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IDBI bypasses reverse merger
- Combined entity to straddle retail banking and project finance

July 29: The boards of IDBI and IDBI Bank have cleared the long-standing plan for a merger of the two entities.

IDBI chairman and managing director M. Damodaran said IDBI Bank will be folded into its parent, but the move will not be the widely expected reverse-merger. Instead, it will be what he called “the coming together of a child with the mother”.

IDBI Home Finance Company will also be united with the parent because there was no logic in continuing with it as a separate part of retail banking, he said.

The merger had become imperative as IDBI will function as a deemed commercial banking company from October 1. The valuation, determination of swap ratio and approval of shareholders will take time but the process should be completed during the current financial year itself.

Damodaran said the IDBI Bank will benefit from the parent’s high capital adequacy, which was five-and-half times its own. IDBI, in turn, will derive advantages from 92 branches of IDBI Bank in 69 cities and the 28 more that it intends to set up in the near future.

Customers will get a wide range of products and services sold from IDBI Limited, which will continue to provide development finance. The bank will function as a special business unit within the combined organisation, offering retail loans and services.

Some analysts said IDBI, one of the oldest financial institutions, will gain more, getting the much-needed banking platform at a time when its traditional business is shifting away from FIs to the all-pervasive domain of banks.

However, Abhijit Chakraborty, an analyst at Mumbai’s Prabhudas Lilladher, said both entities can reap advantages. IDBI Bank is strong in retail lending, but is not so in project finance — a long-known IDBI forte.

The crucial difference will lie in the area of bad loans. IDBI Bank’s non-performing assets (NPAs) are among the lowest in the industry at 0.2 per cent.

The parent’s problems on this count are bigger, but these are being tackled with a Rs 9000-crore corpus set up by the government for its stressed assets. Damodaran said total NPAs after the merger would be less than 1 per cent.

Today, Crisil upgraded IDBI Bank’s rating to the level (AA) enjoyed by the financial institution. The merged entity is not expected to face difficulties in achieving a higher cash-reserve ratio (CRR), pegged at Rs 2500 crore.

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