IBA moots corporatisation of public sector banks

The Indian Banks' Association (IBA) is pushing for corporatisation of public sector banks (PSBs) as a precondition to the consolidation in the industry.

This will pave the way for the government to unlock the value of its holding, in the sense that it can sell its stake in state-owned banks, which is not permitted under the current legislation.

Corporatisation of state-owned banks is seen as one solution to the legal bottlenecks that need to be addressed for paving the path for mergers of PSBs, said H N Sinor, chief executive, IBA.

"Corporatisation of state-owned banks can hasten the process of consolidation since the Companies' Act helps facilitate merger between two entities," he added.

Nineteen nationalised banks are governed by the Bank Nationalisation Act as well as the Banking Regulation Act, while the State Bank of India has a separate Act for itself.

The Bank Nationalisation Act has a provision for the merger of two banks but the government cannot unlock the value of its holding under this Act.

The government also cannot divest its stake in banks and listed banks have all taken the route of expansion of equity to bring down government holding.

Private banks, on the other hand, are governed by both the Companies' Act and the Banking Regulation Act, thereby facilitating mergers.

Enabling the government to sell its stake in PSBs, the Centre will be able to bring down the fiscal deficit. Analysts state that reducing government holding can help raise Rs 20,000-30,000 crore from the banking sector alone.

IBA, entrusted with the task of facilitating mergers between public sector banks, is looking into the legal, regulatory and procedural issues.

"The committee is examining various aspects and corporatisation of banks is seen as one of the solutions. We are examining how best possible it is to undertake amalgamation of public sector banks, what legal amendments are required and whether consolidation in the sector can be achieved without making much amendments," said Sinor.

Finance minister P C Chidambaram, while addressing bankers last Saturday at IBA's annual general meeting, too advocated that "consolidation is the name of the game in each sector".

He further reassured bank chairmen that the government would respond quickly "by thinking global and acting locally" to help them achieve size.

The second Narsimha Committee Report had recommended that government holding in banks be brought down to 33 per cent. However, this proposal has been hanging fire in the face of stiff political resistance.

As banks need capital to meet Basel II norms and rebalance their portfolios as the soft interest rate bias transits to a more neutral level, the real trigger for mergers will be the need for capital.

Regulatory issues also pose a challenge as the Reserve Bank of India (RBI) will need to permit rationalisation of branches since a merger between two state-owned banks with presence across the nation will result in an overlap of branches.

"If the consolidation is triggered by enhancing geographical presence, there should be no problems. However, if it is to create bigger size, then the question is whether RBI will allow the rationalisation of branches," Sinor added.

The IBA is also looking into the issue of redundancy of employees following mergers. The question of cost burden of the merged entity and union issues will arise, said Sinor.