Merger: ICICI's Banking-itch

MERGER
ICICI's Banking-itch

ICICI wants to become a bank, either by a reverse merger with its offspring or on its own. Either ways, it won't be a quick make-over.

By Roshni Jayakar

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The jury was double-quick with its verdict. On October 5, a top team from India's star financial institution ICICI, led by CEO K.V. Kamath, had hardly begun unveiling its presentation on how it wanted to become a bank to the brass at the Reserve Bank of India's Mumbai headquarters, when a stone's throw away at the Bombay Stock Exchange, traders hammered down its scrip to Rs 89. Since that fateful day, the ICICI stock has been sliding to its 52-week low of Rs 74. So has the stock of its offspring, ICICI Bank. Why? Because one of the options ICICI is toying with is doing what hip investment bankers call a back flip. No, it's not a new kind of financial calisthenics; it's an old-fashioned reverse merger. To quickly become a bank, ICICI wants to merge with the highly successful ICICI bank.

Nyet, said the market. And it wasn't the only one. Last fortnight the RBI too wasn't kicked about letting the proposal through. Says RBI Governor Bimal Jalan: ''We don't have any application or proposal under consideration.'' On Dalal Street, the tumble was triggered by concern over the quality of ICICI's assets. And those who'd invested in ICICI Bank's shares and ADRs were irked by the merger because the new entity would have larger non-performing assets (NPAs), and a higher statutory reserve requirement. Says a BSE broker: ''ICICI Bank as a stand-alone entity is a better performer.''

The RBI's concerns are different. It favours a gradual approach for FIs wanting to become banks. RBI's sources explain: ''A gradual transition has to be worked out for a level playing field with the banks.''

The Price Of Morphing

But at ICICI's Bandra-Kurla headquarters, the mood is defensive. Says Kalpana Morparia, Senior General Manager, ICICI: ''The baby is still in the conceptualisation stage and you are talking of marriage.'' Yet, there's no denying the fact that ICICI wants to become a bank-merger or not. Back in 1996, Chairman N. Vaghul had started talking about making it a universal bank. His protégé, Kamath, is only taking ICICI closer to that vision. It's logical for ICICI to want to become a bank. As a bank it would be able to raise short-term funds like demand deposits, lower cost of raising funds and a better asset-liabilities match.

The question isn't about why ICICI wants to become a bank. It's about how and when. First, ICICI would have to meet tough RBI norms: maintain a 25 per cent statutory liquidity ratio (SLR) and a 8.5 per cent credit reserve ratio (CRR). Plus, it have to lend 40 per cent of advances to the priority sector. Given ICICI's Rs 40,000-crore balance sheet, if it morphs into a bank, it would have to maintain huge reserves.

Not really, argues ICICI. Since its balance-sheet (comprising a loan portfolio of Rs 50,881 crore and net worth of Rs 9,330 crore as on March 31, 2000), unlike banks, does not have demand-deposit liabilities, it should not be subject to SLR and CRR norms on its existing balance-sheet size. Instead, says ICICI, it is willing to comply with the RBI's regulatory norms on an incremental basis. And, as for priority sector lending, well, regulatory norms are unclear as to whether the RBI would consider ICICI's huge loans to the infrastructure sector as priority sector lending.

And what of ICICI Bank? The brass at ICICI feels it's logical to merge a morphed ICICI with ICICI Bank. Not only because ICICI is a 62 per cent shareholder in ICICI Bank, but also because it would avoid the duplication of having two banks under one umbrella. A bonus benefit: bank-to-bank mergers do not involve any stamp duty.

Merge Before Or After

The other option is to merge with the ICICI Bank and then convert the entity into a universal bank. With overlap of both corporate and retail customers as well as some common products like project financing and trade financing, ICICI feels merging would make sense. But the apex bank isn't so sure. RBI's April credit policy which first elaborated its approach to universal banking stated that a financial institution which wishes to convert into universal bank has the option to transform provided the prudential norms applicable to banks are satisfied.

Although ICICI officials insist that it is early days still and lot more work on the proposal remains to be done, a merged entity could either be a single company or be structured like the State Bank of India, which does investment banking through its wholly-owned subsidiary. ICICI could likewise be structured as a holding company with individually capitalised but fully-owned subsidiaries.

But that's for later. For the moment, Kamath's agenda is to get the proposal formalised. And, although he and his lieutenants are unwilling to give a time-frame, it could take at least another 18 months for the transformation to begin. The birth of a new big boy in banking doesn't happen in a jiffy.

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