ICICI Consolidating gains [Part II]
[Following is special feature published in May 2001 issue of Chartered Financial Analyst]
After a decade of expansion, the largest financial institution of India is all set to consolidate. Recently, the group has announced its intentions of restructuring its subsidiaries. The present restructuring taken up by the group comes after the decision to dilute its stake in the ICICI Bank following the RBI guidelines. In the initial phase, the company has decided to merge three of its subsidiaries, ICICI Capital Services, ICICI and Web Trade and ICICI personal Finance into a single company. The proposal is awaiting the in-principle approval of SEBI.
The present consolidation assumes importance as it comes in the wake of the Reserve Bank of India direction to bring down the total number of subsidiaries. The premier bank has cited problems in supervision as the main reason behind the suggestion. In fact, the central bank rejected the application of the company to venture into non-life insurance business on the same grounds.
Whether the present revamp and consolidation among the subsidiaries of the group is aimed to gain entry into the insurance sector is the question. Anurag Khanna says, "Partly yes. The impetus to go for immediate revamp of subsidiaries resulted due to the rejection of ICICI's proposal to enter insurance sector by the RBI. Indeed one of the negative factors highlighted by RBI was that the company has too many subsidiaries." Commenting on the same Gopalan Ramachandran says, "While the merger may enable ICICI group to better support its insurance business, the merger is not driven primarily by the need to gain entry into the insurance sector." Kalpana Morporia, Executive Director (Designate) ICICI claims that "with the technology enabling customer relationship management on a much larger scale, this is an appropriate time to consolidate the skills present in the group."
Apart from the entry into the insurance business, the supervision of the group activities has become a difficult task for the central bank as it has acknowledged. Remember the issue in 1998 when the company had exceeded the exposure limits set by the RBI. RBI limits a single business exposure by financial institutions to 25 percent of the company's networth. But surprisingly the group total exposure to a single company was approximately 63.2 percent. Since the number of subsidiaries is more the control of the central bank on the affairs of the subsidiaries becomes difficult and the breach of exposure limits may happen again.
However, the other thing that might have forced the decision of consolidating is the synergies that the group can have by consolidating. By grouping the commonalties of the subsidiaries, the group will be in a position to cater to the needs of the customers in a cost-effective manner and the technology implementation can be easier. Anurag Khanna says, "The main purpose of the subsidiaries is to further leverage group synergies. The upgraded technology has made it easier for ICICI to consolidate the parent institution and subsidiaries."
"All the three subsidiaries have a common factor: retail customers are the raison d'etre of the businesses and the sources of their earnings," says Gopalan Ramachandran. A look at the functionalities of the three subsidiaries will justify his comment. ICICI Capital provides front office services related to all retail and retail liability products with around 91 centers across the country. The focus is on being a one-stop shop of financial products including insurance. ICICI Personal Financial Services is a non-banking financial company, which distributes and services retail products for the group. It markets and distributes products such as automotive loans and consumer durable finance to retail customers.
On the other hand, ICICI Web Trade operates the Internet-based trading service, icicidirect.com. It enables the retail customers to access electronic trading on the exchanges, settlement, payment, and account keeping. According to Gopalan Ramachandran, "The combination of these businesses would enable retail customers to better manage their financial assets and liabilities. The combination provides a brick and mortar presence as well as a virtual presence." Anurag Khanna adds, "The consolidation also aims at strengthening the group synergies as the group moves towards universal banking."
While the consolidation may have become eminent from the RBI suggestion the increase in the number of subsidiaries had helped the group in achieving the image that it wanted to emerge as a universal bank. In general, the subsidiaries enabled the group to allocate a certain amount of risk capital to a business that is exposed to market risk, credit and counterparty risk and operational risk. In case of any adversities, the outcomes are limited to the boundaries laid down by the subsidiaries.
Also this allows the group to nurture special managerial talent for the management of different risks specific to each business segment of the financial services sector. The different risks cannot be diversified away by bunching them in a huge financial services monolith. Defending the diversification of the risk by ICICI, Gopalan Ramachandran says, "In fact, there are no advantages to the accumulation of these risks since the theory of portfolio diversification does not apply to such risks. So, why bunch these risks in one balance sheet and in one headquarters?" he also adds, "since the subsidiaries had contributed to growth in terms of operational efficiency and diversification of risk, it does not mean that these subsidiaries should remain so forever."
On the other hand, the group had decided to dilute its stake in the ICICI Bank. The recent guidelines of the RBI have influenced this decision as the RBI has laid guidelines to dilute the stakes of the parent companies in the banks to 40 percent. The dilution of the stake has resulted in fueling the profits of the group. After recording a stagnant growth in the third quarter the reduction of stake by the group has resulted in a capital gain of over Rs.3 bn. Presently the stake of the group in the bank is around 47 percent which has to be further brought down to meet the regulatory requirements.
In fact, what the ICICI group wanted is not the dilution of stake for fueling its profits. But it has laid out the vision of becoming a universal bank. It has met the central banker to press for a merger between the group and the bank. At the time the proposal was considered the group had a stake of 62 percent in the bank. Since the bank now ceased to be a subsidiary of the group, it is keeping its hope for a reverse merger. To become a universal bank, the group wants to merge as quickly as possible with the highly successful ICICI Bank.
The group is ready to meet all the regulatory requirements as laid down by the Central bank. The present consolidation may also be a part of the strategy to meet the requirements. RBI has suggested that the number of subsidiaries is making a supervision and control aspects a difficult task. The number of subsidiaries can pose a problem for ICICI in order to become a universal bank. As an industry person questions, "There is SEBI for capital market intermediaries, Reserve bank for banks and Registrar of companies for NBFCs. How could one meet all the regulatory norms under one umbrella organization?" HDFC Chairman Deepak Parekh once questioned the choice of becoming a universal bank by quoting that the benefit of evolving as a universal bank is minimized by the multiplicity of regulatory bodies for each segment of the markets.
What will be the future of the Indian financial institutions? Will more and more of the institutions embrace the concept of universal banking? Or will there be consolidation among the players to restrict the competition? These are quiet a few questions that arise particularly after the restructuring exercise taken-up by the ICICI.
Anurag Khanna says, "The consolidation move at ICICI will give further impetus to the movement of financial institutions towards universal banking. HDFC, IDBI have already started working on the concept of universal banking." The financial institutions have been subjected to immense changes in the last eight years. Almost all the institutions have moved closer to the retail markets. And the major beneficiaries of the changes in the markets have been the customers. Customers have become the critical determinants of the long-term relevance and profitability of the financial institutions. Gopalan Ramachandran adds, "The process of restructuring would go on endlessly and I hope that with each twist and turn, each put together and tear apart action would be customer-centric."
The distinction between the banks and NBFCs is fast narrowing due to the opening of the financial markets. In this context, the RBI is of the opinion that the financial institutions are at the crossroads of their future growth prospects. Emphasizing the narrowing gap, Anurag Khanna, says, "The traditional division between banks and FIs is increasingly getting blurred with the integration of financial markets and technology. RBI has already undertaken number of policy measures relating to the prudential regulation and supervision of term lending and refinancing institutions."
The move by the RBI may go a long way in providing the services that they have been waiting for. According to Gopalan Ramachandran, "There is a fascinating congruence of the scenario that each of these institutions and players assume: a surge in retail services with a significant migration of the wholesale business to offshore markets. This migration will be a blessing in disguise for the investors." India's retail customer is under-banked, under-securitised, under-insured and not the least under-serviced. It is irrespective of the shape of the FIs in India they will continue to run their businesses and earn their earnings by meeting the expectations of 190 million households.
Whatever, may be the strategies that the institutions take up in the future, India is going to witness growth in all the segments of retail banking industry. Also the growth of mutual funds, pension funds and insurance policies will make the FIs to think more about the transformation they have to undergo. Gopalan Ramachandran says, "Institutions such as the ICICI group that have a credible presence in retail banking are more likely to succeed in other retail businesses." In fact this seems to be the major force driving ICICI towards the vision of universal bank.