Eager for merger, but Centre holds the key for IDBI

B S Srinivasalu Reddy

Mergers -- reverse or otherwise -- are the flavour of the moment for financial intermediaries. After ICICI Bank-ICICI, it is now the turn of Industrial Development Bank of India (IDBI). And a way has to be found out for in its current avatar, it is clearly at the wrong end of the gun-barrel.

For starters, a formal proposal has been submitted to the Reserve Bank of India (RBI) to transform itself into a universal bank. But it is going to be a long haul before accomplishing this objective. It calls for a lot of convincing of its promoter -- the Centre -- at every mile-stop.

The Centre’s stranglehold on the issue can be understood from what an IDBI official told The Financial Express: "It all depends on what the Centre decides." There are also fears that matters may take political overtones when the management or employees of the target bank were to create hurdles in the process of transformation.
However, if the target bank is a state-run bank in which the government holds the majority stake, matters may somewhat ease.
Unlike in ICICI Ltd, in which the government does not hold any stake directly, in IDBI, the Centre directly holds 58.47 per cent. This gives it a greater say on the issue of merger with a private sector bank as it may not like to bring its stake in the merged entity below a certain level, say 51 per cent or 33 per cent.

The first, and arguably the most difficult of the tasks now, is to select a bank for a reverse merger from among the host of state-run and private banks. On the menu, there are 26 state-run banks and a host of private banks.

IDBI chairman PP Vora has affirmed the FI’s preference for a state-run bank. This preference seems to have stemmed from primarily two reasons.

One, fixing the swap ratio between private sector and public sector companies or institutions has been a complex affair as was noticed in the case of the proposed merger of the Global Trust Bank (GTB) with the so-called private sector UTI Bank. Suspicion that may drag officials into a political debate. The second is the ability to add critical mass in terms of deposits and branch network.

On the state-run bank front, names of potential partners doing the rounds are Bank of Baroda (BoB), Bank of India (BoI), Canara Bank and Union Bank of India (UBI), besides Punjab National Bank (PNB). Deposits and capital base of the target bank would be the most important criteria to be considered by the FI according to the analysts. Other important parameters are the number of branches, non-performing assets (NPAs), listed or otherwise, foreign presence and profitability.

Among the above mentioned banks, only two -- BoB and BoI -- are listed. The two listed banks also have foreign presence with BoB having 38 branches and BoI having 19 branches. In the case of others, the Centre holds 100 per cent. The Centre, therefore, will have to dilute. The extent of dilution -- to a floor of 33 per cent -- will have a bearing on the swap ratio, and the level of the Centre’s say in the new merged entity.

IDBI board in its meeting on October 27 preferred an immediate reverse-merger with a bank in order to quickly migrate to the new model. This is expected to pose a challenge to the management of the new entity in integrating the banking and institutional businesses.

In the case of ICICI Bank-ICICI, it was different. Both parent and the bank it spawned were preparing themselves for meeting the synergistic requirements of the merger plan. ICICI itself made a foray into many retail businesses like housing and auto-finance; had compatible technology platforms, and a well thought-out strategic plan in the run-up to the reverse merger.

In the case of IDBI, there will be a culture shock, if the target-entity is to be a private sector bank. Again, in the event of a merger with a state-run bank, integrating the wholesale and retail business perspectives of the FI and the bank would pose a serious problem. In this context, the decision of the IDBI board not to opt for converting the FI itself into a bank is a valid argument as this could have called for transforming the organisational culture.

If it is opting for a deferred merger, the FI has to evolve a clear strategy as to what form the bank and FI would take in the interim before the merger of balance sheets are effected. RBI has been very clear that it would "maintain a level-playing field for all banks. If one wants to be a bank, they must adhere to all the regulations under the Banking Regulation Act."

A deferred merger process will give the FI two to three years leveraging span for adhering to the Banking Regulation Act.
The crucial regulation that IDBI has to adhere to immediately after conversion is the reserve requirements -- statutory liquidity ratio and cash reserve ratio. However, clarity is still lacking on the issue from the RBI as the balance sheet of FIs is different from that of banks in the sense that their liabilities contain funds provided by the government and RBI for special developmental schemes and deposits by banks in the form of SLR and CRR investments.

The actual SLR and CRR requirements are likely to be much lower than the present projections based on the total non-shareholder liabilities of over Rs 17,200 crore for IDBI and Rs 18,200 crore for ICICI. "The reserve requirements of FIs are likely to be much lower than the present projections, if the RBI concedes to the FI’s request for considering the funds raised through bonds from banks as inter-corporate deposits, which do not attract the norms and the government funding is exempted from reserve requirements," an IDBI official said.