IDBI to buy government's stake in PNB and Union Bank - Views on News from Equitymaster

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  • Feb 4, 2000 - IDBI to buy government's stake in PNB and Union Bank

IDBI to buy government's stake in PNB and Union Bank

Feb 4, 2000

IDBI is planning to buy out a part or the entire 100% stake of the government in one of the two unlisted public sector banks, the Union Bank of India (UBI) or the Punjab National Bank (PNB). If this comes through one of these banks will be merged with IDBI. IDBI, is India's largest development finance institution and has been traditionally concentrating on project finance. It reported a turnover of Rs 74.6 bn for the year ending March'99.

There is also a possibility that IDBI may exchange its stake in the Small Industrial Development Bank of India (SIDBI) with the government's 100% stake in UBI or PNB. IDBI currently has a Rs 4.5 bn equity exposure and a Rs 22 bn loan exposure to SIDBI.

This move by IDBI has been triggered off by many reasons. Traditionally banks have been lending to corporates for working capital purposes and development finance institutions have been lending towards infrastructure projects. However recently ICICI has aggressively got into selling retail products and is firmly entrenching itself in the short term market. As competition is hotting up it would be necessary for IDBI to quickly tie-up with one of these banks to make use of their large branch network and lower cost of funds. Also banks have become more aggressive in project financing in recent times.

The government is also encouraging such moves as this would lead to consolidation in the financial sector and result in a fewer number of wholesale banks. The concept of "Universal Banking" is slowly finding its place in the Indian financial markets as the roles of banks and financial institutions are now merging and they are slowly treading into each others turfs. Hence if IDBI does not become aggressive in retail business either through its bank IDBI Bank or through such takeovers and mergers then in course of time it could become a redundant institution.

If UBI merges with IDBI then the newly formed entity's asset base would be Rs 950 bn and it would have access to around Rs 300 bn cheap deposits of UBI. This would reduce IDBI's cost of funds by atleast 200 basis points. Also UBI's 2,300 branches would help IDBI cross-sell products and raise more retail funds. If PNB were to merge with IDBI then the new entity's assets base would be Rs 1,000 bn and it would have access to cheaper deposits to the tune of Rs 450 bn. The impact on IDBI's cost of funds would hence come down. This merger would add over 3,775 branches to IDBI's network.

Market View:
As the market is still concerned about IDBI's NPA's it is rated as a "SELL" by many analysts.

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