The Right Fit

IDFC Group and South India-based financial services giant Shriram Group are reported to be in talks for a merger to create an entity with assets of over Rs2 lakh crore. While the two sides are yet to confirm this, experts say there are several reasons why such a move make sense.

Access to new geography

The merger will give IDFC Bank access to a well-established network in the entire south. Remember that Kotak Mahindra Bank had done a similar thing a few years ago when it bought ING Vysya Bank.

Ready retail portfolio

Shriram Group is totally into retail assets. IDFC Bank, which had a corporate background, will get a huge portfolio of retail assets, especially micro, two-wheeler, personal, gold, tractor, truck and equipment loans. At present, IDFC Banks retail portfolio is 25 per cent of the total, which is low compared to the close to 50 per cent figure for established players such as ICICI Bank and HDFC Bank.

Will help build a liabilities franchise

IDFC Bank is facing a challenge of building retail deposits. Its current account and savings account (CASA) ratio is less than 10 per cent of deposits. It desperately needs low-cost deposits to compete in retail assets, especially mortgages, where rates are very competitive. Most established public and private banks have a CASA ratio of over 40 per cent. The merger will give IDFC Bank access to a large number of branches. Shriram Transport Finance has a network of 918 branches and 854 rural centres. The centres will also help IDFC Bank meet its priority sector targets.

Reducing reliance on corporate book

IDFC Bank has huge legacy assets. Infrastructure loans, for example, are around 55 per cent of the portfolio. This part is stressed with the RBI insisting on more provisioning even for standard assets. The credit offtake from corporates is also historically low. The retail part of the industry, on the other hand, is growing over 25 per cent and compensating many banks for the lower growth in the corporate book. IDFC doesnt have this luxury because of lower share of retail assets and liabilities. The merger will bring balance to its portfolio.

Build the foundation for a financial super market

The merger will bring non-bank entities like two insurance subsidiaries and the mutual fund business of Shriram into the IDFC fold. In fact, IDFC already has presence in the mutual fund business, alternative asset management like private equity, and securities business.

@anandadhikari