New bank takeover norms soon

The financial sector will have reason to cheer in the next few months, says the government. Measures expected to be taken by the government include smoothening the route for foreign banks to acquire "undercapitalised" private banks through amendments to the Banking Regulations Act and setting in motion consolidation among public sector banks.

"There will be good news in the coming months. The government has on its agenda the tabling of the Banking Regulations (Amendment) Bill as well as the long-awaited Pension Fund Development and Regulatory Authority Bill in the Budget session to push further financial sector reforms," Prithviraj Chavan, minister of state in the Prime Minister's Office, said in his address at a capital market conference organised by the Federation of Indian Chambers of Commerce and Industry in Mumbai.

Chavan said the amendments to the Banking Regulations Act were expected to help foreign banks acquire undercapitalised private Indian banks.

Analysts said it was interesting to know that the government was considering allowing foreign banks to acquire some old private banks that had not been able to raise their net worth to the minimum required Rs 300 crore (Rs 3 billion).

The Reserve Bank of India's roadmap on banking consolidation allows only "weak" banks to be acquired but the central bank has neither defined what a weak bank is nor ever identified a weak bank. The RBI's roadmap proposes to open up the banking sector to foreign banks from 2009.

On mergers among public sector banks, Chavan said, "Some top public sector banks have sent some proposals (for amalgamation)." He, however, did not disclose the names of the banks that have sent merger proposals.

Consolidation among public sector banks was expected to gather momentum in 2007, he said. Even Indian banks would be interested in buying undercapitalised banks, he added.

The amendment to the Banking Regulations Act will align the voting rights of foreign and domestic shareholders with their shareholding.

Apart from public sector banks, the government will also be selling some of its stakes in public sector undertakings. The proceeds of these sales will accrue to the National Investment Fund. This money will be used for social sector programmes and also for the revival of ailing public sector utilities.

Banks with under Rs 300 cr net worth on March 31, 2006

Catholic Syrian
Rs 216 crore (Rs 2.16 billion)

City Union
Rs 286 crore (Rs 2.86 billion)

Dhanalakshmi
Rs 134 crore (Rs 1.34 billion)

Lakshmi Vilas
Rs 291 crore (Rs 2.91 billion)