Financial Daily from THE HINDU group of publications
Tuesday, Mar 23, 2004
Money & Banking
Mergers & Acquisitions
Vijaya Bank eyes NBFCs for acquisition
Bangalore , March 22
UNABLE to find a suitable bank for acquisition, the public sector Vijaya Bank (Vijbank) has now begun stalking non-banking finance companies (NBFC).
Top banking officials said the bank was eyeing NBFCs with a minimum asset size close to Rs 800 crore but was yet to finalise on one.
The target NBFCs should have a stronger presence in the North, where the bank has a low-profile presence, they said. The bulk of the bank's business presence is in the southern and western regions.
Acquiring NBFCs for growth is, however, not new. ICICI Bank was among the first to use this strategy to build up assets.
ICICI had acquired ITC Classic Finance and Anagram Finance to increase its asset book
Vijaya Bank officials declined to confirm or deny the NBFC acquisition proposals. However, they said, "The distinctions between banks and NBFCs have virtually disappeared."
Vijaya Bank has so far been unable to find a suitable bank in the Northern region, either in the private or public sector, for acquisition. One of the major reasons is that the preliminary due diligence done on some potential candidates has so far not been very encouraging.
Besides, bank valuations have been on the ascent. Therefore, it would imply that the pricing was disproportionately high.
Also, some of the banks that were checked out did not have attractive return on assets though their capital-to-risk weighted asset ratios (CRAR) were fairly strong. Vijaya Bank itself has a CRAR of 15 per cent this year, among the highest in the industry. With its net non-performing asset ratio being 1 per cent, the bank has no fear of accretion to its NPA.
However, the sources said, Vijaya Bank was keen that the quality of the target NBFC assets should conform to new banking industry standards effective from the next financial year.
These standards, prescribed by the Reserve Bank of India, mandate that the assets should not have fallen overdue beyond 90 days. NBFCs' income recognition is on the basis of 180 days.
Vijaya Bank has opted for this route for growing since the alternative asset takeouts are not very attractive. This was because some of the assets available for takeouts from other banks or even from NBFCs were through the securitised route and priced at a substantial premium to face value.
This kind of asset pricing was not attractive for the bank, since the effective yields on some of the assets were below the Prime Lending Rates of the public sector banks. Taking over an NBFC, the sources said, had significant advantages in view of the higher lending rates of such institutions.
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