BOMBAY, 18 August 2003 — This week, the Indian banking sector had a lot to cheer about. Apart from the bank holiday this week for Independence Day, the Indian banks were a happier lot, hope surging that all is not lost, yet. Finance Minister Jaswant Singh introduced a bill in the Parliament to amend the Banking Regulation Act, 1949. The amendment, seeks to bring about consolidation in the sector by facilitating amalgamations between banks and non-banking institutions as also merger of subsidiary banks.

Also, any move to acquire more than five percent stake in a banking company, whether hostile or otherwise, will require a nod from the Reserve Bank of India (RBI) as per the new bill. Among the other amendments, the bill provides for a mandatory minimum capital requirement for banks and looks to strengthen the regulatory powers of the RBI.

The bill, if passed, will also give the RBI more regulatory control over cooperative banks. The Banking Regulation (Amendment) and Miscellaneous Provisions Bill 2003 is surely an improvement over the archaic Banking Regulation Act of 1949.

The teeth power which it gives the RBI, analysts say, is very much in synch with the liberalization in the financial sector. The new bill also sets in motion the government’s game plan to encourage the merger of smaller banks with strong regional banks.

What this means is that the bill will allow the merger of banking companies with the country’s lead bank State Bank of India (SBI), a subsidiary bank or a corresponding new bank and a non-banking finance company with any banking company.

It also provides for mergers of banks with non-banking finance companies and empowers the RBI to restrict acquisition of more than 5% shares by a bank without its mandatory approval.

It allows banking companies to issue irredeemable preference shares or redeemable preference shares as per the international practice. The legislation also paves the way for consequential amendments in the SBI Act and SBI (Subsidiary Banks) Act, Companies Act, State Financial Corporation Act, Regional Rural Banks Act, IFCI (Repeal) Act, IRB (Repeal) Act and UTI (Repeal) Act.

The minimum capital requirement for foreign and domestic banks has been fixed in the bill at Rs. 100 crore. For local area banks it has been fixed at Rs. 5 crore and Rs. 25 lakh for cooperative societies.

Following this announcement, the Jammu & Kashmir Bank said that it was open to expanding, particularly in the south, through acquiring branches, rather than banks themselves. The bank had acquired Grindlays’ branch in Kashmir last year, which proved to be a profitable buy. The Bank of Baroda also said that it was open to the idea of growth by way of mergers and acquisitions.

The new bill has also called for insertion of certain provisions that will be applicable to specified financial institutions to facilitate their regulation by the RBI. With this bill, the blanket cover that cooperative banks enjoyed in terms of restricting the applicability of the provisions of the Banking Regulation Act is set to go.

The proposed legislation will freeze the provisions contained in Section 56 of the Banking Regulation Act which apply only to cooperative banks and amend certain other provisions to bring banking cooperative societies on par with banking companies for RBI regulation and supervision.

And while talking about financial institutions, there was the much awaited news on Industrial Development Bank of India (IDBI). The government cleared several amendments to the IDBI Bill, proposing to convert in into a banking entity. At the same time, the IDBI will continue to focus on its main area of business, development financing, providing term lending to industry — large, medium and small.

Established in 1964, the IDBI was set up to, among other things, provide credit and other facilities for the development of the industry. As its operations came under strain, the RBI came out with a policy in 2001 to transform the development financial institution by evolving a cautious transition path to become a bank.

The bill to repeal the IDBI Act 1964 was introduced in the winter session of Parliament in December 2002 and then referred to the Standing Committee on Finance. The IDBI hopes to increase its profits after it is converted into a bank and meet RBI’s prudential norms after five years.

It is estimated that the IDBI would be able to raise about Rs. 5,000 crore per annum by way of savings, current and fixed deposits. Another Rs. 4,500 crore would come from bonds. After providing for CRR and debt servicing requirements, the IDBI is slated to advance Rs. 5,000 crore in the first year of its banking operations.

The bourses have taken this news of the new bill with a lot of zest. Of late, some private sector banks like Federal Bank, Karur Vysya Bank and Bank of Punjab have been garnering interest on the bourses on expectations that they could be the subject of acquisition.

The market sees many private sector banks as veritable takeover targets. Operators have been keenly pursuing second-rung private sector banks of late after Bank of Muscat acquired a 26% stake in Centurion Bank for Rs. 75 crore. The move set off expectations that large multinational banks may expand base in India through acquisition of private sector banks.