You can bank on it

SMARTSHARE

Last Tuesday, 10 lakh-odd members of the United Forum of Bank Unions, mainly PSU bank employees, took part in a strike to protest recent government decisions to allow mergers and upto 74 per cent foreign holding in private banks.

The strike was hailed by the Left. CPI MP, Gurudas Dasgupta, who is a veteran bank union leader, suggested that there could be more strikes.

On Tuesday, only 50 of the 115-odd member banks participated in high-value cheque clearing. Volumes were thin in the debt and forex markets and there was a run on ATMs.

On the stockmarket, bank shares fell amidst rumours that the government would reconsider pending PSU bank mergers. Banking shares lost disproportionate ground through a very bearish week.

The worst-affected were PSU banks linked to M&A rumours. This includes the Union Bank of India and Bank of India (BoI), which were due to be merged to create India's second-largest commercial bank.

The new entity, to be christened "Union & Bank of India", was expected to be launched on April 1. A merger of Dena Bank and Bank of Baroda to create another giant was also being talked about. Both these mergers may now be on hold.

The IDBI-IDBI Bank merger, however, should go through. It's also not clear whether there will be an impact on the contemplated PNB-IFCI merger and the amalgamation of Oriental Bank of Commerce and Global Trust Bank appears a fait accompli.

The urgency to clean up the sector is driven by the need to comply with Basel II norms and capital adequacy norms by 2006-07. The current state of bank balance sheets suggests that the sector as a whole will need to raise around Rs 7,000-8,000 crore as subscription capital to meet Basel II.

Several PSU banks such as PNB, Andhra Bank and OBC are in various stages of IPOs designed to raise capital adequacy levels. The Budget also promises to ease norms for banks to issue preference shares, which count as Tier I capital, while being effectively secured-debt instruments.

The stark truth is that, unless FII limits are raised and sick banks strengthened through mergers, there is no way Basel II can be complied with by the sector as a whole. Unfortunately, most PSU banks suffer from over-manning and any mergers will be accompanied by VRS schemes.

There's been a clear progression on the stock market. In November 2003, the Securitisation Act made it easier for banks to foreclose on bad loans and bank share prices started climbing. Since then, a low-interest regime, high economic growth and high retail growth has kept bank stocks on the boil.

Is the party over? Well, if push comes to shove, I suspect the Left will not walk out of the political alliance. But PSU bank shares will now be at a discount to private bank shares and bank shares as a whole, might start underperforming the rest of the market.

The Sensex dropped 3.85 per cent last week while the BSE banking index dropped over 7 per cent. That about sums up the story for the moment. But there could be an equally dramatic pullback if the UPA rides out the opposition and stays committed to its banking-related measures. If another 10 per cent is shaved off current bank prices, the sector will start looking attractive.