Mega mergers likely in finance sector

Finmin considering merger of SBI with IDFC; IDBI with IDBI Bank, IIBI

The finance ministry is considering merging IDFC with SBI.

The mega consolidation plan for the financial sector could include a merger of Industrial Development Bank of India (IDBI) with IDBI Bank, IIBI and a public sector bank.

The plan is expected to be finalised by June 30.

Senior finance ministry officials told Business Standard that the time was ripe for consolidation in the financial sector, including the merger of nationalised banks.

The proposal to merge IDFC with SBI will give a big fillip to the infrastructure sector. "This is one of the options being looked at. A final decision has not yet been taken," an official said.

The ministry had earlier toyed with the idea of merging IDFC with Infrastructure Leasing & Financial Services, but the plan was dropped following serious differences among key stakeholders. However, there are no plans for a merger of SBI with its associate banks.

The finance ministry has already decided to permit a reverse merger of IDBI with its subsidiary, IDBI Bank, and IIBI Ltd.

The IDBI management has been given a free hand to decide whether a merger with a public sector bank will be required to give the new entity critical mass. "The sequencing of the mergers will be decided by the IDBI management," an official said.

The officials said the government would give budgetary support on the lines of the National Industrial Credit Long Term Operations Funds, which was earlier extended by the Reserve Bank of India, to help IDBI lower its cost of funds and continue its focus on development financing. IDBI has been asked to assess its fund requirement.

The entire process is expected to be completed over the next 12-18 months. A critical element of the merger plan entails the transfer of non-performing assets, estimated at about Rs 80,000 crore, to asset reconstruction companies.

This will result in state-owned banks and financial institutions having clean books with a lower asset base.

Analysts said a merger of IDFC with SBI could help the bank focus on infrastructure financing in a big way.

"IDFC's expertise can come in handy for SBI to push its exposure to the core sector. This is important because the government is focusing on this sector," a banking analyst said.

The government is of the opinion that having bailed out weak banks, there is an urgent need for consolidation among state-owned banking entities. The ministry has sent feelers to some nationalised bank chiefs, who are not averse to the idea.

The officials said the plan was in line with the recommendations of the Narasimhan Committee-II, which had noted that mergers of banks with financial institutions should be based on synergies, location and business-specific complimentarities and should make commercial sense.

Accordingly, the government has begun work on the merger of Punjab National Bank with IFCI Ltd, both headquartered in Delhi and having a large pool of common assets.

Further, it has ensured that there is just one development financial institution in IDBI, which is expected to become a bank from April 2.