CCI should be the final authority
The Cabinet recently considered, and sent back for re-examination, an amendment to the law so that bank mergers could come under the jurisdiction of the Competition Commission of India. Since the creation of the CCI, there has been considerable debate on whether it should at all have jurisdiction over sectors like telecom, electricity and others that have independent sector regulators in existence. The debate appears to have reached a conclusion: the CCI should, as it develops experience, have jurisdiction over competition issues and especially mergers and acquisitions, perhaps in consultation with the sector regulators. The process of consultation has yet to evolve. However, no issues have so far come up.
Issues of competition can be peculiar to the sector. For example, the electricity regulator in Maharashtra introduced consumer choice between suppliers. He forgot that hundreds of thousands of poor households got below-cost electricity because the large users were charged extra. These large consumers were also the ones that competitors? wooed away successfully from existing suppliers. It took a long time for the regulator to resolve the issue. Meanwhile, the original supplier lost a lot of money on these cross-subsidies. That the CCI might usefully consult the concerned sector regulator on competition issues makes eminent sense.
Should this also apply to banks? Few countries have the complex issues that India does?caused by the ?socialistic pattern of society?, mixed economy, high levels of government ownership, bureaucratic management, and political interference in the working of markets.
Regulating banking mergers has to be considered in this context. Banking is the central pillar of the economy. A dominant part of it in India is government-owned, though there are also private minority shareholders in some of these banks. The ?disinvestment? process of selling some shares in government-owned companies has raised growing concerns over the neglect of minority shareholder interests. The private domestic sector has grown in the last 40 years or so but, along with foreign banks, still accounts for a much smaller fraction of branches, deposits and credit.
The banking sector is regulated by RBI. Its coverage is expanding as the need for regulation of other deposit collecting or lending institutions is recognised. It now regulates microfinance institutions, cooperative banks, non-banking financial institutions, apart from commercial banks.
RBI?s objectives are to keep inflation in check, provide adequate liquidity, keep stable the foreign exchange value of the Rupee, safeguard consumer interests, and provide credit to governments. RBI works in close consultation with the central government, though it may not always act as government desires. The principal instruments with RBI to achieve its objectives (not always successfully) are interest rates and liquidity. They are implemented through the commercial banks. Liquidity is controlled by RBI by varying the ratios of deposits that banks have to maintain with RBI, and interest rates by RBI rates of interest for deposits and borrowings of commercial banks with RBI.
Recently, when RBI reduced interest rates, tardy banks were instructed to follow suit since both government and RBI felt that lower interest rates could stimulate growth. In another sector this would be anti-competitive practice since the freedom of the banks to set interest rates is overruled.
Similarly, when a bank wants to buy another bank or start a new branch, it has to be with RBI permission. Presumably RBI would look at prevailing government policies on foreign investment, on other non-banking companies entering banking, and the reputation and capability of the buyer bank. In many of these cases RBI has to consider government policy. With such intertwining between government policies, government ownership and RBI as the instrument of action, it would be difficult to take bank mergers out of the list and hand them over to the CCI.
Further, the monetary regulator and government have to be closely involved in all decisions to do with banks. It is generally agreed that the 2008 financial crisis occurred because the American regulator, the Federal Reserve, relaxed regulation and allowed excessive freedom to banks. Mergers were freely allowed, as was the marketing of increasingly risky products. Some banks grew too big to manage. They also grew so big that failure of a big bank could destabilise the whole economy. The US escaped general financial sector collapse because government pumped in vast funds to prevent their collapse. Many of these big banks are still weak and unstable.
High-risk products introduced by banks didn?t just bring about their near collapse, with many needing rescue by government funds. Some banks had to be closed. Others had to be forcibly merged. What was worse was the plight of millions of households who lost their homes and their savings.
For all these reasons regulation of banks should be of all aspects, not some, with others like mergers being considered by another body. RBI might be asked to consult the CCI when there is a merger proposal and to explains why, if it did not follow CCI?s advice.
The fear that regulators of other sectors might demand similar exemptions is not misplaced in India where protecting and fighting to retain one?s turf is standard bureaucratic practice. If necessary, the law must make it clear that the CCI will be the final authority to consider and approve or disapprove mergers in all other sectors.
The author is former Director-General, NCAER & was the first Chairman of CERC