Now, RBI wants bank consolidation

In a major push towards consolidation in the banking space, the Reserve Bank of India has presented a paper to the government highlighting a proposal for merger of banks.

A proposal discussed by the RBI brass with key finance ministry functionaries in Delhi last week has favoured merger of large public sector banks with small state-run entities and private players, sources close to the development told Business Standard. It has also identified the potential partners for a merger based on the RBI's inspection report for the last two-three years, they added.

The idea is to first seek consolidation on a voluntary basis — as has been the stated stance of the government and the RBI. If such mergers do not fructify, the regulator has suggested that the government could step in to push consolidation.

The sources said enabling legislation for forced merger of the banks has been provided under section 45 of the Banking Regulation Act. Using this provision, the RBI, under government advice, can push the merger of two banks.

The Narasimhan Committee had suggested consolidation in the banking space. While the private sector has moved forward in this regard, there is little to show for the government, which is the majority shareholder in 28 banks.

While the government has been pushing for board-driven consolidation, almost no  proposal discussed so far has materialised due to opposition from unions and political pressure.

A case in point is the merger of State Bank of Saurashtra with State Bank of India, which has now run into trouble as some key politicians in the present set-up are opposed to the move. The law ministry had raised legal objections.

Sources pointed out that even in the case of merger of a small private bank with a larger player in the private sector, it takes a long time for the proposal to be approved by courts and get shareholder nod. On the other hand, the clock is ticking for the RBI and the government to open the doors to foreign banks.

According to the central bank's roadmap, foreign banks are slated to get a more liberal access from 2009.