IDBI Bank: Chequered past, troubled present and a stake sale at major risk

The financial institution that became a bank has a history that would have made it awkward for the government to sell stake to a non-government entity

IDBI Bank or its predecessor, IDBI, has always held a special place in the Indian financial sector. Way before Life Insurance Corporation of India (LIC) became the go-to company for successive governments to bail out companies, IDBI performed the same function. India’s National Stock Exchange (NSE), the National Securities Depository Services Ltd, Stock Holding Corporation of India and plenty more have all been incubated by it. At one stage, there was a plan to merge the long-troubled, state-owned IFCI with IDBI. 

All this has made IDBI and its successor, IDBI Bank, the preferred appointment for the big names of the financial sector even as some spectacular cases of bad loans have matured inside its boardroom. 

It is this history that makes IDBI’s 51 per cent stake sale by the government to LIC significant. Handing over the IDBI papers to any entity less loosely controlled by the government might have been uncomfortable. 

Over the decades, this institution has changed its colours three times, each change symbiotic with major changes in the financial sector. All political parties in power at the Centre have, thus, been careful in their handling of IDBI. A lot rides in the files that line its head office, IDBI Tower at Cuffe Parade. 

The bank’s website records its history as starting in 2004, when the former IDBI was “transformed into a bank”. That is not quite correct. IDBI Bank came into being as a subsidiary of IDBI in 1994 as a private sector bank. It acquired gloss when former chairman of the Telecom Regulatory Authority of India, M S Verma, became the boss. The new entity became one of the first listed shares on the NSE as a commercial bank with an authorised capital of Rs 500. NSE came up in the wake of the Harshad Mehta scam, and borrowed heavily from IDBI’s officer strength, including Ravi Narain, vice chairman, and Chitra Ramkrishna, managing director and CEO.
 

The second change followed the scam that brought down the Unit Trust of India, when it was hit by a massive asset-liability mismatch in its flagship scheme US-64. In September 2003, just one month after Y V Reddy took over as Governor of RBI, M Damodaran was appointed chairman of IDBI. It was an interim arrangement, because Damodaran was already chairman and managing director of the erstwhile UTI. 

A month later, the Lok Sabha passed the Industrial Development Bank (Transfer Of Undertaking & Repeal) Act to transform the development finance institution into a bank. With the merger of IDBI into IDBI Bank, the private sector bank became a public sector bank. Damodaran’s appointment as the chairman of the transformed IDBI Bank was preceded by a lot of discussion about the character of both entities under the IDBI brand — the erstwhile development financial institution and the newly-minted bank. 

In 2000, rating agency Crisil had assigned the highest safety rating  to IDBI’s bond issues. By 2002, another rating agency, ICRA, had downgraded the development financial institution’s long-term programmes. All of this pointed to the need to reshape the mother entity. But the situation was not improved as the government dithered over who would be the boss at IDBI after G P Gupta retired in January 2001. The finance ministry kept appointing officers as deputy managing directors to run the place, until P P Vora, chairman of National Housing Bank, was appointed chairman and managing director. His file had been held up on vigilance queries, even as a long line of officers from IDBI stood in queue for the post. 

Damodaran held dual charge till he got formal charge of the newly minted public sector bank for a three-year  term, from June 1, 2004. Yashwant Sinha, finance minister in the first National Democratic Alliance government, had meanwhile asked RBI Governor Bimal Jalan for his opinion on the two entities. Jalan had suggested status quo with additional capital support for both the banking arm and IDBI. Accordingly, IDBI Bank’s authorised capital was reclassified, with part of its equity converted into preference shares. When Reddy came into RBI, he too had apparently said the two institutions should continue to co-exist. “I agree with my predecessor’s note,” he reportedly said (Reddy did not wish to comment on these issues, when Business Standard contacted him).  

Reddy’s opposition to a single IDBI entity as a bank was also because the Parliamentary Standing Committee on Finance had approved setting up the new bank under the Companies Act, a move that would dilute the RBI’s control over the bank. Time was, however, running out on the two entities. IDBI Bank had a capital adequacy ratio of less than 9 per cent, and needed the support of IDBI to keep it solvent. And that is what led to the merger.  

Damodaran says he had suggested forming a special purpose vehicle (SPV) in the new entity to sequester the loans of IDBI — including to the doomed Dabhol power project, once one of India’s largest foreign direct investment projects —  from impacting the asset quality of IDBI Bank. The former were long-term loans and formed the bulk of the assets of the new bank. The SPV would have allowed the new bank to shore up its capital without having to continually shore up the sour loans of the term-lending institution. RBI was not interested. There was also a huge difference in the salary scales of the two institutions. As those differentials were whittled down, the experts with long years of experience in credit appraisal began to flee. 

That exodus left gaping holes in credit quality. One independent director, who was also an additional secretary in the government, was surprised when his queries to check the records of a previous loan to a corporate group, with large interests in steel, was met instead by a visit from the chief of the group. It turned out that as soon as the director made enquiries about the group’s loan records, the word leaked out. 

IDBI had also invested in the film sector as a pioneer; it had stakes in practically every government-run financial institution including IFCI, PNB and even market regulator Sebi. With those investments came the role of oversight in those institutions, including their management. VP Shetty, took over as chairman from Damodaran, who had left halfway into his tenure to become Sebi chairman. While Shetty’s brief arrest in 2005 on a non-banking issue created a sensation, more than one of his successors were arrested for alleged frauds (see box). The bank has possibly notched up the largest list of criminal cases against bankers in India when one includes the latest round of arrests.

The third phase is unfolding, now, again with eminent people in the loop. Mahesh Kumar Jain, who was appointed to the corner office of IDBI Bank in March last year, was appointed as deputy governor of RBI in June this year. His replacement is B Sriram, managing director (corporate and global banking) at the State Bank of India. One would  expect that Sriram, given his seniority, would have been picked for a larger entity. That he is instead in IDBI is another indication that this bank has always punched above its weight.