Tamal Bandyopadhyay: A unique union

Will IDBI be able to absorb United Western Bank with ease? Business Standard dissects the deal...

In more ways than one, the IDBI-United Western Bank deal is unique. First, the Reserve Bank of India (RBI) took 10 days to decide on who would be the right suitor for the troubled Satara-based old private sector bank. In earlier two instances "" the mergers of Global Trust Bank and Ganesh Bank of Kurundwad "" the suitor was chosen within 48 hours of the imposition of moratorium, freezing normal banking activities (barring withdrawal of deposits up to a specified amount) of the financial intermediaries. This time, the banking regulator could not do this as there were too many takers for United Western.

Second, the RBI has gone beyond protecting the interest of depositors alone. For the first time, the interest of shareholders has been taken care of by the prospective acquirer. In fact, the scheme of amalgamation has promised more than twice the book value and over 31 per cent premium on the market value of United Western stock on the day the scheme was announced.

Finally, the winner itself "" IDBI "" was a big surprise. How did it score over ICICI Bank and Canara Bank, which have much bigger balance sheets and are in a better position to absorb United Western Bank?

The RBI conducted an informal bidding process for the troubled bank which has a positive net worth of around Rs 70 crore. The prospective acquirers were expected to meet certain key conditions.

First among them was the protection of all depositors without any help from the Deposit Insurance and Credit Guarantee Corporation (DICGC), which ensured repayment of deposits for any troubled entity up to Rs 1 lakh. All 14 bidders were willing to accept this condition.

Second, the banking regulator wanted an expeditious resolution by the suitors to restore the confidence of the depositors and the lenders of United Western Bank immediately. On this count, two foreign banks "" Citi and Standard Chartered "" failed as they cannot go ahead with an acquisition without conducting due diligence on the books of the bank.

Third, the RBI preferred to choose those who would not seek any forbearance "" in terms of statutory requirement like maintenance of cash reserve ratio (CRR) and statutory liquidity ratio (SLR) "" from the regulator as a pre-condition to rescue the beleaguered United Western.

Fourth, the central bank also wanted an assurance from the suitors on the fate of the 3,000-odd employees of the bank.

Finally, it gauged the prospective acquirer's commitment to protect the interest of United Western Bank's shareholders. IDBI scored over others on this count by offering Rs 28 per share against a book value of around Rs 13. To this extent, United Western Bank has been awarded to the highest bidder in a well laid-out, transparent process. It is a coincidence that IDBI is Maharashtra-based and will find it easier to integrate United Western with itself.

Why did IDBI make such an offer, while more seasoned players in the acquisition game were not willing to pay so much? Being adequately capitalised (IDBI's capital adequacy ratio is 14 per cent), it would not require any fresh fund infusion in United Western. So, the only cash outgo for IDBI for this acquisition would be Rs 150.55 crore towards United Western Bank's shareholders. A relatively small price to pay to get hold of 230 branches, particularly when its own branch network is only 195 on an asset base of close to Rs 90,000 crore. However, IDBI will have to take care of Rs 227 crore worth of net non-performing assets (NPAs) of United Western Bank and the actual amount could be bigger than the official figure.

If one excludes the two foreign banks that were in the fray, among all suitors, IDBI was the most starved for branches. It would have taken years for the financial institution-turned bank to set up these many branches. This is because the banking regulator is not willing to grant branch licences in over-banked urban centres. Since the beginning of this calendar year, the RBI has issued about 1,800 branch licences and 46 per cent of them are in un-banked districts. Faced with the new branch licensing policy, even the foreign banks are now reaching out to Indore and Kanchipuram.

There are 391 under-banked districts with population per branch more than the national average of 16,000. Uttar Pradesh has the maximum number (63) of such districts followed by Madhya Pradesh (43) and Bihar (37). So, in the normal course, IDBI would not have been able to get 24 branches in Mumbai, 20 in Pune and another 25 in busy urban pockets, apart from over 100 branches in western Maharashtra with good exposure to agriculture and small-scale industries.

The biggest challenge before IDBI would be the integration of technology platforms and people. It uses Infosys' Finacle, while United Western Bank's technology platform is based on TC-4 of CMC, a TCS subsidiary.

Roughly, United Western, about 8 per cent of IDBI's size, has two-third of IDBI's staff strength (3,068 versus 4,548). IDBI has been on a hiring spree since IDBI Bank, which got itself merged with IDBI two years ago, has seen an exodus of employees. So, it can easily absorb United Western employees. Besides, unlike those of IDBI Bank, United Western Bank employees are not better paid than their counterparts in IDBI. However, the skill level of these employees, a section of them unionised, can be an issue.

Finally, the entire episode is a pointer to the fact that some old private sector banks, which are niche regional players and starved of capital, have huge value. Even after substantially eroding its net worth (capital and reserves), United Western Bank has been able to attract double its book value for the shareholders. Had it taken the merger route before the RBI forced it down its throat, it would have got even a better valuation. Other smaller banks like Sangli, Ratnakar, Nainital and Dhanalakshmi should start scouting for partners before the regulator knocks at their doors.