IDBI Bank takes prompt corrective action; all eyes now on Q3 results

The lender has stabilised under LIC ownership, but its exit from the central bank's restrictions may be some time away

Back in May 2017, the Reserve Bank of India (RBI) placed IDBI Bank under prompt corrective action (PCA) on account of its high net non-performing assets (NPA) and negative return on assets (ROA). Though stress levels at IDBI Bank were higher than the system average for the better part of the previous decade, FY17’s net NPA of 13.21 per cent shook the market. Cut to present, with FY20’s number melting to 2.67 per cent. Is the bank reinventing itself as a private outfit under the Life Insurance Corporation of India (LIC)?

To put things in context, LIC came as a white knight when it picked up a 51 per cent stake. The deal was announced in June 2018 and completed by January next year. Heavy lifting the Government of India’s burden, LIC wrote a cheque for Rs 1,260 crore to fund IDBI Bank’s open offer priced at Rs 61.73 a share. LIC and the government together have infused Rs 4,380 crore between FY18 and FY20 and the bank’s capital adequacy has increased from 10.4 per cent in FY18 to 13.1 per cent in FY20. As of September 30, 2020, capital adequacy stood at 13.7 per cent. Nearly two years after LIC’s entry, Rakesh Sharma, MD & CEO, IDBI Bank, said the life insurer’s backing has done the bank a great deal of good.

“It is being seen as a strong promoter backing us. We are getting a lot of synergy from LIC, mainly towards the bank’s cash management business. The consequent improvement in savings account is helping us,” Sharma explained. “We have tied up with LIC for the credit card business and the overall business with LIC is giving us a good float on low-cost current account-savings account [CASA] deposits,” he added. IDBI Bank being LIC’s bancassurance partner is earning fee income and the recent initiative of launching salary accounts for agents and employees of LIC and its subsidiaries is deepening its retail loan base.

In fact, at a time when the PCA restricts fresh lending, these initiatives with LIC have helped strengthen and reinvent its retail portfolio. In Q2, IDBI Bank’s retail book (including agri-loans and micro, small and medium enterprise, or MSME, loans) stood at 58 per cent of the total loan book; a threshold equivalent to private peers. The good part is that the retail book is heavily tilted towards home loans (72 per cent). “Focus will continue to remain on retail, a major portion being home loans, and 10 per cent towards loans against property where the quality of the book is safe," Sharma said. He reiterated that starting with a retail  gross NPA at 1.16 per cent will help the bank contain the pace of bad loan accretion to less than 2 per cent (the accept rate).  “We are slowly increasing personal loans exposure, especially on the salary accounts, and likewise on auto loans but we are not very aggressive there,” he said. That said, owing to a contraction in the loan base from write-offs in the wholesale book, the gross NPA ratio remained at a high 25.1 per cent even in Q2.

The rest of the book, largely corporate accounts, is a lot leaner now owing to constant provisioning costs and significant write-offs, suggesting that many of the legacy issues may have been addressed. This also reflects its provision coverage ratio, or PCR, at over 96 per cent (the highest in the industry).

But the market may not regard IDBI Bank as a retail bank or even as a private bank, a tag that it attracted following 2019’s ownership change, just yet.

This disinclination is also reflected in its fund-raising process, where the bank had an approval for Rs 11,000 crore. When merchant bankers approached the bank for the issue, the capital requirement was estimated at Rs 6,000 crore and subsequently reduced to Rs 3,000 crore. But the market’s appetite was for less than half the amount (Rs 1,435 crore), with public sector banks such as the State Bank of India, Punjab National Bank, Bank of Baroda, Canara Bank and Indian Bank emerging as the principal subscribers.

“A few mutual funds and insurance companies and about 14 financial institutions and foreign institutional investors also participated in this round,” Sharma said. He added that major investor uncertainty centred on the government’s stake sale and the bank’s exit from PCA. In the Union Budget 2020, the government indicated that it would exit its stake (now 45.5 per cent) in IDBI Bank but did not specify when.

To that extent, Sharma is also quite vocal in admitting that the transition to a private bank in the true sense may take time. “Once the government’s divestment happens and a strategic investor comes in and the public shareholding increases, the acceptance of IDBI Bank as a private bank will definitely increase.”

But R K Bansal, who once headed IDBI Bank’s retail operations, said the bank’s transformation to its present form is certainly a feat. Appreciating IDBI Bank in its current form, he said, requires understanding its background. It was an infrastructure-lending outfit that subsequently became a bank. “When ICICI Limited was merged with ICICI Bank, it was a smaller entity combining with a bank, which wasn’t so in IDBI Bank’s case,” he pointed out. IDBI Limited came in with a large complement of legacy infrastructure loans and since IDBI Bank is relatively smaller, it ended up being an infra loan-heavy bank.

Bansal also recalled that at one time, IDBI Bank, the first state-owned bank to offer home loans in the early 2000s, was doling out more home loans than even ICICI Bank. Subsequently, with bad loans piling up and having to top up its priority sector loans by subscribing to rural infrastructure development funds (RIDFs), the inevitable happened. “Now the NPAs are taken care of and the bank is in a better position,” Bansal said.

This may well be the case. IDBI Bank meets three out of four criteria for exiting the PCA (see table). If anything, it’s in the final lap of its two-year journey of redefining itself. “In general, the true extent of pain in the retail and MSME sectors isn’t clear yet and given the absence of granular data, investors are wary of the sector,” explained Ananth Narayan, a banking sector expert. This may be another reason the central bank is being cautious about IDBI Bank’s PCA exit. Which is why all eyes are now on the third quarter results.