The Hindu Business Line : ‘RBI alone should take final decision on M&As among banks’

New Delhi, Nov. 30 The Reserve Bank of India (RBI) alone should take the final decision on allowing mergers and acquisitions (M&As) between banks, and the opinion of the Competition Commission should be made available as an input to the central bank. This is the view of an advisory panel appointed by the committee on financial sector assessment (CFSA), to look at financial sector stability.

In September 2006, the Government and the RBI had constituted the CFSA to undertake a self-assessment of financial sector stability and its development.

The Competition Commission has been given powers to even nullify mergers & acquisitions (M&As), and the opinion of the RBI has no binding effect on the Commission. Moreover, before entering into any M&A, the entities involved in the transaction have to give notice to the Commission and wait for a maximum period of 210 days.

The advisory panel has pointed out that the current provisions of the Competition Act are likely to raise issues of a regulatory overlap/conflict in future. It can also pose a serious problem to the financial sector because the RBI may have to take quicker decisions in situations of compulsory amalgamations to avoid bank failures. “Waiting for the mandatory 210 days would be impractical,” sources in the advisory panel said.

Compulsory amalgamation measures, in the case of failed banks, enable the retaining of public confidence in the systems and avoid systemic risks.

The compulsory amalgamation of a bank with another bank is based on a scheme prepared by the RBI and sanctioned by the central government. An amalgamation scheme for a failed banking company with another banking institution is preferred rather than a reconstruction scheme.

“The flexibility available with the RBI in permitting M&As may get weaker under the provisions of the Competition Act. It is being felt that RBI’s powers should not get diluted or weakened and the current status must continue,” sources said.

Currently, the law provides for voluntary amalgamation at the instance of the banks and compulsory amalgamation at the instance of the Reserve Bank. Voluntary amalgamations could be resorted to by banks for various reasons including avoiding the risk of insolvency. The RBI is empowered to sanction such voluntary amalgamations.

In recent years, private sector banks have shown keen interest in taking over weak banks through the process of voluntary amalgamations.

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‘RBI alone should take final decision on M&As among banks’