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ICICI, bank reverse merger an acid test

Financial Daily from THE HINDU group of publications

Thursday, October 25, 2001


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ICICI, bank reverse merger an acid test


Sanjiv Shankaran CHENNAI, Oct. 24 SIZE, range and low-cost resources have been recurring themes in ICICI's strategy over the last few years. Ever since Development Financial Institutions (DFIs) were cut off from concessional funding in the early 1990s and asked to face heightened competi tion, ICICI has relentlessly pursued its goal of becoming an universal bank to survive the changed environment. Following significant proportion of loans made in the early and mid-1990s turning bad, a drive to increase its size and range of activity, and thereby cushion the impact of loans turning bad, have been the defining features of ICICI's strategy. Currently , the move to embark on a reverse merger with its offspring, ICICI Bank, seems to be the watershed in its dream of becoming an universal bank. Simply put, an universal bank means nothing more than carrying out all aspects of financial intermediation under one roof. For instance, commercial banking, wholesale lending, retail lending and insurance were traditionally carried out by unrelated entit ies. In a new environment where all traditional barriers have vanished, a universal bank to carry out all kinds of intermediation under one roof as been viewed as a route to make the best of new opportunities as well as face up to new competition. In 1998, a committee comprising commercial banks and DFI examined the ways in which the role played by them could be harmonised. The report clearly pointed towards institutions and banks looking at mergers -both within and across different types of fin ancial intermediaries -- and thereby view size as a strategy to thrive in a more competitive environment.

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11/3/11

ICICI, bank reverse merger an acid test

Growing competition from other financial intermediaries, a harsher environment for corporates and withdrawal of concessional funding have left DFIs most vulnerable. Banks such as SBI have been able to venture into the domain of the DFIs armed with low-co st deposits. On the other hand, the foray of DFIs into the domain of banks have been handicapped by the lack of access to low-cost deposits. In this environment, universal banking that includes the likelihood of a reverse merger with ICICI Bank has for long been a st rategy proclaimed by ICICI. The biggest hurdles that the merger is likely to face are smoothening the difference in regulatory requirements between commercial banks and DFI, and convincing shareholders. Only early this week did the RBI say that universal banking should not be viewe d as a strategy to address the problems of financial institutions such as non-performing assets. In the case of shareholder approval, ICICI Bank' shareholders may not necessarily be pleased because it enjoys a better equity valuation and a better perception. ICICI's image has been clouded by speculation on the real extent of bad loans in its books. ICICI's shareholding in ICICI Bank is currently around 46 per cent. Both ICICI and ICICI Bank are listed in New York Stock Exchange (NYSE), thereby making it easier to handle merger-related issues there. Though ICICI Bank's balance sheet (as on March 31, 2001) is just 29 per cent the size of ICICI's balance sheet, it will give ICICI a chance to access lower cost funds and thereby sharpen its competitive edge in many of its lending businesses. One area where the impact could be telling is retail consumer financing business such as commercial vehicle finance, an area dominated by finance companies. ICICI, recently, entered commercial vehicle financing and the impact on pricing structure was imm ediate. In the case of a merger, finance companies will find it almost impossible to compete with ICICI. The attempt at reverse merger between ICICI and ICICI Bank will be the first of its kind in India. However, there have been other path-breaking moves to capitalise on new opportunities. The most significant being the strategic alliance between LIC and Co rporation Bank after LIC took a 26.8 per cent equity stake in Corporation Bank.

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ICICI, bank reverse merger an acid test

The proposed reverse merger is likely to be a test case in the financial sector. If it goes through smoothly, there may other such in the making. For example, IDBI and UTI are two large institutions grappling with critical problems and IDBI in particular needs to access lower cost funds to stay competitive. All eyes are likely to be glued to the ICICI group for the moment. Related links: ICICI to offload stake in bank ICICI to prune outfits -- Plan to consolidate, clean up balance sheet NPAs under control: ICICI Comment on this article to BLFeedback@thehindu.co.in Send this article to Friends by E-Mail Next: ICICI's key is integration Prev: Boards to consider ICICI merger with ICICI Bank News Agri-Business | Corporate | Industry | Macro Economy | Markets | News | Opinion | Variety | Info-Tech | Catalyst | Investment World | Money & Banking | Logistics | Page One | Index | Home Copyright 2001 The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line.

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