`Mergers are unlikely in the Indian banking sector’

The new generation private sector banks are going through a critical phase as the wind of mergers and takeovers has started buffeting the In...

The new generation private sector banks are going through a critical phase as the wind of mergers and takeovers has started buffeting the Indian financial sector. V M Sathish spoke to D.K. Mukerjee, managing director, IDBI Bank, about a host of issues governing the banking system and private banks.

In tune with the global trend, talks have been going on about the possibilities of mergers and takeovers in the Indian financial sector. What is your opinion about M & A in the Indian banking sector?

I don’t see this trend happening either in the Indian on international banking industry. If Indian banks want to play a big role in the international market with big balance sheet to justify huge exposures in foreign projects, such mergers will help. In Japan where a number of such mergers have taken place in the past, one of the reasons was to acquire bigger size. Already these mergers have backfired in Japan as is evident from the current situation in Japanese banking sector. Size posesmajor challenge. However, there are cases where even big banks are managed well.Show me one successful example of recent mergers and takeovers in international banking? I feel that mergers have not been the recent trends. In future also nothing of that sort will happen. In India, IDBI has already become a universal bank as there are several companies under its control – it does term lending, project financing, it has credit rating agency, it has merchant banking activities etc but each activity is undertaken by separate companies. Similarly State Bank of India is a universal bank.

But there had been reports about a potential merger of ICICI and IDBI. ICICI Bank has already appointed an agency to study merger proposal with ICICI. Do you have any such thing in mind?

Talks have been going on about these mergers. In our country, mergers and acquisitions are not well known. Hindustan Lever Tomco merger was a classic example. It has happened in other industries as well. We don’t have any such plans.Appointing consultants like McKinsey is a costly affair.

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How will you maintain your profitability without expanding your savings deposit base and reducing the cost of funds. Almost all the new private banks have huge reliance on costly and uncertain term deposits?

Retail deposit takes time to come in. However, most of our deposits are from the retail sector. Some of the Mumbai branches have good retail base. Eighty per cent of Indore branch deposits is retail. We do have some institutional funds due to our IDBI connection. Our cost of funds is high, but who will prefer to keep their money in savings bank account which yield less returns. There is a competitive pressure to introduce necessity oriented flexible deposit schemes. In the fixed deposit market, people want to deposit for maximum returns. No other country has this sort of flexible products. The term deposit base is more stable because you are assured of it for a particular period.

The new private banks are supposed to bemore efficient in handling risk associated with lending. The bane of public sector banks has been the huge Non-Performance Assets (NPA). Now it seems that the new private banks have been accumulating more NPA than their public sector counterparts within short time?

In our case NPA is very negligible. We have heard about other banks and some of them have problems. NPA is part of the business. In banking there can be no lending without NPA.

What measures do you propose to take to reduce the cost of funds and improve efficiency. Do you think that your original target market of upper middle class segment is difficult to tap?

We are trying to develop our current account business. Saving bank accounts are not easy to come and there is a disadvantage there. On some counts we are weak, but on many other counts we are strong. Only banks with high-technology will be in the forefront. And we have that technology. Using the latest technology, we can send your money to distant places within seconds.We are also working on online card payment systems and other innovative products to attract more business.