Takeover of Private Sector Banks

It is expected that post March 2009 the RBI will permit foreign banks to takeover Indian private sector banks. However, restrictions on expansion by foreign banks may not be relaxed concomitantly. This has already led private sector banks valuations to reflect some kind of a takeover premium. One analyst had in an interview mentioned that the value of a mere licence (no branches) would not be less than US $ 500 million.

If indeed the RBI does permit takeovers the shareholders will enjoy windfall gains – gains in the nature of rents rather then a return on efficiency or profitability. Since a bank and branch licences have been made a scarce resource by the authorities it is not clear why shareholders of banks lucky enough to hold licences should enjoy such gains.

So either the RBI should permit free entry with few restrictions. Or it should sell or auction banking or branch licences. The prices and modalities are matters of details that can easily be worked out.

The several billion dollars that can potentially be earned from this exercise rightly belong to the people of India and not a few shareholders. Even so private bank may be taken over but that will be for their assets or branch network, not the scarcity value of a licence.

Priority Sector Lending

With the recent changes to the category of "weaker sections" (priority sector lending), loans doled out to Azim Premji in Bangalore and Sharukh Khan in Mumbai would be classified as such since they belong to the minority community.

As the list of priority sector lending is expanding (diluting?), soon it will cease to mean anything. That is the silver lining though banks will continue to suffer administrative costs of maintaining and showing compliance.