A merger of the businesses of IDFC and Shriram Group would see some synergies in the form of a large, ready made customer base, but regulatory hurdles and difficulties in integrating such diverse entities could take the sheen off the deal, analysts said. IDFC and Shriram are considering options to merge their businesses to create a larger entity worth around $10 billion, according to news reports. Shriram Capital, the holding company of Shriram Transport Finance and Shriram City Union, is likely to merge the two businesses with IDFC Bank, while the unlisted life and general insurance business of Shriram Capital is expected to be merged with IDFC. One clear benefit for IDFC Bank is the boost to its retail portfolio. Shriram Transport’s leadership position in financing pre-used commercial vehicles and Shriram City Union’s large customer base comprising micro, small and medium enterprises in rural and semi-rural areas would help the bank meet its priority sector lending targets. Also, the cost of funds for the combined entity would come down to an extent because of the bank’s low-cost current account and savings account deposits, analysts said.
IDFC Bank has 74 branches, mostly in Madhya Pradesh, Karnataka and Maharashtra. On the other hand, Shriram Transport has 918 branches across the country and Shriram City Union has 85 branches. While total credit disbursed by IDFC Bank stood at Rs 85,172 crore as of March 31, 2017, total assets under management for Shriram Transport and Shriram City Union stood at Rs 78,760.93 crore and Rs 23,132 crore, respectively.
However, analysts believe that the process of integration is likely to be tedious and long-drawn since two groups deal with very different sets of customers and the systems and processes they have developed to service customers are very different. “They are operating at two ends of a spectrum. While one deals in commercial vehicles, the other has a legacy of lending to the infrastructure sector. You clearly need two different sets of people to do this. All three of them will struggle,” an analyst with a foreign brokerage who tracks the Indian banking and financial services sectors said.
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As per data published by IDFC Bank, the infrastructure sector was responsible for about 54% of its total lending as of March 31, 2017, and about one-fourth of its funded credit was in the retail segment.
Pointing out the regulatory challenges that lie ahead, the analyst said the fact that Piramal Enterprises owns stakes in Shriram Capital, Shriram Transport and Shriram City Union complicates the deal even more. “Piramal Group, which is in the real estate business and which currently owns an effective 15-17% stake in Shriram Transport and Shriram City Union could land up owning a sizable stake (greater than 5%) in IDFC Bank, which the regulator may not like,” Macquarie Research said in a note.
Macquarie further said the goal of giving new bank licences was also to promote financial inclusion and IDFC Bank by acquiring Shriram Group will inorganically meet priority sector lending requirements rather than the organic route which defeats the purpose of giving new licences.
“We believe it makes more sense to do the used CV business and some niche business out of an NBFC rather than a bank. There are challenges involved in doing cash-intensive businesses and recovery-related businesses through the bank model. Plus the burden of statutory appropriations of SLR and CRR will only drag down return ratios,” Macquarie said in the note.
On Thursday, IDFC Bank had said in a notification to the stock exchanges it was unable to confirm or deny the news reports. Shriram Transport and Shriram City Union, too, had said there was nothing that requires disclosures.