Chennai-based Shriram group’s proposed merger of its financial services business with IDFC Bank to create a financial conglomerate is a display of animal spirits in a financial sector that has been listless at best, of late. The merger will be of significant long-term gain to IDFC and to Shriram shareholders but only if three hurdles are cleared in the short term: obtain regulatory clearances, absorb Shriram’s not-insignificant non-performing assets, and bridge the cultural chasm between suited-booted, high-paid IDFC employees and the frugal, man-in-the street culture of the Shriram group. The pact, to be finalised within 90 days, will double IDFC’s loan book to Rs 1.5 lakh crore by 2020, expand the bank’s retail footprint, and give IDFC a presence in multiple financial businesses, ranging from insurance to share-broking.
The management has projected about 10 million customers of Shriram Capital as the potential client base for IDFC Bank. Rightly, an increased asset base would also make it necessary for the merged entity to grow deposits at a fast clip to enjoy lower cost of funds to support the loan book growth. This wide support base will help IDFC face up to a not-improbable challenge to mainline banking from a new breed of fintech companies that are beginning to show their long-term threat to banking as we know it today. The deal remains subject to approvals by the boards, shareholders, regulators and third parties. If it fructifies, an NBFC, that financed trucks for people who had no access to formal finance, will disappear. This could play out in two ways. A large arm of formal finance could make a broad entry into the world of the previously unbanked.
Or, the unbanked could lose a form of financing it used to have access to. It is devoutly to be wished for that the result would be to extend the reach of formal finance.
Apart from valuing Shriram group companies at levels that would make sense for their shareholders to approve the merger, IDFC would have to persuade the RBI to allow a common holding company to own both a bank and an NBFC, Shriram Transport Finance.