Mega merger of FIs back on agenda

Chidambaram examining proposal to amalgamate IDBI, IFCI, IIBI & IDFC.

Finance Minister P Chidambaram is exploring the option of merging the four development financial institutions, Industrial Development Bank of India (IDBI), IFCI Ltd, Industrial Investment Bank of India (IIBI) and Infrastructure Development Finance Company (IDFC).

Highly placed sources said Chidambaram wrote to the All-India IFCI Employees' Association in June informing the body that the finance ministry was looking into the matter of merging IFCI with IDBI, and also into the possibility of a merger of the four FIs.

The minister's letter was in response to an appeal made by Saroj Dubey, a Rajya Sabha member of the Rashtriya Janata Dal, which is an important ally in the United Progressive Alliance government. Dubey is also the president of the IFCI Employees' Association.

A merger of the four institutions will create a financial powerhouse with a total asset base of over Rs 100,000 crore. The combined assets of IDBI, IFCI, IIBI and IDFC on March 31, 2003, stood at Rs 95,820 crore. The sources said prior to the merger, the bad assets of IDBI, IFCI and IIBI would need to be transferred to asset reconstruction companies.

The sources said the finance ministry was also reviewing the previous National Democratic Alliance government's decision to merge IFCI with Punjab National Bank.

The boards of IFCI and Punjab National Bank had cleared the merger proposal and have since appointed SBI Caps to undertake a due diligence exercise.

However, differences over the classification of assets have surfaced with the IFCI management expressing concern on various loan accounts being declared bad or doubtful.

Government sources said a detailed action plan for restructuring the financial institutions would be prepared after the Budget. They said a merger of IDFC with IDBI could provide an impetus to IDFC's lending activities, given the former's experience in term-financing.

IDBI, the Centre and the Reserve Bank of India form the promoter group of IDFC and together hold a 40 per cent stake. IDFC's shareholder's agreement allows the transfer of stake between the promoter group, but a sale to another stakeholder would require amendments to the agreement.

The option to merge the institutions had been explored last year too, but the NDA government was keen on a universal bank set-up.

With the Left parties being key allies in the UPA government, the mega-merger could be easier to push through, the sources said.