Tamal Bandyopadhyay: In the solution lies the problem

The Habeeb Towers on Anna Salai Road in Chennai is humming with activity these days. This is the headquarters of the 32-year-old Bharat Overseas Bank, which is readying for its initial public offer (IPO).

In many ways, this bank is unique among the old private sector banks. It's a private bank in which the largest stake holder is a public sector bank.

The Chennai-based Indian Overseas Bank (IOB) holds 30 per cent of Bharat Overseas Bank. Two other large stakeholders are The Bank of Rajasthan (16 per cent) and Ing Vysya Bank (14.66 per cent). Federal Bank, Karur Vysya Bank and South Indian Bank hold around 10 per cent each while Karnataka Bank holds the rest.

Bharat Overseas Bank was born in 1973 as a special purpose vehicle (SPV) to anchor Indian banks' overseas operations. The immediate provocation was the Thailand government's reluctance to allow a state government-owned bank to have a branch in Bangkok.

Following the nationalisation of Indian Overseas Bank in 1969, the Thai authority directed it to close its Bangkok branch. The Indian government took up the issue, and staved off the closure for four years, but in 1973, following an RBI initiative, six private banks came forward to join hands with IOB, and Bharat Overseas Bank was born with a Rs 50 lakh equity capital.

Bharat Overseas Bank needs a public float to have a net-owned fund of Rs 300 crore to conform to the RBI's regulation on the capital requirement of a commercial bank.

In March this year, it had an equity base of Rs 15.75 crore and a networth of Rs 198 crore. Second, the banking regulator wants a diversified holding pattern for commercial banks.

Since the public float will add to the supply of fresh banking stocks to the market where the demand for such paper is enormous, Bharat Overseas Bank will now have to negotiate with prospective predators.

Most of the listed old private sector banks run this risk. An Australian fund recently wanted to acquire a substantial chunk of Karur Vysya Bank by buying its stocks from the market. Ditto for a well-known stock market broker who has been holding close to 5 per cent stake in Karur Vysya Bank.

Both of them have been prevented from doing so by the RBI which does not allow a single entity to hold more than 5 per cent stake in a bank without its prior permission. Once such restrictions are waived, Karur Vysya can be bought overnight at a cost which is less than the quarterly profit of a relatively small foreign bank as its market capitalisation is just about Rs 900 crore.

The foreign institutional investors (FIIs) stake in Karur Vysya is 13.82 per cent "" the highest among the old private sector banks if one does not take into account Ing Vysya (which for all practical purpose now functions as a foreign bank).

The old private banks are striving to become more efficient by building technology platforms, to cut transaction costs. Most of them are putting core banking solutions in place. Karur Vysya, for instance, has recently given a seven-year term loan of around Rs 200 crore to Neyveli Lignite at 7.75 per cent with a consortium of lenders like State Bank of India.

It has 163 ATMs "" the highest among the old private banks "" besides 233 branches and 80 per cent of the bank's transactions are done through ATMs. As a result of this, it has been able to cut the operational cost by about Rs 20 per transaction. What's more, by tying up with Visa, it is now earning a hefty fee income by allowing other banks' customers to use its ATMs.

However, efficiency alone cannot keep the predators at bay. Banks like Bharat Overseas Bank, Karur Vysya, Karnataka Bank and Federal Bank all need to have a larger capital base, build bigger balance sheets and increase their market capitalisation manifold.

This, of course, is easier said than done. One way out for the small banks is to initiate a dialogue among themselves, to build a loose consortium to get a bigger chunk of the banking business. At a later stage, this arrangement can be converted into a formal merger.

This way, the old private banks can become bigger without compromising on their culture and identity. Otherwise, some of the efficient niche banks will be gobbled up, as and when the RBI allows such moves.