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'No Bank of Madura employee will lose his job due to the merger'

When HDFC Bank took over the Times Bank less than a year ago, it apparently started a trend of the new breed of private sector banks merging to achieve some semblance of critical mass.

Then it was the turn of ICICI Bank to take over an 'old established' private sector bank - The Bank of Madura. The media and the analysts worked overtime pondering over the problems of two different work cultures.

Admittedly, Bank of Madura was one of the highly mechanised and networked banks. There was also some noise about the swap ratio of their shares on merger, which inverted the market quotes, and speculation was rife about whether there had been some insider trading on this count.

The stock market was highly hyped on the technology stocks giving highly overrated valuation for any entity seen as part of the new economy.

Close on the heels of this merger came the news of the merger of Global Trust Bank and UTI Bank, but then both were among the new private sector banks like HDFC and Times.

K M Thiagarajan, Chairman of Bank of Madura, patiently explained about the valuation, the reason for the merger, in a candid tete-a-tete with Shobha Warrier.

Some financial analysts say that contrary to the general assumption, on conventional financial terms, Bank of Madura is better placed than the ICICI Bank. Why, then, did you go for a merger with ICICI bank?

In certain parameters, we may be better placed than the ICICI Bank, which is one of the 'new generation' banks. But if you look at the major parameter of today, that is the growth rate, they are growing very fast.

In the last six years, they have a deposit of Rs100 billion and a capital of Rs 800 million, but we have a capital of only Rs120 million after so many years of existence. Moreover, they are backed by ICICI, and it is not a new institution.

Today, size is a compelling logic in every financial institution. That is because the risks involved are high. The Indian economy is also getting linked to the world economy whether you like it or not.

These days, everybody is looking at the New York Stock Exchange and Nasdaq. The Government of India and the Reserve Bank of India are forced to adopt all the international norms, and the norms are getting tighter by the day.

The need of the hour, is thus, more capital, and for a bank to get continuous access to capital, you need a certain size. But we have been growing very slowly. We are profitable, we have got good parameters but we are looking at long-term growth. They are growing at 50-80 per cent a year.

ICICI Bank last year listed on the New York Stock Exchange to mobilise more capital. Whereas, being a small bank, it will be near impossible for us to access capital and other things.

Is the share ratio of 2:1 (two shares of ICICI Bank to one share of Bank of Madura) justifiable?

The ratio is based on valuation, which in turn depends on so many factors. There is no answer to this anywhere in the world. It depends on the particular transaction. Like they say, the value is in the eye of the beholder.

Let's say a certain company wishes to set shop in India. If it feels that its entry to a large extent depends on a particular company, it will naturally pay a premium. Here value is not the question.

Today, people also pay for the brand. Valuation, as such is a very tricky thing. It is not like valuing a chair or table or machinery. We feel we have got a decent valuation.

Then, why is it that there was a lot of noise from the shareholders' association?

This is not correct. The shareholder's association about which you heard was not even an association of the shareholders of Bank of Madura. A terminated employee of the bank formed it.

Wasn't there some emotional outburst? They said that a 57-year-old Tamilian bank was merged with a 4-year-old north Indian bank….

Who said that? All the shareholders have approved the merger. The media created this and some people who are not actually the shareholders.

But it was reported widely in all the newspapers…

It was reported. Somebody said something and the media reported it. What can I do? Now, you will report it and then, somebody else will say, rediff reported it.

What I am saying is that this is how such news spreads. What you have read is not true. You have to look at facts. If the person is not a shareholder, what is his locus standi to comment about the company?

If the journalists had asked him, how many shares he has, they would have found out. I got hundreds and thousands of letters saying it was a good deal.

Instead of merging with another bank, did you ever consider the option of selling your stocks?

When I talked to merchant bankers, they suggested this as a good methodology.

Ninety per cent of your branches are computerised…

Yes, that was why the association between ICICI and us took place. Otherwise, ICICI would not have liked to associate with a bank that was not automated.

What will happen to your employees? Will there be any downsizing or retrenchment?

We do not have surplus staff at all. We have only 2,600 people for 264 branches. It is less than 10 people per branch! So, ours is a very lean bank. In fact, we will be recruiting people soon rather than sending people away.

What will be your role after the merger?

I will be an advisor to the bank.

Will you miss your life as the chairman of Bank of Madura?

(Laughs) Ask me that after three months!

After Bank of Madura's merger with the ICICI Bank, the Global Trust Bank merged with the UTI Bank. Do you foresee more mergers in future?

There is compelling logic behind this. Merger is consolidation. The State Bank of India, the largest Indian bank, does not figure among the top 100 or 200 banks in the world. On the other hand, banks even from Singapore and Indonesia figure in the list, leave alone those from Europe and Japan. All said and done, we are small banks.

The entire business of banking is based on risk bearing capacity. If you want to do international business, if you want large exposure, you need size and large capital base, which is not there in India.

But we are bringing all the international norms. You can't have such norms when you have only small banks.

What will happen to the rural banking sector? After nationalisation, Indian banks have opened several rural branches. Who will be interested in such branches?

Nothing will happen to them, and the rural branches will be there and they will grow too as rural India is growing. Soon it will become a reasonably big market. I am sure at some point, many may say, well, we have a branch in the rural area. Several parts of south and west India, and some parts of north India are quite wealthy. Only problem is that they (the rural people) are not yet fully geared to the banking system. Once they learn to use banks that will be a huge market.

There are many very wealthy farmers in India but they do not deposit their money in a bank. However, the new generation will change all that.

Why do you think bank stocks have not found favour with investors? Except, maybe, HDFC Bank and ICICI Bank

That is because these are the 'growth banks'. These are the banks, which can compete internationally in future. That is why they have value. It is as simple as that.

Technology is only an enabler. Banking is not technology alone. Today, without technology, you cannot offer good service.

For example, if you want to give an ATM card, you need networking. Quite a few nationalised banks have ATMs but attached to one branch alone and the customers can draw money only from that branch. It shouldn't be like that. You should be able to go to any branch anywhere in the country or anywhere in the world and access your bank account in real time.

You should be able to find out your today's bank balance, and not yesterday's or day before yesterday's.

Internationally, where do you see the Indian banking industry in a few years time? In which direction is it moving?

It is moving in the right direction, I think. Now, international norms are being introduced. There will be a painful process of change. You can see the VRS schemes in the public sector banks. Thousands and thousands are going. Now, the system will become more efficient, and there also will be consolidation. There will be more international banks in India. The government has to give permission at some point. If they (foreign banks) fulfill certain norms, it is very difficult to say, no, we can't allow you to come here.

Once international banks open branches here, Indian banks will wake up to the more competitive atmosphere. And, you have to be large to compete with say, Citibank or Hong Kong Bank.

There will be foreign banks, and strong Indian banks.

A recent RBI study said that in reducing non-performing assets, PSU banks performed better than private sector banks during 1999-2000. Your comments?

I haven't seen the report. So, it is difficult for me to comment. Every bank, nationalised or private, is trying to reduce its non-performing assets.

Ever since the Kumaramangalam Birla committee report on corporate governance was released, it has become a much talked about subject. How important is corporate governance in financial sector?

The answer can only be, 'Yes, it is very, very important to have better corporate governance for better performance'.

It doesn't matter whether it is private sector or public sector; all of them have to come to a common platform of corporate governance. You can't say public sector will have one type of corporate governance and private sector will have another. It has been accepted worldwide that good corporate is essential for everyone.

As India is opening up, we have to do what the rest of the world is doing.

Are you for full convertibility of the rupee?

Ultimately, it will happen. If you want to be globally competitive, currency should be convertible and strong enough.

Those who do not favour full convertibility cite the South East Asian crisis…

That is why I am saying you can't have full convertibility till you are strong. You should have it. But when? That is the question.

We have current account convertibility now. What we don't have is capital account convertibility. We are going step by step, which is good.

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