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CASE GAME The Case Of The Universal Bank Should IDI reverse merge with its banking arm to expand its services? A. Parekh of Arthur Andersen, A. Khanna of banknetindia.com, and U.R. Bhat of JF Asset Management debate. By R. Chandrasekhar
''Not urgent, but relevant for your meeting with the Secretary,'' Singh said. ''We've just received a fax from the president of the All India Investors' Council objecting to the reverse merger of IDI with IDI Bank.'' ''Why should they have a problem?'' said Fernandes, not making any attempt to hide his disdain for the 'trouble maker'.
''They say the need to raise funds to comply with RBI's norms and the pressure from IDI's non-performing assets (NPAs) will erode IDI Bank's shareholder value,'' Singh explained. ''The minority shareholders, they contend will unduly be deprived of dividends and capital appreciation''. ''But the long-term gains cannot be ignored,'' Fernandes argued. ''You and I know that, but not the other agencies,'' said Singh. ''In fact, I won't be surprised if the Finance Secretary got a copy of this ahead of us.'' ''Thanks for the call, Naresh. I have got to go now,'' Fernandes said, ending the call. Sanjay Kumar, the Secretary, was a lean and academic-looking man, but with a great sense of humour. Fernandes had known him for several years now, not just as a bureaucrat but as a person. ''Hey, Vincent, I can see that you are still making it to the squash club every evening,'' said Kumar, shaking hands with Fernandes. ''But I bet I am still several pounds heavier than you,'' IDI's chairman replied in jest. ''What is this about reverse merging IDI Bank with IDI?'' Kumar asked. ''I was talking to RBI's governor yesterday and he mentioned in passing that he has, in principle, approved the merger.'' ''God bless him for that,'' Fernandes interjected. ''It's inevitable that a long-term lender like IDI or housing development bank turns into a universal bank. The demand for project finance has been drying up because corporates have access to cheaper sources of funds. The quality of assets in our portfolio has deteriorated leading to an increase in NPAs. The cost of acquisition of long-term funds has gone up. The only option for IDI, I think, is to raise money short-term, and lend it short term. This is what IDI Bank has been doing. And once we go for a reverse merger with IDI Bank, we can leverage our size and scale to hold on to our customers by offering every financial service they can think of under one roof.'' ''You know I got a fax from some All India Investors' Council, which...'' Fernandes cut off Kumar, ''They sent us a fax too. In a business like ours we need to think long term. As I see it, the more we delay the reverse merge, the harder will be the going for both IDI and IDI Bank.'' ''But I am sure there are other problems involved in the merger,'' argued Kumar. ''I can foresee some kind of an asset-liability mismatch, besides issues relating to mindset, integration, and people.'' ''No doubt,'' conceded Fernandes. ''But we are making the right moves. Matching assets with liability is an operational issue we can handle. We have already pruned the number of subsidiaries of IDI. We have started refresher courses for senior managers in managing retail funds, and we have also set up an integration cell to sort out any hr-related problem that a merger may throw up.'' ''Doesn't your bank have younger people at the helm and the institution, relatively older ones?'' Kumar asked. When Fernandes nodded in agreement, Kumar continued, ''In that case how will you accommodate, reward, and promote people in the new entity?'' ''Initially, we don't expect the merger to destabilise the structures of the two organisations,'' explained Fernandes. ''But obviously we'll have to let some people go a few months into the merger.'' ''What worries me is the size of the merger that we are talking about here,'' said Kumar. ''IDI is one of our top FIs and a botched merger will adversely impact the financial sector.'' ''We are confident we can handle it,'' assured Fernandes. ''And look at the brighter side. A successful merger could start a trend in the industry. After all, almost all the healthy FIs have their own banking arms.'' ''But is there room for so many universal banks?'' questioned Kumar. ''How will it impact the industry?'' ''The impact will be positive,'' said Fernandes. ''An immediate fallout will be a reduction in our transaction costs. In fact, over time we will position ourselves as low cost producer of financial products. Of course, the biggest beneficiary will be the customer-both corporate and individual-who gets customised services under one roof at far lower prices than he is paying now. The cost of finance will come down.'' ''I can only hope you are right,'' said Kumar. ''Well, in a way I am betting my career on it,'' Fernandes pointed out to Kumar. ''We are creating a more stable customer base by targeting state governments. We have offered to do online collection of sales tax and other revenues. I expect it to be a major revenue stream over time. We have started exchanging a portion of our NPAs for real estate. That's proving to be a better solution.'' ''If by allowing our FIs to become universal banks we can create a healthier financial system, it may even be possible to get RBI to ease its balancesheet guidelines,'' said Kumar. ''In fact, I have the RBI governor's word on that too,'' revealed Fernandes with a grin. ''Now, I only need some more supporters such as you.'' |
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Vincent
fernandes had just entered the visitors' lounge at the Finance Secretary's
office in North Block, Delhi, when his mobile buzzed. Fernandes, Chairman
of Industrial Development Institution (IDI), had arrived a couple of
minutes early so he decided to answer the call. It was Naresh Singh, CEO
of IDI Bank-an IDI subsidiary-who was on the line. ''Hi, Naresh, anything
urgent?'' Fernandes asked.