IDBI Bank set to merge with IDBI

Merged entity to function as commercial bank.

The board of directors of IDBI Bank has approved in principle its proposed merger with its parent, IDBI.

The proposal will now await the approval of the shareholders and the regulator, even as swap ratios are being worked out. IDBI will be converted into a bank in October and the merger is expected to be completed during the current financial year.

M Damodaran, IDBI chairman, said the merger would benefit both IDBI and IDBI Bank. "The rationale of the merger is extremely compelling because the bank needs capital to grow and gets to use a name that has great brand value. We can start operations as a full-fledged bank without incurring expenditure on setting up branches, inducting technology, or bringing in new people," Damodaran said.

A new entity, IDBI Ltd, will become the holding company with two strategic business units "" IDBI, which will function as a development finance company, and IDBI Bank, which will be the retail arm. IDBI Home Finance, which was acquired from the Tatas, would also be merged into IDBI, IDBI executives said.

Banking Secretary NS Sisodia told a television channel that IDBI's balance sheet would be cleaned up before the merger, but the capital adequacy requirement would be taken care of after the merger. "Cleaning up non-performing assets (NPAs) will be done with IDBI before the merger actually takes place. A special purpose vehicle will be set up and that will transfer the NPAs, but these details are still being worked out," Sisodia said.

Damodaran said after the Rs 9,000 crore Stretched Assets Stabilisation Fund (SASF) was set up -- domiciled in a special purpose vehicle in the form of an asset management trust -- it would enable IDBI's legacy portfolio of bad loans to be purged.

The government will transfer Rs 9,000 crore of government bonds as cash-neutral assistance through the SASF. The bonds will have a 20-year tenure. IDBI, in turn, will transfer Rs 9,000 crore of NPAs into this SASF, and will get the bonds.

As a result, after the merger, IDBI's cost of funds, which stands at 5.6 per cent currently, will come down because of access to the savings bank, current account and call money markets. The merged banking entity is expected to have an NPA level of under 1 per cent.

The market reacted positively to the announcement of the merger as prices of both scrips rose. IDBI Bank shares hit the upper circuit breaker on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE), and closed the day at Rs 50.55, after opening at Rs 43.45. IDBI opened at Rs 64.25 and went to a high of Rs 74 before closing at Rs 66.75, up 5.70 per cent over yesterday's price.

On the BSE, the trade volume of the IDBI scrip was of the order of 10 million. On the NSE, 20 million IDBI shares were traded. On the BSE, 405,000 shares were traded of IDBI Bank, while on the NSE, 1.28 million shares exchanged hands.

Marketmen said, considering the scheme of merger of the bank with the financial institution, the latter would be the real gainer and investors could unlock a lot of value from their investments in the shares of IDBI.

The merger process should be completed during this financial year, the IDBI chairman said. "Chartered accountants on both sides need to look at valuations and arrive at a swap ratio. After that, there will be the approval of shareholders and court approval in Mumbai and Indore. The entire process will be completed during the current financial year itself," Damodaran said. The valuation process for the merger swap ratio will begin next week.

While IDBI has net assets worth over Rs 58,000 crore, it is expected to have net NPAs of 19.5 per cent by September, on the back of legacy assets.

In contrast, IDBI Bank has one of the lowest NPAs in the banking sector, at 0.2% at the end of the first quarter this year. The bank's total assets stood at Rs 13,900 crore and it has a comfortable capital adequacy ratio at 16.7 per cent. With a network of 95 branches in 76 cities, the bank in the first quarter had total deposits of Rs 11,000 crore with over 910,000 customers.

Damodaran said IDBI Bank was a clean bank and had the best risk management system. The RBI had commended it as a model for other banks to follow.

Analysts said the merger was to help a term-lending institution like IDBI to improve its liability profile, much in line with the ICICI-ICICI Bank merger a couple of years ago. According to them, it is a good merger as a fairly tech-savvy bank is being merged into an old institution, which did not have the spread or the technology to handle retail assets.