Tamal Bandyopadhyay: Consolidation drive

Business Standard explains how the RBI's attempt to put the banking sector in order will lead to a spate of changes in shareholding patterns.

On Tuesday, the Indian Overseas Bank (IOB) board met in Mumbai to pass a resolution on buying 70 per cent stake in the Chennai-based Bharat Overseas Bank. Since it has already held 30 per cent stake in this old private sector bank, once the regulatory nod is in place, it will acquire it and merge it with itself. While the IOB board was discussing the nitty-gritty of the buyout at its regional headquarters in Mumbai, a few kilometres away, the Reserve Bank of India (RBI) was presenting the regulator's side of the story on the proposed merger of yet another old private bank "" Ganesh Bank of Kurundwad in Maharashtra "" with the Kerala-based Federal Bank before the Bombay High Court.

Ganesh Bank, which has eroded its net worth through accumulated losses, was put under moratorium on January 7, Saturday, and the next Monday, the RBI announced its merger with Federal Bank. The Federal Bank board met on Sunday and approved a proposal to take over this bank. However, the promoters of Ganesh Bank challenged the RBI action and dragged the regulator to court.

These two incidents are indicative of the way the Indian banking sector will shape up over the next few years till April 2009 when it is expected to be opened up to foreign players, to have a free run on the turf. There will be many more mergers and acquisitions, particularly among the old private sector banks. And, there could be many more court cases as promoters of some of these banks will not hesitate to challenge the regulator.

This is because, all actions stem from two key decisions of the banking sector regulator. The RBI wants all old private sector banks to have a net worth of at least Rs 300 crore. Besides, it also wants all commercial banks to have a wider investor base with no single entity holding more than 10 per cent stake. In case of a banking entity, holding a stake in another bank, the cut-off limit is 5 per cent. However, there is no time frame to achieve these twin targets. The RBI has been holding discussions with each of the old private sector banks over the last one year or so to hasten the process. IOB's proposed takeover of Bharat Overseas Bank and the planned merger of Ganesh Bank with Federal Bank are the first of the two cases and many more such cases will come up as part of the regulator's exercise to put the banking house in order.

Apart from Ganesh Bank, which has zero net worth, there are at least 11 old private banks (see graphic) which have net worth less than Rs 300 crore. They need to infuse fresh capital and make huge net profit to shore up their net worth. Two of them, Sangli Bank and Ratnakar Bank, have less than Rs 50 crore net worth. Two other banks, Nainital Bank and Dhanalakshmi Bank have just over Rs 100 crore net worth.

Similarly, another 11 old private bank (not exactly the same set of banks), apart from Ganesh Bank, do not have a widely held stake-holding pattern. For instance, Bank of Baroda holds almost the entire stake in Nainitial Bank.

Then, the Aga Khan Trust holds over 68 per cent in Development Credit Bank; the Puris hold about 65 per cent in Lord Krishna Bank; and the Tayals over 44 per cent in Bank of Rajasthan. All these stakes will have to come down to 10 per cent.

Some of the new private banks also need to pare the promoters' stakes. For instance, both UTI and LIC need to bring down their stakes in UTI Bank to 10 per cent, while HSBC will have to pare it to 5 per cent. Similarly, the promoters of IndusInd and Kotak Mahindra Bank, too, will have to look for investors to offload part of their stakes in due course. The exceptions could be J&K Bank where the Kashmir government holds over 50 per cent stake and Ing Vysya Bank where the Dutch group holds close to 44 per cent. In the first case, a state government is not a corporate entity, and in the second case Ing raised its stake in the Bangalore-based private bank before the RBI norms came into effect.

So, IOB's acquisition of Bharat Overseas and Ganesh Bank promoters' moving court are just the trailers of an action-packed three years in the run up to the opening up of the banking sector. There will be placement of stakes with private equity investors, a string of public floats, a few shot-gun mergers, and possibly, more court cases challenging some of the mergers as some promoters may not like to lose their hold on the bank. Action in the secondary markets is already visible with ICICI Bank substantially bringing down its stakes in both Federal Bank and Sound Indian Bank through open market sales.