The Telegraph
Since 1st March, 1999
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RBI sceptic about success of mergers

Mumbai, Dec. 28: The Reserve Bank of India does not advocate mergers between public and private sector banks as the best solution though the regulator is in favour of a banking sector which is diverse, serving different segments of the population. This was stated by RBI deputy governor G.P. Muniappan in Bangalore today while addressing senior bankers at the Bank Economists’ Conference (Becon).

The RBI deputy governor made this observation while referring to the strategy of merger being looked by some to create size in the sector. “Let me very clearly state that the regulators are interested in seeing a banking sector which has a diverse array of well-capitalised and sound banks that have the skill and appetite to serve different segments of the population. However, we do not prefer any particular method by which this should be achieved and certainly do not promote mergers between public and private sector banks as the best solution,” he said.

Muniappan’s comment comes at a time when some public sector banks such as Vijaya Bank and Andhra Bank are understood to be looking at acquisition opportunities, particularly among private sector banks. He said that bank mergers are not easy as finding suitable partner is not an easy task and once this is done, getting agreement on a suitable swap ratio is equally difficult. Further, if the merger is approved, there is the vexatious issue of management control.

“Compulsory mergers are not always a good option because they invariably involve one weak bank and lead to a loss for the shareholders and the depositors and also has the potential to create a systemic problem,” he said.

Muniappan said that in such a context, mergers are “best left” to the markets to decide and that regulators should only create an environment which can facilitate consolidation among willing institutions. Yet, regulators may have to step in where a weak bank can no more exist and compulsory merger is the only option in the interest of both depositors and the system.

Referring to the reverse merger between financial institutions and banks, he said the consequence of such a development is the drying up of sources of long-term finance. Banks, he added, have to fill this gap by funding long-term projects which are viable.

On corporate governance the deputy governor said the regulator has come across instance where members of certain bank boards showed reluctance to ratify and adopt the covenants circulated by the RBI containing the recommendations of Ganguly Committee on Professionalisation.

He said the CEOs of banks should also “educate” new non-official directors who should be briefed on organisational structure, strengths and weakness of the institution, grey areas of internal control and regulatory gaps observed in the past audit/inspections, business plans both near term and long term.

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