Financial Times

Smaller banks may merge
New capital requirements for commercial banks raised to Rs. 2.5 billion from Rs. 500 million, in a bid to provide security for depositors' funds are likely to force smaller banks to merge with their bigger counterparts - or seek foreign partners.

The Central Bank has given time to December 2006 for banks to raise 50 percent of the capital and till 2007 to raise the balance. In 1996 the minimum requirement was Rs 200 million.

An analyst said banks such as PABC Bank, which 'turned around' by recording a net profit of Rs. 41 million in 2004, and Union Bank would find it difficult to raise the extra capital.

A PABC official said the bank is planning a rights issue early next year to help meet this requirement. The bank's current capital is Rs. 375 million. "It is a Herculean task to meet a Rs. 2.5 billion capital requirement, but we are hoping to raise some capital through a rights issue and retained profits," he said, adding that they will be asking for time from Central Bank if unable to raise the required capital by December 2006.

He said the only option available if all else failed would be to merge - either with a bigger bank, or a new entrant, foreign bank. Union Bank also faces a similar situation with an official there saying the bank has about Rs. 500 million in its capital base. "We have to go up by 500 percent to meet the new requirement, which is a tough call," he said, adding the bank may consider a merger with a foreign partner.

A Sampath Bank official said the bank has five billion rupees in its capital base, double the minimum requirement. "We have four billion rupees held in shareholder funds and the rights issue this February brought in one billion rupees," he said. An industry analyst said established banks will not have an issue, but their return on assets (ROA) ratios will be affected.

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