Banks consolidate, credit gets dearer

A death and a rebirth. This sums up the year for the banking sector. Seeds were also sown for a few mergers that will see the light of the day in 2006. Then, there was controversy over a foreign bank's acquisition of stake in a local private bank.

At the macro level, the year will, however, be remembered for the reversal of the soft-interest rates trend. Yes, the rates have started going up even though the Reserve Bank of India (RBI) has not touched the benchmark bank rate, which continues to be pegged at its three decade-low of 6 per cent. The regime of cheap money is over.

Global Trust Bank (GTB), a new generation, private-sector bank, had to die an unceremonious death after its net worth turned negative. Its stakeholders were left without a penny after GTB was merged with the Delhi-based Oriental Bank of Commerce (OBC).

The banking sector regulator did the match-making with electrifying speed. On July 24, GTB was placed under a moratorium for three months, and 48 hours later it was merged with OBC. Post merger, the 850,000 depositors of GTB now bank with OBC.

The employees have come into the fold of the public-sector bank with an assurance that there will not be any change in terms and conditions of employment for three years.

GTB employees may not be extremely happy in the public-sector fold, but the executives of Industrial Development Bank of India (IDBI) have reason to smile.

Following on the footsteps of ICICI, this term-lending institution transformed itself into a commercial bank in October. Following the conversion, IDBI received a Rs 9,000 crore largesse from the government to clean up its balance sheet.

It will grow bigger as its offspring IDBI Bank will soon be merged with it. M Damodaran, IDBI chairman, is cherishing a dream of acquiring a public sector bank, adding more flesh to the balance sheet and giving the State Bank of India a run for its money.

Damodaran's dream is not a reverie as the finance ministry has started talking about consolidation in the banking sector. On the drawing board is a proposal to merge Bank of India and Union Bank of India.

The proposed merger will kick off a huge ruckus in trade union circle but nothing can beat the controversy surrounding HSBC's acquisition of a UTI Bank stake.

The RBI first allowed it to pick up a 20 per cent stake and later changed its mind and limited it to 14 per cent. In draft guidelines on ownership of private banks, the RBI capped a foreign bank's stake in an Indian private bank at 5 per cent.

Ordinary people will, however, remember the year for only one reason "" the first sign of rise in interest rates. Home loans have already gone up.

Ditto for consumer and personal loans. With the RBI increasing the risk weight on retail loans and the rise in global interest rates, the year marks the beginning of the end of their honeymoon with cheap money.