Banking on a new behemoth

The long-expected merger of IDBI & IDBI Bank seems to have kept all sides happy.

It didn't need a soothsayer to figure out that the Industrial Development Bank of India (IDBI) and IDBI Bank were about to merge. That became obvious several months ago when the IDBI top brass "" Meleveetil Damodaran, chairman and A K Doda, executive director "" stepped down from the bank's board. The reason was clear to banking industry insiders: they couldn't be on the boards of two companies that were about to merge.

Nevertheless, the exact timing of the move was still shrouded in secrecy. And, the announcement, when it finally came has changed the contours of the Indian banking industry.

After all, the new behemoth IDBI Ltd immediately becomes the seventh largest Indian bank out of 35 scheduled commercial banks. It has a market capitalisation of Rs 5,500 crore and asset base of Rs 79,923 crore.

Most importantly, Damodaran and the others involved in planning the merger seem to have found a formula to keep all sides happy. Many people initially believed that a reverse merger of IDBI (Rs 66,921 crore) and the Rs 13,002 crore IDBI Bank would be the most logical move seeing that the bank was in flourishing health.

But political compulsions put the kybosh on that move because the Left would surely have said that it was a backdoor privatisation. Other solutions would have made the bank's employees nervous about their future.

Under the circumstances the current solution was the best one possible. The new entity IDBI Ltd will act as a holding company and IDBI Bank will be an independently run strategic business unit.

Certainly, the merger will put an end to the insecurity that has gripped IDBI Bank and affecting its functioning. In the last few months, the managing director, seven senior executives and half-a-dozen slightly lower-level employees have headed to exit because they didn't know what the future held for them.

Yesterday's merger announcement appears to have ended that uncertainty. "It has ended the trauma faced over the last few months as rumours did the rounds and created uncertainty over our future," says a relieved manager at one of IDBI Bank's 103 branches.

But the careful planning "" and coordination between IDBI and the Government "" has laid the ground for this merger. A few months ago G V Nageshwara Rao, the former chief of IDBI Capital Markets was brought in as managing director. His role was clearly to steer the bank during its last few months before the merger.

Nageshwara Rao was brought in after the earlier board of directors headed by former managing director Gunit Chadha strongly resisted the amalgamation.

Rao's arrival had an almost magical effect and suddenly it started to get the improvements that it needed. It got Rs 154 crore of fresh capital through a rights issue. Then it was able to open new branches and plans were put forward for an expansion overseas.

Damodaran was quoted as saying: "We are committed to supporting the growth plans of the bank." Reiterating the close relationship, Nageshwara Rao in his first press interview said: "We will work closely with IDBI in the transformation phase (as the parent converts into a bank)."

IDBI Bank's employees are now looking more sure of themselves. But it's the staff at the institution that is looking nervous. Damodaran has already issued an ultimatum to the effect that they must shape up or ship out.

"Even as the merger modalities are being worked out, the task at hand is to rationalise the workforce. The idea is to clean up from a cultural perspective with proposals of reducing the cut off age on voluntary retirement," says a senior IDBI staff member.

IDBI has about 2,700 employees but the institution has a famously 'babu' culture. By contrast the nimble-footed bank has about 1,900 people on its rolls.

The two sides will definitely be an odd fit. "The talent pool is so different. It could be counter-productive for an IDBI employee to head a bank branch and likewise, for a bank personel to sanction a long-term project loan," says a rating agency official.

The differences between the two institutions come out strikingly in the latest quarterly results. IDBI Bank booked a profit of Rs 36 crore on a total income of Rs 260 crore. Its parent clocked Rs 23 crore profit from a total income of Rs 1,379 crore.

Operating margin was just 7.9 per cent in the case of IDBI, against a more admirable 49 per cent for IDBI Bank. Compare the bank's negligible non-performing assets at 0.2 per cent with IDBI's figure of 14.2 per cent as on March 2004.

It might seem that the entire merger is lop-sided, favouring IDBI. But this is clearly not so, not in a world where balance-sheet size matters when it comes to bagging corporate business. "IDBI Bank with a small balance sheet size of just Rs 13,000 crore was not in a position to capture corporate business from the clientele of its parent," points out a former public sector banker. For banks today to become serious players capital is of key importance. Also, the promoters must be able to grow the balance sheet as business grows.

It also helps that IDBI has a capital adequacy ratio of 18.7 per cent, against 9.9 per cent in the case of IDBI Bank. That will also help the bank to boost its business. "A stronger balance sheet size will help as it offer corporate guarantees on large-sized accounts, which today it is not capable of doing," says a corporate treasurer.

At the same time, IDBI equally stands to gain as its cost of funds to undertake business comes down considerably. Against the bank's cost of 3.9 per cent, the incremental cost of funds for the institution is as high as 5.6 per cent.

With the merger, IDBI will get access to low-cost deposits, exposure to the fast-growing retail finance market, a readymade distribution set up, banking expertise and a private sector culture. IDBI Bank gains immensely with a larger balance sheet size and more importantly "" looking at what has recently taken place in the private banking sector "" government support.

If the merger is clearly a win-win situation for both sides, how do the respective shareholders gain if at all? Most analysts feel there will be complications because this is a government-led merger. "It's very difficult to estimate a swap ratio, with the only indication being the book value of IDBI at Rs 110 and that of IDBI Bank at Rs 35," says one analyst.

"The government is working out a way to make these institutions viable. So while the overall reaction to the merger is positive, it will be a while before both entities are out of the woods, as was the case with ICICI Bank," says Rajeev Thakkar, banking analyst, Parag Parikh.

IDBI shareholders are expected to gain since the institution was saddled with more problems than the banking arm. But most people in the banking industry agree that it seems to be a satisfactory solution to a long-running saga.