IFCI merger set to bloat PNB bad loans book

The merger of IFCI with Punjab National Bank (PNB) will push up the latter's sticky assets to Rs 13,600 crore against Rs 4,670.13 crore in the fiscal ended March 31, 2004, credit rating agency Icra said in its latest report on the banking sector.

As per Icra's assessment, the higher non-performing assets (NPAs) level will severely impact income and reduce the competitive advantage of the merged entity.

The merged entity would have a gross NPA of 12.6 per cent, which is significantly higher than the combined average of 4 per cent of all scheduled commercial banks (SCBs) at end of financial year 2003.

The asset base of the combined entity will stand at Rs 1,07,900 crore, making it the second largest scheduled commercial bank.

"Mergers of development financial institutions (DFIs) with an established bank/conversion into a universal bank has some negative features. In case of a merger, the asset quality of the merged entity could deteriorate," Icra said.

As a step towards conversion into a universal bank, the board of IFCI decided on January 30, 2004 to merge IFCI with PNB, subject to requisite approvals and to initiate further necessary steps in this regard. On the same date, the PNB board also accorded in-principle approval for taking over IFCI.

Icra said with the merger of the DFI with an established bank, the combined customer base of the two entities could provide the appropriate critical mass to facilitate retail initiatives.

With a big capital base, the new merged bank entity would be able to further exploit its corporate relationships to develop fee income.

The merged entity could leverage on its large capital base, comprehensive range of products and services, extensive corporate and retail customer relationships, brand franchise, and talent pool.

Cost-cutting benefits could be derived from merging overlapping back-office operations and departments of the two entities.