Arjun Fernando | Pics by Gihan Dulwala

CEO, DFCC Bank, Arjun Fernando says that the process to merge DFCC and Vardhana Banks took off as the previously planned merger with National Development Bank was not a priority with the new Government. Speaking to The Nation Gain, Fernando explains the planning and processes that were put into making the merger a reality and also talks about the future strategies to position them in the already competitive market

Following are excerpts:
Q. Until the DFCC’s announcement on 1 October 2015 regarding the merger, DFCC Bank and DFCC Vardhana Bank had two distinct models of operation and portfolio of operations targeted at two different types of clientele. Over the years, this had resulted in specialization giving good returns to the group as a whole. So why did this merger happen?
The decision to merge both banks had been considered and contemplated for the past five years. You would have noticed them even in our annual reports. It was just a question of waiting for the right time. Around two years ago, we felt that it was the right time to bring the two banks together. However, it did not move forward since the NDB merger came in through an Act of Parliament. Then we thought of merging all three instead of just DFCC and Vardhana.

However, the NDB merger was not a strategic priority of the new government. Then we felt it was time for us to come together.

We already had the footprint. We have 137 units at the DFCC group, namely 20 common branches, 60 stand-alone branches, and 57 post office units which provide limited services. So now we have the full network to sell all our products and services.

I guess your question was why the merger. What we always felt was that, for a development bank to sustain on its own, it was going to be difficult since we do not get the credit lines, the chief funding and such facilities. If you look at globally, none of the DFIs have survived unless it was fully owned by the government. If you look at certain banks such as the ICICI Bank, they have converted from development banks to fully-fledged commercial banks now.

So whilst we had the model of keeping the two banks and the group getting the benefits, we feel the time is now right to look at one bank under one roof so to speak and drive both lines.

Going forward, we wouldn’t convert to a fully-fledged commercial bank just because we have go a commercial banking licence. But we will keep the focus on development banking, which is our core competencies and heritage. But at the same time, the growth area could be in commercial banking.

Earlier the two banks were driven separately. But now, if you look at it from a customer’s point of view, we can provide development loan, working capital loan to trade, current account savings and the full gamut of services in a single bank.

Q. In your point of view, what would be the advantages and disadvantages of running one entity and two entities as in the case of the DFCC Group?
You would get the maximum synergy out of the whole group of staff. Even when we had kept both banks separately, we had centralized certain operations. But having said that you still have two different boards, two different secretariats. The advantages in that sense are that you can have one Board of Director and processor, etc.

As far as the disadvantages are concerned, there are certain concessions, such as regulatory concessions, given to specialized banks. Those will not be there when you become a commercial bank. But having said that, as a commercial bank there are certain things that you could do as well. Another advantage is that as a combined bank, the balance sheet would look much stronger. It will be of advantage for us when we go overseas to get funds.

Q. DFCC’s plans for a merger were not something that was sudden. We knew it had been in the pipeline as it had been repetitively stated in the Annual Reports but you had awaited the regulator to facilitate the merger. Tell us about the planning stages and how it came through?
When the new government came in at the beginning of the year, and since the NDB merger was not one of its strategic priorities, the board of directors set a goal to do the merger. That decision was taken around March this year. We sort of had an aspirational target to get this done by October 1. We also engaged legal, accounting and HR consultants on a need basis. But for the whole process, I am proud to say that we managed it internally.

Q. What is the kind of benefit from synergy you expect with this merger?
The initial thinking in any merger is the cost benefit. Yes, there will be certain rationalizations that would happen in terms of processes and practices. We don’t really look to reduce the number of staff in any form in that sense, but to re-skill and redeploy them in other areas. For example, if you look at the Vardhana network, we have what you call 20 common branches where DFCC and Vardhana were operating at the same premises.

Then we have about 60 stand-alone Vardhana branches island-wide. These branches were only involved in commercial banking lending and not in project lending. So immediately when you become one, you can use that network to do project lending as well.

We already had the footprint. We have 137 units at the DFCC group, namely 20 common branches, 60 stand-alone branches, and 57 post office units which provide limited services. So now we have the full network to sell all our products and services.

Q. Does that mean that you will have to upgrade these branches?
Yes, we will have to upgrade them gradually. But, our initial plan with the regional offices is to bring in the expertise from day one. I’ll be quite upfront. I can’t have project lending experts in all of the branches on day one. We have the regional offices geared up to provide that, and depending on the nature of the growth in those regions, we will house the experts at branch level.

What are the areas of cost reduction and even cost additions that you might have to deal with?

We do not have to pay two separate license fees. We had two IT systems earlier and now we have migrated all data into one system. Through processes and practices, we hope to see other reductions as well. As far as expenditure is concerned, we feel that we need to invest on technology. We have been delaying certain investments especially on mobile applications as we were anticipating the NDB merger. We also feel that investment is required in terms of branding and getting an upliftment to our façade, and brick and mortar. Plus, there will be some investment required on staff, to train and uplift them.

Q. What is the staff count you have in DFCC Bank and DVB and with this merger how would they be treated in terms of employment contracts and once they are pooled into one?
We are talking about 1,500 employees in total. We had approximately 500 at the DFCC and 1000 in Vardhana.

DFCC is the surviving entity. As far as this amalgamation goes, the DFCC had already owned 99 percent of Vardhana. So what we did was to acquire the remaining shares which belonged to the minority shareholders.

The Vardhana staff was given letters that ensured the continuation of their services and grades under the new entity.

Q. Any retrenchment you might have to consider down the road to cut costs? Would there be a rotational policy where now DFCC Bank employees would in future have the opportunity to work at DVB and vice versa? What are the staff training plans in the pipeline?
As I said, we do not have plans of retrenching any of the staff at the moment. As far as the rotational policy goes, we already have a policy of rotation which is carried out once every four years. Right now we have a greater opportunity to rotate the employees because it is a larger bank. When we were just a development bank, there was a limited amount of rotation we could do. But now we can look at the whole gamut of our department and service areas.

Q. What are your short-to medium-term plans?
The very near term plan is to ensure that the integration is seamless and robust. We have short term goals and deliverables for day-one, day-30 and so on. But our medium term goal is to look at this as a hybrid model. We have to look at where to position ourselves since it is a commercial bank and a development bank. We do not look at ourselves as a pure commercial bank. Our core competencies are in development banking and therefore, play to that strength. At the same, there are opportunities at the commercial banking sector too.

A strategic imperative is to synergize the group effort. The DFCC has a 100 percent owned IT company, an investment bank, and we have a consulting arm. What we are now looking at is towards group synergies.

Another medium term goal is to venture overseas through the group. We have our presence in the Fiji, Solomon Islands and Uganda providing our knowledge and expertise.

Arjun Fernando (1)