According to newspaper reports, the Industrial Development Bank Of India (IDBI) is planning to enter into a strategic alliance with a commercial bank. The move is aimed at transforming IDBI into a universal bank.
IDBI's decision to focus on transforming itself into a universal bank should come as no surprise. Once the leader in the sector, IDBI of late has been playing second fiddle to such companies as ICICI in the market. This has mainly been the result of the fast moves initiated by ICICI to transform itself into a universal bank. Infact, it has already met with a large degree of success.
The benefits of a universal bank are many although the actual impact of the synergies on the bottomline is as yet uncertain (as is evident from the mega merger of Citibank and the Traveller's Group). A universal bank gives the entity an opportunity to increase the size of its resource mobilisation and disbursal activities. Then there is the possibility of cross selling products, employee and branch rationalisation, larger market reach and more capital. All these factors contribute to the creation of a more stable and efficient financial institution.
One peculiar aspect in the case of IDBI (and also other financial institutions) is that it is unable to accept deposits from the retail market. It thus has a serious handicap as compared to the banks that have access to large amounts of retail deposits, a part of which, the savings bank deposits, are low cost in nature.
IDBI's decision is right on target. However, efficiencies would be exploited especially when there is a possibility of rationalisation of labour. Thus, the government's approval is a must, and this could prove to be a hindrance.
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