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Santanu Saikia & Anirban Nag
New Delhi/Mumbai, Jan 3: The centre is drawing up a blueprint for outright sale of its stake in the smaller, profitable public sector banks (PSBs) to the larger and more profitable ones. It is also considering reducing the Reserve Bank of India's stake in the State Bank of India (SBI) to below 51 per cent.
Going by the SBI Act, the RBI holding cannot be diluted below 55 per cent. The objective behind sale of the government stake in smaller banks to the bigger banks is to help create larger banking conglomerates in the country on the SBI model. This is in line with the recommendations of the second Narasimham Committee which has said that mergers should be encouraged between larger and smaller banks to take advantage of economies of scale and meet the global challenges. The government will consider the compatibility of financial fundamentals as the key parameter while reshuffling its stake in banks. It will also seek to merge large public sector banks with a strong regional base with smaller banks in thesame region in a bid to synergise operations.
North Block sources told The Financial Express that the blueprint is being evolved for a series of amalgamations in the banking sector--which will be completed through the sale of the government stake in one bank to another. The sale proposal seems to have emanated from within the finance minister's office. The banking division in the finance ministry is open to the proposal of crossholdings of the kind mentioned in the outright sale proposition.The special secretary (banking), finance ministry, CM Vasudev had told The Financial Express last month that the issue of crossholding could be looked into by the government to bring down the government's stake in public sector banks.
If the plan is okayed, it will essentially mean one public sector bank holding a substantial stake in another bank or banks. "But changes in the Banking Regulation Act (BRA) and certain other legal changes have to be made before the government is able to bring down its stake," Vasudev hadsaid. The finance ministry's main intention seems to be to completely divest its stake in some of the PSBs in order to garner more funds for fiscal correction. By completely divesting its stake in some of the PSBs, the government also ensures that some banks are sent outside the ``government system''. The proposed exercise is similar to the idea--recently floated and scotched in the petroleum sector--of selling IBP, a pure marketing company, to IOC or BPCL or HPCL.
The evolution of another set of government-controlled banks, large enough to take on the State Bank, is possible only through amalgamations which can take place through the outright sale route. Technically the government will continue to have a controlling stake through the divestment as most of the strong public sector banks are still controlled by the centre. A subsequent divestment of government stake in the larger (and stronger) amalgamated banks will fetch a higher price and funds for the exchequer. The finance ministry has still not firmedup plans for the sale of weak banks with a high proportion of non-performing assets to stronger banks. Such mergers will not be easy to organise in view of the adverse effects this could have on the balance-sheets of the stronger public sector banks. The sale process is expected to continue independent of the government's attempt to palm off weaker banks to others. The ministry has identified three weak public sector banks-Indian Bank, United Bank of India and Uco Bank-and has planned to float at least one asset reconstruction company (ARC) before the end of the year. To date, the centre had followed a conservative partial divestment route in the banking sector by divesting its stake in OBC, Bank of India, Bank of Baroda, Corporation Bank and Dena Bank.
INSIGHT
Money-raising exercise
The substitution of the government's stake in banks by crossholdings between the banks themselves seems primarily a scheme to garner resources for the government. The takeover of smaller banks by the largerones is ostensibly intended to enable them to acquire "economies of scale". But one has only to look at the Japanese banks to realise that bigger may not necessarily be better. Excellent banks become big because they are excellent-not the other way around. It is true that size has advantages, but quality of service can make up for lack of size, as several of the smaller private sector banks have shown.
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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