The Reserve Bank of India is seriously considering a proposal to allow foreign banks to buy the branches of public sector banks and the politically sensitive issue is being debated at the highest level in the central bank, is likely to take final shape by the end of fiscal year 2002, after consultations with the finance ministry.
Banking sources said that this is high on the Reserve Bank’s agenda; however, the Centre needs to tread the path of reforms with caution as the move may invoke political opposition.

The immediate provocation for pushing the proposal is the inability of most of the public sector banks to maintain high enough standards of customer service following the exodus of employees through the voluntary retirement scheme (VRS) and besides three big foreign banks operating in the country—Standard Chartered Grindlays, Citi and HSBC—are willing to buy the branches of state-run banks instead of setting up new branches through the licensing route.

The source also said that some of the foreign banks have already approached the RBI with a proposal to buy the branches of state-owned banks and it makes sense as they can capture the customer base of state-owned banks this way. Once they get a ready list of customers and a chunk of the resources as well as new assets through the acquisition route, they can put in place the right technology to change the face of these branches.

Moreover, by acquiring the branches of state-owned banks, these foreign banks will get an opportunity to be present in certain important centers and if they seek a license from RBI to set up branches, it will take a few years to expand their reach, by buying government-owned bank branches they can speed up their expansion plan.

Once the RBI proposal is translated into action, it will be a win-win situation for both foreign as well as state-owned banks as most of the state-run banks (barring Corporation Bank, all have implemented VRS) are finding it difficult to run many of their branches following the exit of a large chunk of employees. Over one lakh bank employees (out of 8.6 lakh) accepted the VRS and collectively, 27 public sector banks have around 46,000 branches across the country with the State Bank of India accounting for the most (9,000 branches).

The SBI associates have another 4,500 branches. Among the other nationalized banks, Punjab National Bank has the maximum number of branches (over 3,600), followed by Central Bank (over 3,000), Bank of India, Bank of Baroda and Canara Bank (all over 2,500 branches). The foreign banks together have close to 200 branches. After the acquisition of Grindlays, StanChart Grindlays tops the list, followed by HSBC and Citi. Private sector banks (both old and new) have around 5,000 branches.