The Hindu Business Line : Consolidating banks

The Finance Minister has stressed the importance of consolidation in the banking industry, which basically means merging some of the banks with each other so that the capital base and business of the new identity are enlarged. This is an unexceptionable objective and must be pursued without delay. An important reason for doing this is, as the former Governor of the Reserve Bank of India, Dr Y. V. Reddy, has been pointing out, one of the unanticipated consequences of the US banking crisis and the recapitalisation of banks there with tax-payers money. Simply put, US banks will emerge bigger and stronger. Given that pressure from the US to allow its banks to operate freely in India is only likely to grow, and given that it is only a matter of time before public sector banks come on to the sales counter, it makes perfect sense to strengthen them, first to withstand competition from the private sector, both Indian and foreign, and second, to be able to fetch a better price when government equity is eventually brought down to 33 per cent, as suggested by both the Narasimham Committees and accepted by everyone except the Left and some regional parties. Indeed, the need to consolidate cannot be seriously questioned even if the above pressures did not exist because if the economy is to grow at between 8 and 9 per cent over the next decade, India does need bigger and stronger banks which are necessary, though not sufficient, condition for achieving the target rate of growth.

That said, the Committee on Financial Sector Assessment (CFSA), whose report was jointly authored by the Finance Ministry and the RBI, has pointed to some practical considerations that need to be kept in view. Foremost amongst these is the need to bring all banks under a single banking legislation. Commercial banks are at present governed by the following statutes: Banking Regulation Act, 1949, Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970 and 1980, State Bank of India Act, 1955, State Bank of India (Subsidiary Banks) Act, 1959, Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003 and Companies Act, 1956. Such a Bill needs to be prepared and brought forth without delay.

At the same time, the gains from consolidation and the synergies needed should be clearly quantified. As the expert panel for the CFSA pointed out “consolidation will prove useful only if certain enabling conditions, such as progress in terms of industrial relations and human resource issues, are adequately addressed.” In short, the Finance Ministry needs to get cracking straightaway. It is no longer a question of what but how.

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