Financial Times

Indian banks urged to merge
The following article was sent to us by a top Colombo banker who suggested that Sri Lanka should take a cue from India in bank mergers
NEW DELHI - Taking a leaf from moves to consolidate the banking sector in Singapore and Malaysia, the Indian government is prodding state owned lenders to boost their competitiveness by merging to become larger players or buying out smaller rivals.

"Consolidation, competition and convergence are the three mantras being followed by banks the world over, Finance Minister P. Chidambaram said.
"Indian, including its public sector banks, cannot be immune to that," he said in parliament recently.

He said given India's aspirations to be an economic power, the country needed five or six banks that would rank among the top 100 in the world.
Currently, only State Bank of India, which ranks 82nd, figures in that list.
India counts 27 banks in the state sector, led by State Bank, the former Imperial Bank, which has the largest network in the country.

Together they account for 800,000 workers spread over 47,000 branches in the nation of one billion. Most of the banks were run privately until the late prime minister Indira Gandhi's socialist policies triggered a wave of nationalisation in the early 1970s.

Soon, many profitable banks turned "sick" as bankers were forced to cater to government directives ranging from concessional interest rates to the poor to outright doles ladled out by politicians.

While "loan fairs" are unheard of these days and India is now widely acknowledged to have a well-regulated banking sector, Mr. Chidambaram's anxiety is that state-owned lenders, with the exception of State Banks, do not have the size or scale to compete internationally.

They also need to meet rising competition at home from private lenders and foreign banks such as ABN Amro that are poised to get bigger access to the domestic market.

ABN Amro, for instance, expects to have 3.5 million customers in four years from one million currently. Besides, banks need to prepare for enhanced capital requirements prescribed by the Bank for International Settlements that take effect in 2006.

Since Prime Minister Manmohan Singh launched economic reforms as finance minister in 1991, the country has gradually freed up several sectors of the financial industry.

Several private banks, including ICICI Bank, in which Temasek Holdings is an investor, and HDFC Bank have been licensed. The scorching pace of growth they have established is also setting new benchmarks in profitability and expansion for the domestic industry.

Mr. Chidambaram said India stood by its decision to allow overseas banks to own as much as 74 per cent of local private lenders such as ICICI, from the current 49 per cent. He said guidelines would be announced by the central bank before yearend. Still, investment bankers say they do not foresee any immediate flutter of merger and acquisition activity.

"We haven't had any specific mandate to pitch for," Mr. J. Niranjan, joint head of investment banking and M and A advisory at ICICI Securities, told The Straits Times.

"Even if the consolidation starts, it's not as though the number of banks will suddenly drop to 10. We might at best see four or five mergers in the nest year or so." One big worry for the government is how unions and the communist parties backing the coalition will react to banking consolidation. Mr. Chidambaram said that any merger will not hurt employment prospects.

(Singapore Straits Times)

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