IDBI merger proposal gets S&P thumbs up

Standard & Poor's (S&P) Ratings Services today said the proposed merger between the Industrial Development Bank of India (IDBI) and its subsidiary IDBI Bank is a positive development for IDBI as it moves toward a conversion into a commercial bank.

This move is further supported by the government's provision of a stressed asset stabilisation fund (SASF) worth Rs 9,000 crore, an S&P release in Singapore said.

The SASF will clean up IDBI's balance sheet prior to its conversion, which is expected to formally take effect from October 1.

At present, IDBI's foreign currency rating by S&P is BB with a stable outlook. Although these developments are positive for IDBI, there are uncertainties with regards to the government's final intentions for the institution, given reports of a possible merger with other development financial institutions, S&P pointed out.

IDBI and IDBI Bank recently obtained in-principle approval from its boards for the merger, which is still subject to regulatory approvals.

The SASF, which was announced last month in the Union Budget, is expected to operate as a special purpose vehicle. IDBI will transfer its existing non-performing assets (NPAs) to the SASF, in exchange for non-interest bearing government securities.

The positive impact of the SASF is likely to be seen in the institution's financial statements ending September 30, 2004, which will be its new fiscal year-end, S&P said.

The proposed merger is expected to propel the combined entity to among the top 10 commercial banks in India by asset size. It is also expected to further lower IDBI's overall cost of funds through a wider access to relatively cheaper retail deposits, via the banking subsidiary's branch network.

IDBI is also expected to benefit from a more diversified asset profile, through IDBI Bank's existing retail assets, which formed 40 per cent of its customer assets in fiscal 2004, as well as its continued focus on project financing.