The Reserve Bank of India has, time and again, made it clear that a move by a financial institution into universal banking should never be driven by the compulsions of liquidity. Rather, it should be a strategic decision driven by an ambition to grow in the business. The hope, therefore, is that ICICI Bank, the merged entity, will come into being as a result of the years of planning and strategising which has been undertaken by KV Kamath and his team, not because the institutions are grappling with three deadly words asset-liability mismatch. Thus far, the ICICI team has been going about its huge task of the merger with a fair degree of precision. It has begun raising the statutory liquidity ratio to comply with the laws governing banks, and the target is Rs 18,000 crore or thereabouts. Asset swaps are also being undertaken as a major exercise to comply with the SLR objective. It has also begun discussions with RBI and following all the other statutory norms for the merger.
But consider the issues that lie ahead. There is, of course, no denying that strategic reasons apart, avoiding a serious asset-liability mismatch is one of the reasons why a move into universal banking makes eminent sense for ICICI. Having come this far and set a date for the makeover, ICICI will now have to realise that this huge change has now got to be justified by it to its large body of shareholders by its performance. Once it turns into a universal bank, it will have access to short term, low cost deposits like any other bank, which will address the critical issue of mismatches. But that apart, the key issue will be how ICICI Bank, in its new avatar, takes on competition.
In this case, size is not a guarantee for success. Yes, it will turn into a banking behemoth overnight with an 11 per cent loan market share, second only to State Bank of India with 17.9 per cent, and also have greater access to retail funding with the ability to capture more fee based income. But it must also be remembered that there are in the category which ICICI Bank will enter, major foreign players like Citibank, HSBC, Stanchart and ABN Amro, with the entire suite of products which ICICI is also going to hawk.
The name of the game in the banking sector, as is now widely known and recognised, is branding, retail, customer servicing and technology. While it is true that ICICI has made a mark in these areas, the new entity will have to ensure continued growth so that competition is tackled effectively. And the fact that there will be short term pressures on profitability owing to the makeover and hefty investments in reserve requirements will pose the greatest challenge.
In fact, ICICI itself has acknowledged the pressure on profitability post-merger, and the fine balancing act between maintaining a healthy rate of growth and tackling the profitability pressures will be the next crucial task before Mr Kamaths team. How the team faces up to this will be the basis on which the shareholders of ICICI Bank will judge the management. Experts have also argued that ICICIs non performing asset levels have to be judged on the basis of banking norms and not as a financial institution. This point, to me, makes eminent sense. If you are going to be a bank, why not let your portfolio be judged on the basis of the rules governing the banking sector It will then be interesting to see how ICICIs NPA levels compare, and that, in turn, will have an impact on the capital-adequacy ratio. This is an aspect which RBI must surely be examining, and the central banks view on this will be crucial to the future of this merger. An independent entity is also taking a re-look at the share swap ratio of two shares of ICICI for one of ICICI Bank and all eyes are going to be on that report as well.
Returning to the issue of size, it must also be remembered that the biggest banking entity, SBI, is also undergoing a major transformation as far as its business strategies go. Retail is clearly the mantra at SBI too and home finance, personal finance and the like are aggressively being pursued by it. And if ICICI has cutting edge technology (a fact widely acknowledged in the financial sector), SBI is also getting increasingly tech-savvy. In such a scenario, size with profitability has to be the future guiding principle for the merged entity. At a time when the slowdown is still very much a reality, the new look ICICI Bank may have to run faster just to stay at the same spot.