Sunday, February 20 2005 15:41 Hrs (IST) - World Time -

New Delhi: In a bid to push banking reforms, the Budget is likely to lay the foundation for "hassle-free mergers" of banks by bringing in necessary changes in the tax laws.

Presently, mergers in the public interest under Section 45 of the Banking Regulations Act is not covered for tax sops under the Income Tax Act, thereby denying banks to claim rebate against losses of the acquired bank, official sources said today (Feb 20, 2005).

At present, only voluntary mergers of banks under Section 44 of the Banking Regulation Act are covered under Income Tax Act for tax relief for losses of the acquired bank.

The non-inclusion of mergers in public interest as in the case of OBC-GTB merger last year for tax sops acted as a deterrent to carry forward reforms in the sector, particularly those of sick banks.

Meanwhile, Oriental Bank of Commerce chairman B D Narang hoped that the Budget would carry forward these necessary changes to encourage mergers of banks.

"I hope the budget would facilitate mergers under Section 45 of the Banking Regulation Act," Narang said at an interactive session with 'Forum of Financial Writers'.

Narang said banks needed to be encouraged to fulfil the capital adequacy ratio as laid out in the Basel-II norms, which has to be adhered by all banks by 2006.

However, he said banks in India were more prepared than other banks in Asia, except Singapore, to comply with the Basel-II norms.

With the implementation of Basel-II norms, the capital adequacy ratio would come down by three per cent, which meant banks would have to raise more capital.

Indian banks would need an estimated Rs 7,000-8,000 crore to fulfil the capital requirements under the Basel-II norms.

"This money could only be raised by injecting fresh capital or through increased volumes by mergers and acquisitions," he said adding, "I don't think Government can provide such huge amount of money through budgetary support."

Elaborating on the need for mergers, Narang said the largest Indian bank (State Bank of India) was 200th among the world's biggest banks.

As many as 28 public sector banks were operating in the same turf, he said, adding it was time that the country shed regional affiliations of banks and move ahead towards mergers for bringing about economies of scale.

Finance Minister P Chidambaram has also already indicated that the Government would favour mergers of public sector banks but it would not force them towards this.

Narang said the mergers need not be only among public sector banks but could as well be among public and private banks, cooperative banks and regional rural banks.

Most of the 196 regional rural banks were in bad shape, he added.