The Hindu : Foreign capital aggravates employees' concerns

Online edition of India's National Newspaper
Saturday, Mar 13, 2004

Business

Business

Foreign capital aggravates employees' concerns

By C. R. L. Narasimhan

An increased level of foreign direct investment in Indian banking will hasten the process of consolidation. There are good reasons to allay the genuine fears of bank employees.

With the notification of the new rules on the scope of foreign direct investment (FDI) in Indian banks, the season of speculation on the future structure of the industry has begun in earnest. The rules give foreign banks and overseas investors two choices: (a) to start a 100 per cent subsidiary. A foreign bank already operating in India can use this route to incorporate its existing branches in the new subsidiary. (b) The other alternative is for overseas investors including a bank to buy into a private bank, with the proviso that not more than 74 per cent of the target bank's stake can be acquired through this route. The cap therefore includes all types of foreign investment (such as portfolio flows, NRI, ADR and GDR) in a specific bank. The existing cap on voting rights restricted to 10 per cent of the equity remains and is considered to be a dampener to FDIs.

Public sector banks are not covered by the new rules and that considerably reduces the scope for FDI. Yet there is no denying that all banks, including the PSBs, are bound to be affected by the liberalisation, which has come at a time Indian banking is getting ready for a major consolidation. Mergers and acquisitions so far few in number are expected to become common. At a recent interactive meeting organised by the Corporation Bank Officers' Organisation in Mangalore, this correspondent could gauge the concerns of the large audience, most of whom were bank employees. From the discussions it was clear that the pubic sector banks feel threatened as much by the anticipated rush of foreign money as by the edge that such inflows will give to the ongoing competition among banks. In several ways the concerns over FDI resemble the ingrained fears of PSB banks in relation to foreign banks and later the new generation private banks.

PSB employees have a special reason to worry. Most of these banks have entered the capital market. As has already happened with Vysya Bank, a foreign bank (the Netherlands-based ING group) can start a takeover bid, buying shares from the stock market. With the new clarity in the FDI rules, there is nothing to prevent a hostile takeover. PSB managements now have to reckon with another influential group of stakeholders, the shareholders. The other concerns of the PSB banks in general and of their employees in particular have been well documented: as to how in the reform era they have been forced to do a sharp U turn in their business orientation. Much of their past strengths are now considered to be weaknesses. Adding to the stress of the employees has been the phenomenal success of the VRS schemes, which many unions had opposed in the first place. Besides, the ongoing technological upgradation has rendered many of the employees' skills either obsolete or irrelevant. Foreign investment flows are expected to boost the process of technological change in Indian banks.

More specifically PSB employees are concerned at the ways the profile of Indian banking is changing in the liberalisation era. The typical branch of a foreign bank or a new private bank is manned largely by sales people with a few bankers thrown in between. Computerisation has taken away most of the discretionary powers at the branch level. The devaluation of the once powerful branch manager is complete. Customers are often discouraged to come to the branch: Internet, banks as alternatives recommend telephone banking. The traditional bank branch has become uneconomic. Since routine banking services do not fetch a return that covers the costs, banks are undertaking a variety of financial services. The thrust to universal banking arises out of this.

There are other concerns as well. When even PSBs have been niggardly in financing small-scale sector and agriculture it is naive to expect those banks set up through foreign capital to pursue those activities, once considered a priority area. Hence FDI liberalisation brings in its wake many types of challenges to Indian banking. Public sector banks stand to be affected as much as private banks even though unlike the latter there is very little chance of their being taken over. At least for now.

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