IDBI disvestment will be mixed bag of opportunities and challenges

Idea will face political and trade union challenge before becoming reality

The government's plan to reduce stake in IDBI Bank below 50 per cent will give the bank operational freedom in decision making, spare it from intense scanner of agencies CVC, CBI and CAG and get better pricing to raise capital.

Armed with the new status, bank would be position to give market linked compensation to attract and retain top-class talent. This change is only expected to happen only over period, given time consumed by government for such critical decision, analysts point out.

K P Kharat, managing director and chief executive, IDBI Bank, said the Mumbai-based lender is working on business plans independently. It is a coincidence that there is talk of government reducing its stake holding in the bank below 50 per cent. There is no communication or discussion with government on issue.

Many challenges on course

The travel on the road to freedom for the erstwhile development financial Institution is hardly going to be a smooth affair.

Its business has grown by less than 10 per cent annually in the past three financial years. Part of this is for practical reasons -- high growth especially in big corporate loans, comes with the obligation of enhanced priority-sector lending targets. With limited branch presence in semi-urban and rural areas, meeting these targets has been difficult. That, in turn, has forced it to deposit money in the low-yielding Rural Infrastructure Development Fund.

The new chief executive wants to more than double the business in three years. As of end-March, deposits plus advances were Rs 4,68,213 crore; by the aspiration, this ought to reach Rs 10, 00,000 crore by 2018. His three-year tenure as managing director and chief executive officer is to end in September 2018.

While being in the slow growth lane for three years, IDBI has used the time in growing the share of retail, small and medium enterprises, and agriculture in loans. Analysts say bringing aggression into action is needed. At the same time, the bank will have to factor in resolution of and recovery from the current portfolio of stressed loans (non-performing loans plus standard restructured loans). The share of non-performing loans was 5.9 per cent in March 2015.

Global rating agency Fitch, in a report last month, said IDBI was vulnerable to a downgrade, with the deterioration in its stressed asset ratio to 13.6 per cent in FY15 from 11 per cent in FY14, and higher exposure to stressed sectors. The portfolio of restructured assets had doubled in three years from Rs 10,000 crore in March 2012 to Rs 20,936 crore in March 2015.

Despite huge pile of stressed assets, IDBI bank has not seen run on deposits. People are placing money by looking at the predominant government holding (over 70 per cent) in bank. They expect support to bank in times of crisis. When stake dips below 50 per cent, perception will change for government support may not be forthcoming from government for it would no longer be majority owner. Bank will have to work hard to build public confidence.

A head financial sector rating with rating agency said government stake moving below 50 per cent does open doors for opportunities for IDBI Bank. For it to make real gains either board of directors and top management has to be strong or will need strategic investor - a financial sector player may be one with global brand franchise (read foreign bank).

While rating the financial paper of IDBI Bank, now agencies assume systemic support from government in times of crisis. Under new avatar the emphasis and monitoring with be on standalone performance and less weight would be given to government stake.