The Hindu Business Line : Drawing on reforms

BANKING is fast emerging as the Finance Minister's pet sector. On Monday, he showed his penchant for forcing the industry through structural changes. He seems intent on unleashing the three C's on the industry — Competition, Consolidation and Convergence.

From the banking industry's perspective, however, the emerging landscape is full of high risks as well as opportunities, especially for public sector banks. Consolidation in the form of mergers and acquisition, however, appears a long way away with the RBI firmly set against any such denouement.

In terms of budgetary measures, the striking feature is that the pre-emption of resources by the Central Government is going down. The excess cash with banks will need to deployed elsewhere.

The Central Government is manoeuvring banks to lend to two sectors - Agriculture and State Governments. Both these sectors are riskier compared to Central Government.

In addition, the larger liquidity in the system will need to be channelised towards project finance. The changes bring forth an opportunity to earn higher interest and fee income.

The infrastructure thrust provided by the Budget and the proposal to utilise foreign exchange reserves create the enabling environment for banks to lend and earn more. The threat of being submerged by bad loans will hang over their heads, however, especially if their risk assessment skills are found wanting.

The Budget's measures will also help banks manage their resource mobilisation efforts better. In this regard, the reduction of tax incentives, such as the removal of section 80-L, for small savings is a positive factor. This would help the competitiveness of the banking sector in pricing its term deposits.

The promised amendment to allow banks to issue preference shares as well the provision of legal framework for securitised debt also provide much needed latitude for banks to diversify their sources of funds.

What the Finance Minister has left unsaid is also interesting. Though he referred to consolidation in his speech, he did not pursue many measures such as:

Enhancing the voting rights for promoters of private sector banks

Amendment of Acts to enable SBI to access overseas capital as well as merge with its associates

Mergers of public sector banks with other private sector banks

In contrast, the RBI has now come out with guidelines that seek to scuttle consolidation of share ownership. According to the guidelines just announced, no entity can hold a stake of more than 10 per cent in a private bank.

In addition, no bank having a presence in India can hold more than 5 per cent in any other private sector bank. Consolidation of market shares is, however, inevitable. Some weak banks may well be faced with stagnation or may go down the drain.

Suresh Krishnamurthy

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