Indian Bank and Oriental Bank of Commerce, which agreed to, among other things, rationalise branch network, and share IT and treasury resources.

Private banks are having to grapple with survival issues of their own. Being financial intermediaries that mobilise public savings and lend them onwards, banks have a fiduciary responsibility. Hence, the ownership pattern of banks is considered crucial to protecting the interests of depositors. As some of the private sector banks are community-based or promoter-driven, their shareholding pattern is concentrated in the hands of a few, which raises the possibility of misappropriation of funds.

If their stakes are to be reduced, some of the smaller banks will necessarily have to merge among themselves. Compared to public sector banks, there’s less overlap between private banks, as they have different business models and cater to different segments, but that also creates its own shortcomings. Says Shailendra Bhandari, managing director, Centurion Bank of Punjab: “They have different strengths. So, they know how to do SME, but they don’t know retail. They know how to do deposits, but not processing. There’s a need for them to come together.”

That apart, the RBI has also mandated a net worth of at least Rs 300 crore for banks. Some of the smaller banks with a lower net worth will be forced to become bigger and find ways to raise more capital. In a short period of time till 2009, it will be difficult for banks to grow organically, hence they are left with no option but to merge.

... contd.