to pack up or hold hands in the future when competition gets scarier.

At one point of time, Mr S.P. Talwar, Deputy Governor, RBI, had talked of making into one the too many old private entities dotting Kerala and Tamil Nadu. But then he was not allowed to move ahead. The RBI experiment with licensing new banks has not had an impressive track record and their actions have often agonised the central bank.

The Narasimham Committee (second edition) makes the important point "that merger of public sector banks should emanate from the managements of banks with the government as the common shareholder playing a supportive role. Mergers to be meaningful should lead to the emergence of a stronger unit by way of increased capital base and organisational strength."

It will not be surprising if the initiative starts from the boards of government banks, as that is what the government and RBI desire.

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