Policy on M&As in banking sector soon

The Indian government will soon unveil a policy guideline to encourage mergers and acquisitions in the Indian banking sector, union minister of state in prime minister's office Prithviraj Chavan said.

He was speaking at the inaugural address at the conference on 'Global Banking: Paradigm Shifts', organised by the Federation of Indian Chambers of Commerce and Industry (FICCI) on Monday.

The policy is expected to provide the impetus for growth in the wake of the government's decision to retain the public sector character by capping the public holding of capital, Chavan added.

Further, he said, the rapid technological advances in the sector also spelt the need for a new breed of regulators and inspectors to keep amateur hackers and professional techno-thieves at bay.

He said, the government will however not force mergers and acquisitions. "We will support M&As that ensure increased banking reach, better synergy and those that ease the stressed assets of weaker banks." However, he did not specify a time frame for the new guideline, adding it will be announced soon.

He clarified that the move to formulate such guidelines was fuelled by the fact that present day banking required a smaller number of very large banks rather than a pack of small banks. Also this will help banks raise capital for growth from the financial market without further liquidating the public sector character in ownership and management, he said.

Other issues that need attention now are policies for long term lending "" with the dismantling of development financial institutions "" and legislation on the lines of lapsed bill on co-operative banks reforms, he said. The co-operative reform bill will soon be reintroduced if Parliament is allowed to function, he added.

Chavan, stressing on the emerging complexity of banking business said, the sector aspiring to go global and will have to properly assess capital and credit risks. He added that the proposed Basel II framework attempts to focus precisely on the regulatory capital that banks must hold to cater to complex risks.

Earlier in his theme address, State Bank of India chairman N K Purwar said, while adoption of Basel II norms will be expensive initially, the banks that implement them will enjoy a head start and reap benefits in the long run.

The adoption of such norms will back the global aspirations of banks. He said, "Sooner or later the growing institutions will reach saturation point domestically and there will be little choice but to move overseas. Most banks started testing foreign waters long before they reached saturation."

However, the global foray will achieve the desired objective only if the banks consolidate here, he said. "Banks need to compete for a piece of the international markets. But to do this, they need to have the size advantage that most foreign banks have."

This imperative will ensure the re-emergence of mergers and acquisitions.