Allowing bank mergers would boost local consolidation

NEW DELHI: The finance ministry and the Reserve Bank of India (RBI) are working on new guidelines that will ease mergers and acquisitions (M&As) among banks, which would pave the way for the creation of stronger entities through consolidation and for foreign banks to strengthen their local presence.

“We are in discussions with the RBI. The idea is to make the norms easier and remove the irritants, which lead to delay in such transactions after regulatory approvals have been obtained,” a finance ministry official said.

RBI governor Raghuram Rajan had, last month in Washington, said that the banking regulator was planning a significant change in the rules to allow foreign banks to have a much bigger presence in India than they currently have and that they may even be allowed to acquire domestic lenders.

Mergers and acquisitions in the banking space have been few because of strict rules governing them. The last such exercise was the troubled Bank of Rajasthan’s absorption by ICICI Bank in 2010 in a union that was brought about by the RBI.

Among state-owned entities, the last one was State Bank of India absorbing subsidiary State Bank of Indore, also in 2010. “The new norms will also be applicable to all banks including state-run banks but within the existing framework,” the official said.

The government has often voiced the need for consolidation to create stronger and bigger banks but has maintained that it will not force state-run lenders into any mergers. Any such move would have to be initiated by the banks themselves and the government will act as a facilitator, the finance ministry has maintained.

India has 26 state-run banks, 1,545 urban cooperative banks and 64 regional rural banks. It has 24 private sector banks, a number that’s expected to rise once new licences are issued. RBI is currently evaluating applications.

The ministry has already asked the Competition Commission of India (CCI) to exempt banking mergers and acquisitions from its purview. The ministry of corporate affairs (MCA), however, is not inclined to provide such exemption, an official said.

“We have sent our comments to the finance ministry,” the corporate affairs ministry official said, adding that CCI’s role is to ensure that mergers, compulsory or otherwise, do not have an adverse effect on competition. CCI comes under the administrative control of the corporate affairs ministry.

In February, the government exempted mergers and acquisitions plans for loss-making and failing banks from the purview of CCI for a period of five years.