Banks May Encourage Takeovers Of Weak Clients To Merge

Banks and financial institutions are examining the possibility of encouraging mergers and acquisitions of their weaker accounts with healthier partners which could aid the turnaround of such units. This would improve the quality of banks' asset portfolios.

SBI Capital Markets, a leading financial services firms active in arranging mergers and acquisitions, has initiated dialogue with its parent, State Bank of India, India's largest commercial bank, as well as financial institutions for managing such M&As of the weaker accounts in their portfolios, officials at SBI Caps said.

SBI Caps executive director Birendra Kumar said the firm had already identified a few potential units from the SBI's network, which could be hived off through the M&A route.

 

SBI Caps officials said weaker units would be a target area for M&As, on which they would increasingly focus in future. The firm is active as an advisor and arranger for several M&As in the past few years, particularly in the disinvestment of PSUs.

Most of the units identified would have the potential to be turned around, officials said.

"They are technically sound, with no significant erosion in networth. But they may be facing a liquidity problem in terms of acquiring working capital from banks, or they may not have the marketing muscle, or they may not have built up their distribution network or exploited their exports capacity," he said.

Officials in the corporate finance divisions of banks and financial institutions said the number of accounts going bad due to problems of liquidity rather than erosion of networth were alarming.

Term lenders have substantial funds locked into these units; mostly long term loans extended during the economic boom of the early 1990s.

They felt merging of a sick unit with a healthier unit could result in a turnaround, and said they were open to the idea.

SBI Caps officials said expansion through the M&A route was in some ways, better to the traditional form of organic expansion where a corporate would set up a new plant in order to expand.

"Here you have a unit readily available for expansion. It results in faster growth as you are cutting down on the gestation period," an official said.

Corporate India saw a spate of mergers and acquisitions in the last year following the slowdown in industrial activity and excess capacity which has reduced the scope for organic growth.