Merger Of Strong Banks Essential: Narasimham

The Narasimham Committee on banking reforms has recommended the merger of strong public sector banks, selective closure of weak ones, separation of the regulatory and supervisory powers now vested with the Reserve Bank and an increase in capital adequacy levels.

Suggesting a radical recast of the banking structure, the panel has opposed bail-out mergers, where a strong bank takes over a weak one, as that results in an adverse impact on the asset quality of the stronger bank.

Reacting to the panel report, which was submitted to him yesterday, finance minister Yashwant Sinha said, We are examining the report. And we shall be coming up with our conclusions.

A summary of the report released to the press yesterday says: It needs to be recognised that for mergers to be meaningful and useful, it should not be a mere arithmetical merger of balance sheets and staff of the banks, but should yield benefits in terms of staff and branch network rationalisation. Hence, mergers must be driven by business needs and have a force multiplier effect, the report said. Bankers see this as a direct castigation by the panel of the earlier merger of the ailing New Bank of India with the profit making Punjab National Bank.

The panels blueprint for the recast of the banking structure entails the creation of a three-tier structure. The new set up, the report suggests, should have two-three large international banks, 8-10 national level banks and a large number of local area banks.

The committee, set up in December 1997 by the United Front government to outline the blueprint for the next phase of financial sector reforms, has strongly favoured merger of strong banks, recognising the phenomenon of size as a determinant of banking strength.

The report has expressed concern on the issue of weak banks and has suggested that their rehabilitation must be dealt with separately. It has also provided a working definition of a weak bank -which is one that has accumulated losses and net non-performing assets that exceed its capital funds, or in respect of PSU banks, whose operating results minus income from recapitalisation bonds reveal losses for three consecutive years.

The committee felt that some weak banks could be turned around through corrective measures, but for others, alternative approaches including the option of closure should be examined. The report said the concept of narrow banking, where a bank restricts itself to taking deposits and refrains from advances, could be a short term solution to facilitate the rehabilitation of the weak banks. The report said reforms in the next phase must ensure greater functional autonomy to banks, and towards in this end it has regarded dichotomy between ownership and management as the hallmark of modern corporate organisation. Hence, to start with, to improve flexibility and autonomy of banks, it has called for depoliticisation of appointments of chairmen and the bank boards.

The report said another major issue is the arrangement of regulation and supervision of banks, and has defined the two concepts while indicating bifurcating the two roles that are at present vested with the Reserve Bank .

Regulation should appropriately concerned with the formulation of policy with regard to prudential norms, capital adequacy and the like, while the function of supervision should be regarded as the instrumentality for ensuring that the regulatory norms are complied with, the report said.

The nine-member panel consist of Dipankar Basu, former chairman of State Bank of India, Deepak Parekh, chairman Infrastructure Development Finance Corporation (IDFC), P Kotiah, chairman Nabard, Shiv Nadar, chairman HCL Corporation, M V Subbiah, chairman and managing director of EID Parrys, Sunil Munjal, executive director Hero Cycles, S S Tarapore, chairman advisory board on bank frauds, and C M Vasudev, special secretary .

It added that while discussing issues of regulation and supervision, the new core principles set out by the Bank for International Settlements (BIS) must be kept in view. These principles broadly states that a central bank must be concerned with monetary policy, leaving the supervision role preferable to an indepent agency.

The committee has also called for an increase in the capital base of banks and a review of their minimum capital adequacy level, currently placed at eight per cent of net bank credit. This they felt had become necessary, in view of risks such as volatitility in exchange markets greater use of interest rate variations as instruments of monetary policy.

The report however did not suggest any fresh solutions to deal with the problem of the back log of bad assets, and has suggested a fresh look at the concept of Asset Reconstruction Fund (ARF) mooted by the first Narasimham panel set up in 1991 to deal with the backlog of NPAs.

The committee has also recognised the practice of universal banking-erasing the distinction between development finance institutions and commercial banks.

Besides, it has also recgnised the imporatnce of the non-banking finance companies in the financial market, and has suggested integration of the para-banking activities into the financial system.