The fledgling IDFC Bank and the Shriram Group announced on Saturday they were exploring a merger that would help build a mass retail franchise with a universal bank at its core, which would offer customers a range of products. Justifying what is essentially the coming together of a strong retail franchise and a wholesale lending business, Rajiv Lall, MD & CEO, IDFC Bank, said the two groups complemented one another and that there was compelling logic for a merger. “From a banking perspective, many of the entrepreneurs who borrow from the Shriram Group can be offered other products,” Lall said. R Thyagarajan, founder of the Shriram Group, said the idea was to cater to the under-served and neglected sections of the population. “We are enthusiastic about this association as we have grown on the strength of partnerships,” Thyagarajan said.
Broadly, all operating businesses will be brought under the umbrella of IDFC Ltd. Shriram City Union Finance’s merger with IDFC Bank will give the lenders’ loan book a big boost and access to customers. SCUF has assets to the tune of Rs 23,000 crore while IDFC Bank has assets of Rs 1.12 lakh crore.
Shriram Transport Finance (SHTF), however, will remain a stand-alone listed entity, allaying analysts concerns that the equity capital of IDFC Bank would be heavily diluted. Lall explained IDFC Bank would have found it difficult to absorb the assets of SHTF. “If we had diluted our equity capital too much, we would have violated the RBI’s licensing conditions,” he said, adding that the bank could nevertheless cross-sell products to customers of SHTF. That would please analysts who believe SHTF’s business is a niche one, built around collection efficiencies that banks are not geared to handle.
“The first step is to merge SCUF with the bank. At a later point we could explore other options,” Ajay Piramal, chairman of Shriram Capital, said. The Shriram Group’s companies lend to small entrepreneurs, selling them loans to buy second-hand trucks and also individuals to whom it gives two-wheeler loans. It has a strong customer base—of close to 36 lakh—across nearly1,000 branches with a reach even in Tier-III and Tier-IV markets.
Lall explained these customers could be sold a range of products, even without the presence of branches with the help of business correspondents and technology; complying with KYC norms would also be easier. IDFC Bank has just 90 branches, but it has 8,613 touch points and a customer base of nearly 14 lakh. The contours of the deal are to be worked out over the next 90 days and the merger would be subject to approvals from Reserve Bank of India, Sebi, IRDAI and CCI.
Thyagarajan said he would convince minority shareholders in Shriram Capital, the holding company of the group, of the benefits of the merger with a “good explanation”. If the transaction did not benefit them, it would not be pursued, he said.
Ajay Piramal, who owns a 20% stake in Shriram Capital via Piramal Enterprises, observed that while no merger was perfectly smooth, and that there would be cultural challenges, they could be overcome if the focus of both groups was aligned. Analysts have also been concerned about Ajay Piramal’s real estate interests queering the pitch by not meeting with regulators’ approval.
We will find a good explanation for minority shareholders. If they do not benefit, we will not go ahead
R Thyagarajan, founder, Shriram Group
With technology, we don’t need branches, we can sue BCs. And it will be easier to comply with KYC norms
Rajiv Lall, MD & CEO, IDFC Bank
This is a good transaction and will make IDFC Bank a much bigger player
Deepak Parekh, Chairman, HDFC
Cultural challenges can be overcome if there is a common intent. The cost of liabilities will come down significantly
Ajay Piramal, chairman, Piramal Group