The reverse merger of IDI with IDI Bank is a good way to create a universal bank in India. In my view, it is the best option. A reverse merger ensures a leap forward as opposed to either organic growth or even acquisition of a few banks. When convergence is the order of the day in financial services, there is merit in securing synergies in technology, distribution, infrastructure, and business skills. The biggest benefit of a merger is that it reduces the cost of operations, enabling the merged entity to position itself as a low-cost provider of financial services. The size and scale of operations will bring in several other benefits to the entity.

There are, of course, some areas of concern that make the transition to universal bank, particularly in the Indian context, difficult. Take the corrections required in the advances book, for example. The crucial issue that Fernandes will have to address is the availability of quality assets in the economy. There are simply not enough of these around-certainly not if you go by the conventional credit deposit ratio of 60 per cent applicable to a commercial bank.

The second area of concern pertains to investments. The issue here is similar. Where are the investment options that offer a respectable yield? These two issues are so crucial that they may put the relevance of the union per se in doubt. But I would still say that a reverse merger is a preferred option.

As the process of consolidation gets under way, several related issues will surface demanding the attention of top management. The choice of technology, is a case point. Clearly, the young and contemporary IDI Bank will be way ahead in this regard. But the issue here is whether employees feel comfortable with the technology being deployed by the new entity. No doubt, technology reduces transaction costs, but is it integration-compatible, and being customer-friendly?

Another area of concern is the integration of business itself. It will be necessary to purge some products from the existing portfolio and add new ones, keeping costs and revenues in mind. Yet another issue is in terms of integrating the distribution channel.

But all these issues pale into insignificance in light of what may be called the people factor. This is an issue that will be both trying and time consuming for Fernandes and his team. Several skills will become redundant in the new entity. There will be an overlapping of skills at various levels which will need to be ironed out. What will also become evident is the lack of skillsin some other areas necessitating training.

To go or not to go the way of universal banking is not a choice before IDI anymore. This is particularly true in the current scenario, where the economy is slowing down and sources of subsidised long-term funds drying up, leading to asset-liability mismatch, escalation in NPAs, and lower margins. The market has already made the decision for IDI.

Once the objective has been finalised, it is important for IDI to have a game plan. The road map must ensure that IDI not only reaches its objective with minimal disruption to its existing framework, work flow, and employee morale, but also does so in full compliance of the regulatory requirements of RBI.

IDI can examine the possibility of adopting a hybrid structure. This is somewhat along the lines of the structures of non-banking finance companies (NBFCs) and can be an interim measure until IDI can meet the central bank's norms completely. In this mode, IDI could do some of the businesses a commercial bank would without getting into full-fledged banking. It will be less than a bank and more than a FI. The advantage of this structure is that IDI will get some breathing space for complying with the CRR/SLR and other norms.

Considering the synergy in terms of customer base, market segments, and the business profile of IDI and IDI Bank, a reverse merger is a cost-and time-effective route to achieve the objective. There are, however, a few issues that Fernandes should deal with upfront. The foremost is to create an atmosphere of trust and confidence among employees. Once that is achieved, half the battle is won. Other things will automatically fall into place. Operational issues relating to statutory requirements, investments in equity, loans to directors, and priority sector lending will have to be addressed in due course. But a clear strategy is a must for the tasks ahead. And employee buy-in is crucial.

In fact, most issues that will surface in the implementation-phase are certain to be related to hr. Typical of any merger scenario, these pertain to redefining job roles, identifying skill sets, retaining core talent, retrenching dead wood, relocation, and supersession. It may be a good idea to have some clarity on the basis underlying such decisions right at the beginning so that there are no surprises in store for any one. It is important to ensure transparency in all hr processes. That is the one sure way of sustaining employee morale. Apart from this, other issues that will come up could include striking a balance between retail and wholesale banking activities, supplementing each other's markets by leveraging existing strengths, and, of course, customer relationship management.

When you move from class banking to mass banking, technology is the single largest facilitator, particularly in terms of product standardisation and back office processing. Technology and the integration of it, thus, is another issue that Fernandes must address upfront.

Access to low-cost float funds and short-term deposits is the main motivation for a FI to become a universal bank. But the ability of a universal bank to enhance its margins depends on several factors. It must have a strong distribution network to mobilise low-cost funds and market credit products. It should deploy sound technology to help reduce transaction costs. Committed and motivated staff who understand the needs of the customer is also an essential pre-requisite.

In transiting towards a universal bank through the reverse merger route, there are three issues that merit consideration.

Business-related issues: The ideal situation is to get the regulator to agree to a 'gradual' compliance with the high SLR/CRR requirements of the merged entity. But it is unlikely, in the interests of fair competition, that the central bank will be amenable to this idea. If the merged entity has to comply with these requirements, raising deposits to cover the FI's liabilities even while maintaining SLR/CRR on them (the new deposits), will prove difficult.

The only option, therefore, is to contract the assets of the FI to the extent required. If this can be done effectively, a merger may not even be necessary. Of course, a merger helps reduce the negative impact on profits on account of the substitution of the FI's customer assets with lower-yielding sovereign assets. But this, pre-supposes that the bank and the FI are of comparable size.

Balancesheet-related issues: If the FI comes with a huge baggage of NPAs, the merged entity will start sick from day one. This is hardly desirable. It's important to do a clean up act before the merger. One can, however, charge the write-offs to the capital of the merged entity. Herein lies the importance of an arms-length due diligence exercise. But the risk is that since it is the FI which spawned the bank in the first place, and is driving the merger initiative, it might ensure that the merger ratio is in its favour.

People-related issues: Clearly, the merger will make several roles superfluous. In fact, the biggest savings could well come from job redundancies. The skills of a bank exec are somewhat different from those of one in a FI. A FI's executive spend time in project appraisals and raising funds through medium-to long-term bonds. A retail bank, on the other hand, is partly in the hospitality business on account of the need to build and nurture a large number of retail relationships. A banker is skilled basically in managing portfolio of short duration assets and in treasury management. A service and process orientation is an important attribute for a retail banker. These differences make it desirable that the task of finding the right person for the right job in the merged entity be left to an independent body.

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