BOMBAY, 30 April — Till now, we were all witness to the mega mergers between banks, one small private sector bank being taken over the bigger private sector bank. Even when the banking sector is yet to consolidate, there is now this big news breaking that even financial institutions are in a consolidation mode. Did you ever imagine that a day would come when there would be mergers amongst the financial institutions?
Well, that day has been ushered in what with the Finance Ministry announcing that the merger of two financial institutions — IDBI and IFCI is being mooted.
IFCI to be taken over by IDBI? The first thing which comes to mind is whether this is a reprieve being sought out for IFCI which seems to be desperately in need of some shoulder to cry on. It is too small an institution as compared with IDBI and ICICI, there was also this feeling that this was an institution which just exists.
And this is nothing like IDBI being an outsider coming down like a predator to takeover the institution. That is so because, IDBI already has a 31.7 percent stake in IFCI which permits IDBI to sit on IFCI’s board. Infact it was big brother IDBI who had bailed out IFCI during its rights issue which failed to get the required minimum subscription.
Under former IFCI Chairman K.D. Agrawal, there had been pressure to delink the two institutions, but this talk was set aside in recent times on account of the trailing performance of IFCI. Infact there was one interesting observation which came to the fore — the present chairman of IFCI is P. Narasimha and prior to this, he was the chairman of IDBI. So is this something like a going-back-home kind of a scene?
The merger proposal has been prompted by IFCI’s request for a Rs.4.00 billion bailout package from the government to shore up its capital adequacy ratio. If one may recollect, last year, IFCI had sought for a Rs.4.00 billion, 20-year preference capital infusion from the government to improve its debt equity ratio from 12:1 as on March 31, 2000, to around 10:1. Apart from this, it had also called for induction of a strategic partner in association with IFC, Washington or the Asian Development Bank.
This may prove to be a win-win situation for IFCI but not so for IDBI which is expected to resist this move of merger. Those supporting the merger say that with IFCI’s inclusion, IDBI’s dominance which is currently restricted only to West and South of India, will now be able to get a foothold in the North.
And those opposing the merger say that IFCI has been mainly a laggard wherein in terms of sanctions and disbursements, IDBI has been growing steadily, while IFCI has been cutting exposures.
There are many who are even saying that this merger is being mooted by the government as it is not in a position to pump in the recapitalization fund and it thus found the best alternative in a merger.
And currently, even IDBI is fighting for survival. It recently decided to redeem Rs.247 million redeemable preference shares of Rs.10 each, aggregating Rs.2.47 million, held by the Center, mainly to improve its earning per share. There are many who feel that instead of creating a mega institution, it will not augur well for the future of IDBI and IFCI.
Infact IFCI is currently in the red and post merger, the profit after tax of the merged entity would be about Rs.7.55 billion, which is actually an erosion of IDBI’s profitability.
Talking about the merged entity, what would this new huge financial institution look like? Well, in case the merger plan is accepted, the merged entity is estimated to have an equity base of Rs.12.99 billion. Investments of the two institutions would stand at Rs.130.90 billion, while the combined advances would amount to Rs.679.27 billion. It is estimated that around Rs.86.37 billion would accrue via interest earnings, while dividend income of the merged entities is expected to be approximately Rs.8.48 billion.
One can only wait and see whether this merger does come through. Yes, there are going to be oppositions as it is always painful for the profit making institution to takeover another institution which is in the red.
But when one looks at the entire picture as a whole, maybe the new huge financial institution will be able to do much better collectively than what it did individually. Now that is indeed a very big maybe!
