The Hindu Business Line : RBI's choice

One positive outcome of the proposed amalgamation of the troubled United Western Bank with Industrial Development Bank of India is that it will provide relief to the 22 lakh hapless depositors who were made to suffer the consequences of mismanagement and the subsequent moratorium by the Reserve Bank of India early this month. Unlike the cooperative banks that have come under the RBI's hammer for bad practices, UWB was also answerable to shareholders. So the solution, such as it is, will also bring smiles to these stakeholders of the UWB stock. With IDBI required to make an upfront payment of Rs 28 for every fully paid-up share of the beleaguered bank, such a merger appears an optimal bailout option. The merger plan is at this point a draft in the public domain and IDBI will presumably lose no time in finalising the details pending final approval.

While the contingent interests of stakeholders appear to have been met, the RBI's nod for the IDBI scheme, among the 17 banks that expressed interest, does throw up questions and issues that need to be considered from a long-term view of bank mergers. None is still clear about the parameters the RBI went by to pick IDBI from the formidable list of 17 suitors; a more transparent match-making process would have put paid to some of the murmurs and misgivings that have attended the announcement. IDBI is still finding its feet as a commercial bank after the reverse merger of the term lending institution with its bank in 2004. Long-term borrowings still form 60 per cent of its liabilities with the cost of funds still pegged higher than the industry average. Given its carryover costs and its lingering identity as a term lending institution, UWB's deposit base will stand it in good stead. But the ailing bank has also incurred net losses of Rs 200 crore over the past two years and its non-performing assets were 5.66 per cent in March 2006. While the latter adds marginally to its low NPAs, IDBI's capacity to turn these around will be tested given its relative inexperience in retail banking and the fact that UWB's exposure to the sugar industry is fraught with cyclical risk. According to the draft proposal, IDBI is to have sweeping powers to change the top management of UWB and close any of the 240 branches across Maharashtra, Goa and Karnataka that are unprofitable. Yet for an institution still morphing into a universal bank, the assimilation will be quite a challenge.

Yet the proposed merger will certainly benefit all vulnerable stakeholders and one can hope that this will encourage the central bank to keep depositor interests uppermost in its future rehabilitation schemes. That has not always been the case, as the shutdown of mismanaged cooperative banks suggests, with many depositors still to get even a whiff of their savings.

More Stories on : Editorial | Private Banks | Mergers & Acquisitions

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
The vexed issue of appointment of directors

RBI's choice

Finding funds for ambitious Plans

Convertibility: Go all the way

Supersession at MEA

`ICAI is not averse to opening up of the accounting sector'

12 financial must-knows

Power cuts

Farm credit