Business Standard (‘RBI or Comp Comm?’, Sept 22) supports the RBI suggestion that bank merger regulations be exempted from the purview of the Competition Act, 2002, an issue which was also recommended by the joint Ministry of Finance-RBI Committee on Financial Sector Assessment in March, 2009. RBI’s request is understandable given that the banking sector’s stability is critical for the whole economy, and the fact that there are too many banks in the public sector which need to be consolidated.
A distinction should be made between prudential regulation of banks by RBI and competition regulation of the whole economy, including the financial sector, by the Competition Commission of India (CCI). Prudential regulation is largely centred on laying and enforcing rules that limit risk-taking of banks, ensuring safety of depositors’ funds and stability of the financial sector. Thus regulation of M&As by RBI would be determined by such benchmarks. Competition regulation of M&As in the banking sector, on the other hand, is aimed at ensuring that banks compete among themselves in fighting for customers by offering the best terms, lower interest rates on loans and higher interest rates on deposits and securities. While the CCI does not have either the expertise or the remit on prudential regulation, RBI does not have the expertise or remit to regulate anticompetitive behaviour.
Studies in the banking sector have found a negative relationship between an increase in the level of concentration and savings deposit rates, and a positive relationship between an increase in concentration and an increase in interest rates and accompanying conditionalities.
The International Competition Network (ICN), the global association of competition authorities, calls for application of general competition rules to the banking sector by competition authorities in parallel to the rules enforced by the central bank. This practice is also followed by almost all countries with competition laws, save for few, but qualified, exceptions.
In Turkey, the competition law is not applicable to the banking sector, but only if the total assets of the banks to be subjected to merger do not exceed 20 per cent. In Italy, although the competition law applies to the banking sector, the provisions are enforced by the central bank. In Brazil, financial institutions are exempted from competition laws, and the central bank is expected to administer its own competition rules in the sector. The US situation is also interesting; although banking mergers are exempted from competition laws, once the relevant agency (there are four of them, including the Federal Reserve) has approved a merger, the Anti-Trust Division of the Department of Justice has a 30-day post-approval period in which to file a suit to block the transaction. Parties are barred from consummating the merger once a suit is filed until a federal district court conducts a review of the transaction.
In the case of failing banks, unquestionably the mergers are allowed swiftly as happened in the case of Global Trust Bank in India, which was taken over by Oriental Bank of Commerce in 2004. There can also be a one-time exemption from competition rules allowed in specific cases, as happened in the UK in 2009 when Halifax Bank of Scotland was merged with Lloyds TSB after the earlier turned turtle, following the financial crisis.
Pradeep S Mehta and Cornelius Dube, CUTS International
