INDIA BUSINESS WORLD - OCTOBER 2005
THE MONTH THAT WAS

RBI GUIDELINES FOR MERGERS BY PUBLIC SECTOR BANKS

Public sector banks planning to merge will have to ensure their client exposure portfolios do not clash and their branch networks are not concentrated in the same geographical region. These are part of the government and Reserve Bank of India's informal guidelines for mergers and acquisitions by public sector banks. Government sources said it is also necessary that the banks complete their M&A activities by 2008-09 to ensure they have the strength to take on the foreign banks. The norms, therefore, say if two banks have given credit to similar sectors they must not come together at all. It would multiply the credit risk for the new entity if the sector faces a downturn and create a larger problem for the financial sector.

So the rule of the game is to bring together opposite parties. Accordingly, if a bank has a strong retail presence, it should marry one with a large corporate exposure. A similar caveat would work for geographical exposure. Banks operating in the northern region would do well to tie up with a southern bank.
Sources said talks are already on between several players and at least one merger could be okayed in this fiscal year. But they said the process would have to be driven by the banks themselves. The government can only play the role of a facilitator.

This is because the road map laid out by the RBI for foreign banks will give them entry into the domestic market and provide them the same treatment as the public sector banks. The present capital structure of the public sector banks will therefore make them vulnerable to takeovers unless M&As take place. The size difference can be gauged from the recently released World Investment Report. It shows that no Indian public sector bank ranks among the top 100 financial companies of the world by assets, whereas there are several of the top 50 operating in India.