News: Three Indian state banks to form strategic alliance

(RTR 14/09/2006) Mumbai - Three state-run banks are set to form a strategic alliance on Friday to meet growing competition, in a step analysts say could be the first towards consolidation in the tightly regulated sector.

Corporation Bank said on Thursday Chairman B. Shambamurthy would meet counterparts at Oriental Bank of Commerce and Indian Bank on Friday to sign a deal for joint operations in some areas where customers were likely to benefit.

The Business Standard newspaper reported the banks, which collectively have an asset base of 1.4 trillion rupees, will cooperate to give loans, undertake fee-based business, and share branch and ATM networks and employees.

But the agreement does not include equity participation.

"This is definitely a unique model for growth and the success of this first attempt may spark attempts by other banks to join hands," said Kanan Shah, a banking analyst at Networth Stock Broking.

"It is probably a measure to fend competition among themselves as the competition in the banking sector is huge."

Although bank credit in India's robustly growing economy is expanding at 30 percent year-on-year, deposit growth is lagging behind at 20 percent, as banks struggle to attract savings.

As a result lending rate rises have lagged behind increases in deposit rates, squeezing bank margins.

TAPPING SYNERGIES

The collective asset base of the three banks will bring them nearer to India's largest private sector lender, ICICI Bank, which has 2 trillion rupees worth of assets.

But the deal will still leave the three behind the country's largest bank, State Bank of India, which has an asset base of more than 4 trillion rupees.

"There is a scope for geographical synergy, as except the State Bank of India, there are few banks with a pan-Indian presence. Consolidation would help as long as there is no overlapping of branches," said Ravikant Bhat, an analyst at IDBI Capital in Mumbai.

"From 2009, foreign banks would have more freedom to acquire local banks. Therefore Indian banks need to attain a bigger size, so they are not vulnerable to hostile takeovers."

India has 88 major banks, and more than 100,000 urban and rural cooperative banks, employing more than a million people.

The sector is dominated by state-run banks which have nearly three quarters of business. Foreign institutions are not allowed to pick up more than 5 percent in any private sector bank.

The central bank is due to review the policy on foreign ownership in 2009.

An expert panel on capital account convertibility -- headed by a former deputy head of the central bank -- has said foreign banks should be allowed to increase their presence, a suggestion the government's communist allies are likely to oppose.

The communists, whose main backers are trade unions and who provide the government with a majority in parliament, fear greater participation of foreign banks could lead to massive job cuts.

The convertibility panel's suggestions were made public a day before private sector lender United Western Bank collapsed. It is due to be bought by state-run IDBI Ltd.