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M. Sitarama Murty

While piloting the SBI (Subsidiary Banks Laws) Amendments Bill 2006 in Parliament, the Finance Minister had declared that the merger of the associate banks with SBI was not being considered as these banks had special regional character and the aspirations of the people of the regions were involved.

A good opportunity to signal the beginning of a process of consolidation and give a thrust to banking reforms has been frittered away.

Recently, in an interview, the Finance Minister stressed ad nauseam, the need for consolidation in banking industry.

He felt that in a global context the Indian banks were small in size and would lose out in competition! He, however, left it to the banks and unions to initiate steps in this direction, hinting that the Govt. would not be able to do any thing due to political compulsions.

It took nearly 50 years of procrastination to carry out some amendments to the SBI (Subsidiary Banks) Act of 1959, the State Bank of Saurashtra Act of 1950 and the the State Bank of Hyderabad Act of 1956.

The snail pace at which the Government machinery moves is illustrated by section 25(a) of the 1959 Act, which says, ‘the Chairman for the time being of the State Bank, ex-officio.’

What was meant to be an ad-hoc and temporary arrangement, took 48 years to be modified. Even the present exercise fails to meet several basic requirements.

While some of the associate banks are small, which in the Minister’s own words were sure candidates for merger, others are larger than some of the nationalised banks.

Thanks to their subsidiary status and the historical policies pursued by the parent, they remained small in the shadows of the giant, while the peers and some, even smaller, over took them and grew 10 or 20 times bigger!

It is another story that despite all the odds, the associate banks have out performed the parent and several nationalised banks in efficiency parameters and walked away with awards.

The occasion for amendments, that took more than two decades to materialise, provided a good opportunity to merge the associate banks with SBI or all of them with one amongst them, creating the second largest public sector bank (PSB). If, however, it was the concern and consideration for the sentiments and emotions that weighed against the merger and the Government wanted the associate banks to grow stronger to take care of the regional aspirations, they should not have been content with some cosmetic changes.

In most Sections of the 1959 Act, the words “…with the approval of SBI and in a manner as the SBI may, with the approval of the RBI (or GOI), direct …” appear. Virtually, associate banks could do nothing without a nod from the parent. One clause would have sufficed to say so. The legacy of the ‘Imperial’ Bank must have influenced the law makers of the time.

As a regulator, the RBI has wide powers. In case of the associate banks, the parent assumed the role of a second regulator, combining the role of owner, manager and regulator. An owner likes to retain control of matters relating to capital structure, constitution of the board and broad business policies.

But in the case of the associate banks, who are in the same business of banking and competing with the branches of SBI and inter-se, many of the provisions in the Act inhibit initiative, restrict operational freedom and delay decision making.

The Act reduced the status of the associate banks to that of glorified branches of SBI, though some regulations have been liberalised in the last few years.

Section 24 enables the parent to give directions to an associate bank on any of its affairs or business and the associate banks are bound to comply with the directions and instructions so given.

The owner is represented on the boards with three directors besides the chairman. The boards are responsible for running the banks. But they have virtually no say, some of the provisions reducing them to mere rubber stamps. This is a case of accountability with no authority.

(To be continued)

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