The Hindu Business Line : Centre to encourage bank mergers — `No divestment of Govt stake; PSBs can tap markets'

(From left) Mr A. K. Purwar, Chairman, SBI; Mr Prithviraj Chavan, Minister of State in PMO; and Mr Yogendra K. Modi, President, FICCI; at a banking conference in Bangalore on Tuesday - - G. R. N. Somashekar

Bangalore , Sept. 14

THE Centre has ruled out any divestment in the public sector banks and sought consolidation to make them internationally competitive.

Speaking at the FICCI conference on `Global Banking: Paradigm shift', Mr Prithviraj Chavan, Minister of State in the Prime Minister's Office, said: "There will be no divestment of Government equity to 33 per cent. Public sector character of the banks will be retained." However, he added, "Banks will be given freedom to tap the capital markets."

In addition, he said the PSU banks would be given full managerial autonomy to build a world class banking system. Some would also be permitted to operate in the international banking markets. This was in line with the guidelines of the World Trade Organisation when the banking sector would have to be opened up.

For operating in the global markets, Mr Chavan said, banks would have to be merged to create large sized entities. He said for building a global brand for Indian banks, it was preferable to have a few large banks than a large number of small banks. Therefore, such mergers would be encouraged among the strong banks themselves, he added.

However, Mr Chavan emphasised that bank managements would be given freedom on the merger proposals. Creating such large banks would ensure that they were not burdened by stressed assets, he said. This was especially so if they were to comply with the new Basel II capital requirements as prescribed by the Bank for International Settlements. Only banks that become Basel II compliant would be allowed to enter global banking markets, he said.

But the Government was also committed to protecting the interests of the depositors, he said. Consequently some mergers would be permitted between the strong and weak banks. These banks, he said, would be given a relaxed deadline for becoming Basel II-compliant. This was identical to the approach adopted by the US where only the large banks, with a global presence were made Basel II-compliant. The smaller domestic banks were exempted from the high capitalisation norms.

He said that the Government favoured greater supervision of the banking sector and for optimal regulatory regime. He said some changes would have to be made in some of the statutes and these would be taken up.He said that despite the creation of large banking entities, the financial institutions would have a defined role to play. Mr Chavan also noted that the IDBI, despite its conversion into a universal bank, would continue its role as the lead domestic financial institution.

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