Govt asks Sidbi to acquire a bank, do a reverse merger

MUMBAI: The government has asked financial institution Small Industries Development Bank of India (Sidbi) to look for a bank it can acquire. This follows a recent meeting between the institution and the secretary-financial sector Vinod Rai. Sidbi has proposed that it should be either allowed to take over a bank or given a banking licence.

The government had formed a three-member committee comprising former Bank of India chairman M Balachandran, former Sidbi chairman N Balasubramanian and present deputy MD Rakesh Rewari to study the future growth model for Sidbi. The committee has suggested that Sidbi should be converted into a bank while it should continue its developmental role towards micro, small and medium enterprises (MSME).

The panel said one of the options is following the ICICI Bank model, wherein Sidbi would acquire a small bank and then get itself reverse merged to get the banking licence. Second, it can take the IDBI route wherein the government would issue a banking licence by taking the Parliament’s approval. The third option, according to the committee, is letting Sidbi form a special purpose vehicle which could acquire the majority stake from the government in a state-owned bank.

Sources said the government has asked Sidbi to consider the first option, i.e., acquire a bank and then do a reverse merger. “An internal committee has been formed to identify the bank. It could be a private bank,” added sources. Senior officials from Sidbi said the financial institution is unable to fulfil its mandate of financing MSME primarily due to lack of cheap resources and reach.

Sidbi thinks it has the financial wherewithal to acquire another bank. As on March ‘06, it had a capital adequacy of 43%, net worth of Rs 5,000 crore, net profit of Rs 270 crore and net non-performing assets of 1.97%. The committee has also questioned the FI’s viability in the long run given the fierce competition among lenders and stiff cost of resource mobilisation.

Unlike banks, with 25-40% of total deposits as low-cost fund Sidbi has to pay a higher interest to raise money to on-lend. In the past, Sidbi had approached the Reserve Bank of India in this connection. However, the central bank had not responded favourably. PSU banks own 72.15% in Sidbi, insurance companies 21.43% and financial institutions 6.42%.