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Small banks in a competitive era

The decision to merge the troubled United Western Bank (UWB) with IDBI Bank in no way obviates the need for a wide-ranging debate on the larger issues related to small banks. Earlier this year, another small Maharashtra-based bank, Ganesh Bank, came under moratorium, which while temporarily placing restraints on normal banking transactions, is meant to give the beleaguered bank some breathing space to reorganise. It has since been taken over by the Kochi-based Federal Bank. In both cases, the Reserve Bank of India justified the extraordinary step of recommending a moratorium on the ground of their deteriorating financial position. UWB's net worth had fallen below the stipulated Rs.300 crore and it had a negative capital adequacy ratio. Both Ganesh Bank and UWB belong to the category of "old private banks," so called to distinguish them from "the new generation private banks" that came in the wake of the financial sector reform of the 1990s. Only 18 of these old private banks survive. Barring some large banks that have an all-India reach and good profitability record, they are facing the pressures of competition that has become the hallmark of the reform era. The demands of technological upgradation and capital adequacy (a key regulatory requirement) have been particularly onerous and have exposed the vulnerability of these banks.

Bank failures are by no means confined to the old private banks. Nor are the causes attributed to the failures — bad management in the case of UWB — unique to them. In the recent past, many banks, both public and private, have been saved — sometimes from the brink — by regulatory action. While the top managements of many of those banks have been held accountable, a variety of flaws and bad judgments have come to light. It needs to be noted that many public sector banks have received massive capital infusion from the government. Most certainly, their survival and their recent record of turnaround have plenty to do with government ownership and provision of funds. Even the record of the new private banks, well capitalised and endowed with the latest technology, has not exactly been stellar. Only those with an excellent pedigree — such as ICICI Bank, HDFC Bank and UTI Bank — have flourished. For many others, the route to salvation has been through consolidation and mergers. It is not surprising, therefore, that the older private banks should contemplate a similar course in many instances, even before a regulatory nudging. The UWB case shows that its poor financial condition did not deter a large number of banks from bidding for it. The value of these old private banks will surely be measured in terms of banking access they have provided to some remote parts of the country. While amalgamation with another bank is the sensible way out, opinions differ as to which category of banks — public, private, or even foreign — would make the ideal partner.

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