All the bidders for a troubled bank

The RBI’s alleged decision to punish banks by barring them from opening new branches itself needs some discussion. One uses the word ‘alleged’ because banks deny media reports about the three-year ban, while the RBI is officially silent on the issue. It is indeed a fact that these banks have not been allowed to expand for almost a year and no permissions are on the horizon either.

Until recently, the RBI has never been such a stickler about rules and procedures either. Or else, bank after bank would not have collapsed under the burden of dubious lending practices. Moreover, the Securities and Exchange Board of India’s seemingly hard-hitting initial order on the Demat Scam has already been considerably diluted since then. The RBI’s initial reaction was to impose a paltry penalty that was not even a slap on the wrist. But although one is in favour of stringent monetary penalties that act as a real deterrent to indiscipline, the damage caused by a three-year ban on expansion, when the economy is growing at 8 per cent seems excessively crippling.

In fact, each of the banks that have been punished, would probably have willingly paid penalty running into crores of rupees rather than suffer the incalculable damage caused by halting growth through branch expansion. But unlike the storm of protest that is raised by every Sebi order, the banking sector does not even dare to voice a protest against RBI decisions. In contrast, Sebi has even faced the ignominy of being fined by the appellate tribunal. Clearly, the RBI needs to revisit some of its statutes to align them with the changing economic environment while giving it more flexibility in decision-making.

Coming back to the UWB issue, if one excludes the IPO-tainted banks, it leaves a few foreign banks and certain public sector banks in the running, plus, of course, the Maharashtra government-led revival plan.

The last mentioned ought to have the least consideration, despite HDFC’s presence to lend it credibility. Firstly, the grapevine says that political interference in lending decisions were responsible for the collapse of UWB’s finances. Giving the bank another chance at revival, after it has several rounds of public money without adequate transparency will be hugely controversial. As for HDFC’s contribution to the bid, it is not relevant since the mortgage financier already has a significant stake in HDFC Bank.

That leaves only the untainted nationalised banks, the foreign bank bidders and Indiabulls. The latter two require a serious change in the RBI’s policy, which is very unlikely to happen overnight, especially when the central bank is under pressure to make a quick decision and there are plenty of other options. That leaves only a few nationalised banks in the race. My sources among banks and regulators say that RBI will settle for a bank with the strongest balance sheet, which has travelled

... contd.

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