Business

Consolidation in banking sector

By C. R. L. Narasimhan

Certain key banking topics are back in focus. The ownership issue figured prominently in the recent budget speech, with a strong indication therein that foreign banks will henceforth also be allowed to incorporate subsidiaries in India. Hitherto, they could only expand in India by opening branches. Only one of the two routes will be allowed but the latest announcement along with a few earlier ones clearly shows the increasing role being afforded to foreign banks and foreign direct investment (FDI). A relaxation in the existing restriction on voting rights of bank shareholders has been contemplated in the budget speech. At present, irrespective of the size of the shareholding no one can have more than 10 per cent of voting rights. Even earlier, there has been a clarification that overseas investors (FDIs) can invest up to 49 per cent of the equity in the private banks although in the case of PSBs it has been restricted to 20 per cent.

It is, therefore, certain that foreign capital will play a role in the consolidation of the banking industry, a development widely anticipated by several experts including the Finance Minister. For the present not many structural changes are on the cards for the public sector banks. But the Government has a medium term goal of reducing its stake in the PSBs to a third. In all the PSBs, however, the Government will hold the majority stake for now. Hence, though FDIs can play a role in the PSBs, the question of their taking control does not arise for now. Not to be forgotten at this point of time most PSBs command pathetic valuations. It will be scandalous to let go control at these levels. Ironically low price-earning multiples are a potent barrier to a PSB sale.

Consolidation in private banks

How will private banks consolidate? What role will foreign capital play? One of the larger "old'' private banks, Vysya Bank, is tantalisingly close to being acquired by the Dutch financial group, ING. The main advantages claimed for FDI are that they will help in meeting capital adequacy norms and secondly in enhancing technological capabilities. But these are not relevant in all the cases.

For getting a first hand account of the FDI factor in the "old'' private banks, this correspondent spoke to K. P. Padmakumar, Chairman of Federal Bank in Alwaye. According to him foreign direct investment might be relevant only for those banks which are "starved of capital.'' For them, accessing the capital market is not a viable option what with the low levels of price-earnings multiples which most bank shares command today. Some of these banks' shares have a sizable book value and they would not like to sell their shares at a huge discount. On the other hand, they need to shore up capital.

There are no specific advantages in welcoming foreign direct investment says the Federal Bank Chairman, who also feels that a distinction ought to be made between foreign investors who would buy a scrip in India for the value it offers and those looking for management control. The Federal Bank scrip, for instance, has evoked some strong buying interest from abroad recently. Its Chairman feels that it is so because at current levels it is undervalued and might therefore appreciate. All those are relevant for a portfolio investor. For a strategic investor looking at control as well there are other factors to be considered. For instance all the private banks possess some niche market strengths. Under a new management, dominated by foreign banks with little understanding of local conditions these may disappear rapidly. For instance, his bank's strengths come from rural and semi-urban areas — niches which even a superior foreign technology platform may not preserve.

Very pertinently, technology must be harnessed to solve local problems for which again a thorough understanding of local issues is necessary. Often there are facile assumptions made as to what technology can do to present day banking in India. For the Federal Bank the strategy clearly is to develop technological applications — ATM, Internet banking and so on — side by side with preserving the niche market strengths.

It has been well established that many bank customers would prefer to have a physical contact with the bank rather than deal with ATMs or other machines. Clearly neither foreign direct investment nor the technological advantages which a foreign bank is said to possess need be relevant always.

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