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Wednesday, October 31, 2001

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Universal prescription

The impending merger of ICICI with its own banking affiliate ICICI Bank, is certain to set off a wave of consolidation within the financial services industry. Close on the heels of the announcement by the ICICI and ICICI Bank, IDBI has already announced that its Board is contemplating merger with a banking institution with complementary strengths. The process is bound to gather momentum with pure banking institutions merging with one another or institutions in the long term assets markets such as housin g finance converting themselves into banks with similar proposals of merger.

The development is entirely in keeping with trends wide. Europe in general and Germany in particular has had a long tradition of universal banking and more recently inthe US there has been a wave consolidation across entities engaged in commercial and in vestment banking and insurance businesses.

Without doubt, there are synergies to be had in the arrangement. Enterprises that need long term project finance also need short term working capital funds. Hence an entity which has access to both long term and short term funds can conveniently set itse lf up as single window of capital to a prospective borrower and thus leverage its credit appraisal and other infrastructural investments for greater profits. Similarly the investment management skills of a term lending institutions or for that matter a c ommercial banking outfit could be leveraged across a larger volume of investible funds that a conglomerate structure spanning both businesses offers. Cross selling of other financial products involving commercial borrowers and the extended family of empl oyees in the borrower enterprises is another possibility. In the Indian context, the synergistic benefits acquires a new meaning with the skewed portfolio structure of these institutions. Commercial banks have an expanded exposure in government securitie s - far more than what the Reserve Bank considers as prudent. In contrast the term lending institutions have a preponderance of loan assets some of which is of doubtful quality. A combined entity would provide a reasonable balance to the asset portfolio thereby promoting a more secure financial sector in the economy. Besides more intensive use of existing, there are cultural aspects to a merger. The term lending institutions in the public sector have shown themselves to be a little less credit shy (some might say, far more venturesome than had been good for these institutions) than their counterparts in the commercial banking sector. A merger between two such entitites lends itself to the development of a composite culture among the workforce, that com bines the entrepreunarial skills of development banker with the native caution of a commercial banker.

But the path to universal banking is strewn with structural rigidities in the system. For all the balance between short term and long term assets that a combined entity can bring to bear on its operations, they could nevertheless do with a little more li quidity in the asset market than is prevailing in the economy at the moment. Policy initiatives aimed at giving a thrust to the process of securitiesation of assets must therefore be expedited. Similarly legal hurdles in recovery of problem loan assets t oo brook no delay. Corporate restructuring can go only so far in securing a healthy financial sector. They are no substitute for structural and institutional reforms in the system.

Related links:
Boards to consider ICICI merger with ICICI Bank
ICICI, bank reverse merger an acid test
ICICI's key is integration
ICICI Bank shareholders pay for ICICI's NPAs
ICICI's debt obligations

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