Three Musketeers Of Indian Banking

What do PS Jayakumar, V Vaidyanathan and Chandra Shekhar Ghosh have in common? Well, the trio is currently anchoring the three most interesting mergers in Indian banking. 

Bandhan Bank Ltd, headed by Ghosh, has announced taking over Gruh Finance Ltd, a subsidiary of Housing Development Finance Corp. Ltd (HDFC), while Vaidyanathan’s Capital First Ltd has already been merged with IDFC Bank Ltd, and two relatively small public sector banks – Dena Bank and Vijaya Bank – are being merged with Jayakumar’s Bank of Baroda (BoB).

Both Jayakumar and Vaidyanathan are on the cusp of making history as there is no precedent in Indian banking of the job in their hands. 

The BoB-Dena-Vijaya Bank merger is the first attempt at consolidation in India’s public sector banking industry with close to 70 per cent market share in loan assets. Indeed, before this, five associate banks of the State Bank of India (SBI) got merged with the parent, catapulting the nation’s largest lender into the league of the top 50 global banks but that was a family affair. 

Similarly, Vaidyanathan, the youngest executive director of ICICI Bank Ltd who chose to be an entrepreneur, is the first professional to get a banking licence without applying for it! For all practical purposes, his non-banking finance company, Capital First, is taking over IDFC Bank, which is as old as Bandhan Bank. 

All three are dealing with investors’ expectations but I am not focussing on that aspect as all mergers may not be value accretive from day one and the shareholders can get the benefit over a longer term. The Centurion-Bank of Punjab Ltd merger with HFDC Bank Ltd is one such instance.

Consolidation apart, the merger of Dena Bank and Vijaya Bank with BoB is also a rescue act for Dena Bank. Put under the so-called prompt corrective action (PCA) of the banking regulator, Dena Bank has been restrained from normal banking activities. Since December 2015 when the bad loans of the banking system started rising, following the Reserve Bank of India (RBI) intervention, Dena Bank has recorded close to Rs 5,000 crore net loss (making losses in 11 out of 12 quarters) till September 2018. Its gross non-performing assets (NPAs) during this period rose from 9.85 per cent to 23.64 per cent, the fourth highest among the state-owned banks.

Jayakumar has done a good job of cleaning up the BoB balance sheet and changing the way a large public sector bank works with a slew of initiatives but steering a merger is a different cup of tea. His biggest challenge will be managing the ego of the senior employees of Dena Bank and Vijaya Bank who are bound to suffer from persecution complex. 

And, it can turn ugly if the balance sheet of Dena Bank shows a far bigger hole that what it does now. Remember how SBI’s bad loans zoomed after its merger with associate banks? Till September 2018, Dena Bank provided for less than 60 per cent of the Rs 16,140 crore gross NPAs. If the bank is not as transparent as it should be, then Jayakumar will have a nightmare. Incidentally, the merged entity (it will have a new name) will be the third-largest lender in India by assets after SBI and HDFC Bank Ltd, employing 85,675 people strewn over 9,489 branches. 

IDFC Bank, renamed IDFC First Bank (subject to shareholder approval), will have a loan book of Rs 1.03 trillion. It will cater to 7.2 million customers through its 203 bank branches and 454 rural business correspondent centres. Its retail loan book will now contribute 32.46 per cent to the overall loan book.

Vaidyanathan, known for his passion for balance sheet growth and penchant for technology, has already reshuffled the top deck. While Capital First will give the bank its retail teeth, the biggest challenge for Vaidya, as he loves to be called, will be generating low-cost liabilities.

Unlike the other two, for Bandhan Bank, the first instance of a micro-finance entity transforming itself into a universal bank in India, the Gruh Finance deal is a compulsion. Under the RBI’s licensing norms, it needs to be listed within three years of starting operations and the promoters have to pare their stake to 40 per cent. Bandhan Bank, which took off on August 23, 2015, has gone public but the promoters’ stake has not come down to the required level. The takeover of Gruh Finance will help the promoters to pare their stake to a certain extent. 

Most analysts feel the Bandhan Bank-Gruh Finance deal is not good for the minority shareholders of both the entities and that the real gainer is HDFC, which holds the majority stake in Gruh Finance. Some of them also say it is good for Bandhan but the bank is paying too much for it.

Post merger, Bandhan Bank will have a Rs 50,000 crore loan book (based on September 2018 earnings) and 15 million customers served by 4,182 banking outlets across India. More than half of Gruh Finance’s business is in rural pockets and its average loan size is Rs 9.4 lakh. Its presence in western and central India will complement Bandhan Bank’s overwhelming presence in the east. 

The merger will help Bandhan Bank derisk its portfolio concentration, diversify loan portfolio (with more secured loans) and cross sale products but Ghosh’s challenge will be synergising the cultural diversity (Gruh Finance is more technology savvy than the bank and its senior executives are better looked after than their peers in the bank). Of course, in the run up to launching the bank, he has done a good job in making newly hired bankers and home-grown micro-finance employees eat from the same plate. (A disclaimer: I was associated with the bank from August 2015 to October 2018 as an adviser, strategy.)

Rakesh Sharma too has a tough task in hand. In October 2018, he moved to the corner room at IDBI Bank Ltd, which can rival Dena Bank when it comes to the pile of bad assets. Life Insurance Corporation of India (LIC) is taking over IDBI Bank -- again, a unique experiment in Indian banking. 

Sharma is one of the two CEOs who were picked up from the private sector to run a government-owned bank in 2015 (the other being Jayakumar). But he has been given just a six-month term to oversee the LIC takeover. Jayakumar will be around for one year. So, both are in a hurry but Vaidyanathan and Ghosh have plenty of time to steer through.

This column first appeared in Business Standard / www.business-standard.in

To read the writer’s previous columns, please log onto www.bankerstrust.in

The columnist, a consulting editor of Business Standard, is an author and senior adviser to Jana Small Finance Bank Ltd. 

Twitter: @TamalBandyo