Icici-Scici Merger Sets Trend For Consolidation

The merger of the Shipping Credit and Investment Corporation of India (SCICI) with the Industrial Credit and Investment Corporation of India (ICICI), according to the RBI report, may be the beginning of the process of consolidation in the financial sector.

The report points out that it is through mergers that banks and financial institutions can consolidate their business.

The merger of the two entities was based on the economic logic of a strong capital base and optimisation of operational efficiencies.

It has resulted in the share of ICICI and SCICI in total disbursements of all-India financial institutions going up considerably to 22.7 per cent and 5.2 per cent respectively in 1996-97 as compared with 16.3 per cent and 1.4 per cent in 1990-91.

Referring to the other benefits of the merger, the report says that it is expected to provide synergy in operations and resource mobilisation, and add improvement in asset quality.

ICICI, as a larger entity, would be able to take up significant exposures in increasingly

internationally scaled projects, particularly in the infrastructure sector.

Further, the low debt equity ratio of SCICI would enable ICICI to increase its leveraging ability and enhance its capacity to borrow from domestic and international markets on cost effective terms.

This will lead to an improvement in earning per share of ICICI as it does not have to resort to the capital market for raising equity capital.

On the contrary, SCICI, as a relatively smaller DFI, did not have the necessary critical mass to raise wholesale funds at competitive rates.

The report points out that the merger of the two entities will lead to a large equity base, lower incremental cost of funds, and more efficient project appraisal machinery.

It would result in creation of an institution with a net worth of about Rs 4,000 crore and an asset base of over Rs 33,000 crore.

With the larger size of the balance sheet , coupled with the benefits generated from economies of scale as well as operational synergies, a single, large entity would be well poised to assume a leading role in financing of new infrastructure projects.