Bank CEOs must not aid market speculation

Bank CEOs must not aid market speculation
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First Published: Mon, Jan 14 2008. 01 21 AM IST
Updated: Mon, Jan 14 2008. 09 45 AM IST
Kolkata-based Uco Bank’s stock rose more than 38% in one week between 26 December and 4 January, from Rs57.90 to Rs80.09. The trigger for the rise was Uco Bank’s wish to merge another Kolkata bank, United Bank of India (UBI) with itself. Uco Bank has reportedly sent a note to the finance ministry suggesting the merger. P.K.Gupta, chairman of UBI, an unlisted entity, has denied receiving any such proposal either from the ministry or from Uco Bank, while S.K.Goel, Uco Bank’s chairman and managing director, declined to comment on market speculation.
Another CEO of a public sector bank recently told one of this writer’s colleagues that he is “closely looking at” a bank for a possible takeover. He did not name the target but said that Mint could report the story as long as it didn’t bring him into the picture. Had this paper run the story, his bank’s stock would have surged on the bourses.
Almost everyone is talking about consolidation in public sector banks that account for close to 70% of the Indian banking industry. A few months ago, there were reports about Bangalore-based Canara Bank’s keenness to merge Mumbai-based Dena Bank with itself. Canara Bank has even reportedly appointed a consultant to look into the synergies of business between the two and prepare the ground work. Indeed, there are synergies between Canara and Dena. Canara, with more than 2,500 branches, has a strong presence in the southern part of the country, while Dena, with less than half of Canara’s branch strength, is most visible in Gujarat.
While a Canara-Dena merger will create a big bank with a national presence, the philosophy behind the Uco-UBI merger seems to be the creation of a relatively bigger regional player. The same logic was touted when two Mumbai-based banks—Union Bank and Bank of India—started talking about a merger two-three years ago. With the help of an international consulting firm, both the banks worked on the details of the merger, including identification of branches that needed to be closed and even the name of the new entity, but the proposal was never placed before their boards. That was because the signal from the coalition government at the Centre was very clear—the Left parties, on whom the government depended to stay in power, would not give their nod to such a merger out of fear of job losses. The current management of Union Bank tried to revive the proposal by initiating talks with the trade unions, but has not been able to make any headway as yet.
What CEOs of public sector banks want is not important as the government has the last word on such mergers. The Banking Companies Acquisitions and Transfer of Undertakings Act 1970 and 1980, or the Bank Nationalization Act, lays down the guidelines for mergers between two public sector banks. Indeed, banks can take the initiative but after the merger proposal is passed by the boards of the respective banks, the merger scheme must be finalized by the government in consultation with the country’s central bank and, finally, Parliament has the right to clear, modify or even reject the scheme.
Even for the merger between a public sector bank and a private bank, a parliamentary nod is mandatory. In this case, norms laid down by both the Nationalization Act as well as the company law (that govern private banks) are to be followed. CEOs of public sector banks in India can initiate talks, deny merger reports or keep mum and watch their bank stocks soar, but without the government’s active support, no merger can take place.
Historically, there has been only one instance of a merger between two public sector banks but even there consolidation was not the motive behind the merger. In 1989-90, the troubled New Bank of India was merged with Punjab National Bank—a rescue act by the Reserve Bank of India (RBI). Barring a few exceptions such as HDFC Bank Ltd’s takeover of Times Bank Ltd, the merger of erstwhile financial institution ICICI and Bank of Madura Ltd with ICICI Bank Ltd and IDBI Bank with Industrial Development Bank of India Ltd, almost all mergers in the Indian banking space have been rescue acts by RBI. The regulator’s motive has all along been the protection of depositors’ money. Since 1969, when Bank of Behar was merged with State Bank of India, around 40 mergers have taken place between banks and non-banking finance firms and most of these mergers have been driven by crises and the need to bail out depositors.
In August 2004, at the annual general meeting of Indian Banks’ Association, the country’s premier bankers’ body, finance minister P. Chidambaram for the first time flagged off the issue of consolidation. However, not a single merger has taken place since then for lack of political will.
Meanwhile, RBI has been proactive in merging relatively smaller old private banks with new private and even public sector banks. This is to prepare the Indian banking system for April 2009 when the regulator is expected to revisit its policy on foreign banks. In the run-up to the opening up of the sector, RBI has made it mandatory for every bank to have at least Rs300 crore worth of equity and reserves and a wide investor base. Those that are not able to raise their equity and reserves are being forced to merge with relatively stronger local banks.
In a bull market, investors look for excuses to buy stocks and there is no better excuse than mergers and acquisitions. However, because bank CEOs cannot do much about bank mergers, they should not speak on such issues as they may end up misguiding the market.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as the Mumbai Bureau Chief of Mint. Please email comments to bankerstrust@livemint.com
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First Published: Mon, Jan 14 2008. 01 21 AM IST