BS Banking Annual 2018: After the merger

People, technology and the opportunity to tap growth in an economy undergoing rapid financialisation are the key factors in play in two historic mergers this year. V Vaidyanathan heads IDFC First Bank after the merger of Capital First with IDFC Bank. P S Jayakumar is MD and CEO of Bank of Baroda, which is in the process of a merger with Dena Bank and Vijaya Bank. The two CEOs discuss the opportunities and challenges

On the way ahead for IDFC First Bank

V Vaidyanathan: I believe that retail is a very big opportunity. Having said that, I also see opportunity in wholesale banking along the way, though definitely the bias will be in favour of being a retail bank. Out of Rs 80 trillion of credit only Rs 20 trillion is personal credit. Micro, small and medium enterprises (MSMEs) have a share of under Rs 5 trillion. 

We will have a substantial bias towards retail banking. Our retail loan book on a combined basis is only Rs 35,000 crore. In the next five-six years we want to take it close to Rs 1 trillion. And we believe that should grow at a compounded rate of 25 per cent. We have close to around Rs 60,000 crore on the infrastructure and wholesale financing part. We believe that over time infrastructure should wind down to probably as good as nil. The wholesale bank, which is about Rs 25,000 crore, should grow to about Rs 50,000 crore. 

All in all, it should get fundamentally transposed from being a 70:30 bank in favour of wholesale banking vs retail; to becoming one where it is 70:30 in favour of retail.   

The biggest challenge in a public sector merger 

P S Jayakumar: There are a number of challenges in the amalgamation process. When you look at the history books, one of the top five reasons that amalgamations don’t work is the lack of a central business purpose or clarity around what the new institution is going to do, as opposed to what the individual businesses were going to do. Other reasons include aspects such as human resources (HR), culture, technology, and also surprises that come from audit and forensic checks. 

Some things make it easier. The underlying ethos and compensation structure from an HR perspective are nearly homogenous. The other two banks were planning to upgrade technology to a level similar to where we already are… there is an overlap in terms of the total number of branches in 15 per cent of the cases. This is more than one branch of one or the other bank in the same pin code, which is relatively small when you come to think about it. 

On retrenchment  

Jayakumar: We have around 3,000 people retiring every year. This is around 3.3-3.4 per cent of the combined workforce. I think that can get adjusted. 

Vaidyanathan: There are a few who may choose to move on for better opportunities or be close to retirement. But there is terrific talent, genuinely available on both sides. It is my job as CEO to do an honest job to figure out the best mix of talents that can bring the organisation together. 

On IDFC First’s limited retail liabilities 

Vaidyanathan: Before the merger there were close to 200 branches, and about 100 of these are in metros that are largely liability-focused. The other 100 are in rural areas and are largely working on the asset side of the business. 

The extent of financialisation that is happening in this country is stunning. Therefore, the amount of savings that is going to come to the country on a year-on-year basis is mind-boggling. A report suggested that India has $250 billion of savings coming in every year, which is 10 per cent of the GDP. In five years it is going to be 15 per cent. And that’s $750 billion. That’s a big number. 

How do we get it? Branches will help. A payment mechanism and an engagement mechanism which makes the customers repeatedly interact with the bank will help. And finally, we need to add value and not chip the customer on an insurance piece or something here or there, trying to spin Rs 100 from a customer’s account. We need to focus on doing an honest job where the customer trusts us, and knows that we are a good bank that means well for them.

I believe over the next five years, if we put up, say, close to around 600 new branches over and above those which already exist, which we already plan to, we believe that an enormous amount of liabilities can be raised.  

Our intention is to grow incremental assets just from retail liabilities. And not have wholesale liabilities incrementally. And that will fix the balance. 

On the synergies for the merged public sector entity

Jayakumar: If we take Bank of Baroda as the base, the merged entity will have 40 per cent more deposits and 44 per cent more loans, but it would also have 70 per cent more distribution. So, there is a productivity play that needs to come in. In effect, if we were to look at per-branch business volumes, if Bank of Baroda is one, Vijaya is at 0.7 and Dena is at 0.5. So more products to customers would obviously be brought to play. 

Vijaya Bank brings to the table a very substantial increase in distribution for us in the southern states which also, from a GDP perspective, are in among the forefront. For example, Bank of Baroda on a standalone basis has 160 branches in Karnataka, which will increase to 760 branches for the combined entity. 

In Maharashtra we have close to 500 branches, and the combined entity will be closer to 1,000. There is also a play of distribution in the markets which are showing a higher growth rate than is seen in terms of GDP growth rate at the national level. 

We have a global presence as Bank of Baroda (which the other merged banks don’t have) and the attendant products. There are also other products such as credit cards which can also be brought into play. 

Likewise, there are learnings that the other banks would have in terms of individual products or segments which can also be brought into play.