Why the IDFC, Shriram Group merger in financial services space is the right fit

Infrastructure turned banker IDFC Group and South based financial services giant Shriram Group are in discussion for a merger. While the combined entity would have assets of over Rs 2 lakh crore, there are many qualitative factors that would give a fillip to the  business of the combined entity. Here are five reasons why this merger is a right fit

Access to new geography

The merger would provide IDFC Bank access to a well established network in the entire South of India. Remember Kotak Bank did a smart merger few years ago when it pounced on the ING Vysya Bank.

Ready retail portfolio

Shriram Group is completely into retail  assets. IDFC Bank  which comes with a  corporate background, will get a huge portfolio of retail assets especially micro loans ,two wheeler, personal loans, loan again gold, tractor and equipment financing and truck loans etc. Currently, IDFC Bank has a retail portfolio of around 25 per cent -- it's low compared to  established players like ICICI Bank and HDFC Bank, which have over half their advances in the retail assets.

Will help build a liabilities franchise

IDFC Bank has a huge challenge of building retail deposits as the banks current account and savings account (CASA)  is less than 10 per cent of the total assets. The bank desperately need low cost deposits to compete in the retail assets esp mortgages where rates are very competitive. Most of the well established public and private banks have a  CASA of over 40 percent.  This merger would give IDFC Bank huge access to branches. Take for example , Shriram Transport Finance has a network of 918 branches and 854 rural centre. The rural centrse would also help IDFC Bank in meeting its priority sector advances

Reducing the reliance on corporate book

IDFC Bank has legacy assets esp infrastructure loans in its book which are around 55 per cent. The credit off take from corporate is historically low.The existing portfolio of infrastructure is also stressed with RBI insisting on more provisions even for standard assets whereas retail portfolio is growing at over 25 per cent for the industry, which in a way is compensating for the lower growth in  the corporate book for many banks. IDFC doesn't have this luxury because of lower share of retail assets  as well as retail liabilities. This merger would definitely act as a balancing act in future.      

Build the foundation for a financial super market

The merger also brings non bank entities like the two insurance subsidiaries and the mutual fund business of  Shriram into IDFC fold. In fact, IDFC  already has presence in mutual fund business, alternative asset management like private equity and securities business. Currently, ICICI, SBI, HDFC  has a  financial supermarket model with a scaled up operation.