Ever since the announcement of the two way merger between IDFC Bank and Shriram Capital, there has been a lot of speculation and debate over the actual rationale for the merger. While it’s the expanded size of the combined entity and the lure of entering into the banking services, which seems to be driving Shriram Capital, for IDFC, the rationale seems to lay in the benefit of gaining a footprint in the south Indian markets.
R Thyagarajan, the founder of the Shriram Group, believes that adding banking services would benefit the organisation by creating another revenue stream. He has said that once a zfinance entity becomes large, it is best to be closely linked to a bank, as banking is the core sector. Thyagarajan also seems to be a believer in the Too Big to Fail theory, as was apparent from his statement that the regulator and the government would not allow a large bank to fail, while a NBFC is dispensable.
Thus, for Shriram the big synergy will be that it automatically converts its NBFC operation into a banking operation. However, the uncertainty about the strategic rationale looms large in light of the statement made by Ajay Piramal, the Chairman of the Shriram Group, who recently clarified that the merger was not an attempt to enter banking through the back door. He says that Shriram is entering into the deal as a strategic investor. The Piramal group owns a stake in Shriram Capital as well as a direct stake in Shriram Transport and Shriram City Union Finance (SCUF).
Shriram was always one of the contenders for a banking license, although the fact that Shriram Chits owns a stake in the banking entity, will be a matter of concern for the RBI, Angel Broking said in a note on Wednesday. The big positive for the Shriram group is that it gives them access to a large institutional balance sheet that can be a major blessing in turbulent times, it said.
What’s in the deal for IDBI bank? The merger with Shriram will most likely open up avenues in South India. Shriram Transport along with SCUF has more than 1 crore customers in South India. It would otherwise have been difficult to acquire such a large customer base organically, Angel Broking said in the note. The advent of technology has further magnified the value of an active client, as the cost of client acquisition and maintenance comes down substantially, the research and brokerage firm added.
However, analysts foresee a lot of impediments to a smooth merger. The range of issues include regulatory hurdles, cultural and people challenges, as well as potential Asset Liability mismatch for IDFC bank ltd. Whether the synergies will actually be reliased remains to be seen.