We'll be selective in our lending decisions, says IDBI Bank's Rakesh Sharma

IDBI Bank, which came out of PCA last week, says processes have been strengthened and past mistakes will not be repeated

After nearly four years IDBI Bank came out of the restrictions imposed on it by the Reserve Bank of India under the prompt corrective action (PCA) framework last week. The move comes at a time when the government and Life Insurance Corporation  (LIC) are planning to divest their stakes in IDBI Bank. While the LIC holds a 49.24 per cent stake in IDBI Bank, the government holds 45.48 per cent. IDBI Bank was categorised as a private sector bank by the regulator after LIC acquired a 51 per cent stake in the bank in 2019.

The then public sector lender was put under PCA in May 2017 due to which bank’s lending, branch expansion and recruitment were restricted. The bank’s gross advances which were Rs 2.08 trillion at the end of the April-June quarter of 2017-18, fell to Rs 1.6 trillion at the end of the October-December quarter of 2020-21. While taking the lender out of the PCA framework, RBI said the lender will be subject to certain conditions and continuous monitoring.

The decision to bring IDBI out of the PCA framework augers well for the planned stake sale to private players. There would not have been much investor appetite for a bank which faced regulatory restrictions to grow business, open new branches and expand workforce. However, just the removal of restrictions is not going to make the lender attractive to investors. The bank needs to improve its performance, have robust risk management practices and state-of-art technology among others, to attract investor interest.

Organisational restructuring

The bank’s management says that the lender used the time while it was under PCA to strengthen the processes. Global consulting firm Mckinsey was hired for the purpose.

“All our verticals have been strengthened in the meantime.  For restructuring and realignment, we took the help of Mckinsey,” Rakesh Sharma, MD & CEO, IDBI Bank, told Business Standard.

“They suggested some organisational restructuring. Earlier, the mid corporate group was reporting to the zonal heads, who are the retail heads. Now, for the mid corporate grpup, we have created a separate vertical in the head office with a separate executive director,” he said. As a result, the zonal offices are now focusing exclusively on the retail segment. In addition, the marketing and processing department of retail assets has been separated for managing it in a better way, Sharma said.

Calibrated strategy

One thing that IDBI’s chief executive conveys in no uncertain terms is that the bank is aware of its past mistakes and is makling a conscious effort not to repeat them.

“We have to see why we went under PCA. Because we were over exposed to certain units and those units were not doing well, so the NPA level had increased. Now we have framed out credit policies and risk management policies so that it does not recur. We now have industry-wise limits beyond which we will not go. We have revised all the risk management policies. The aim now is to do business in a prudent manner. So that such things are not repeated,” Sharma said. Due to the restrictions the bank lost clients, as it was unable to lend even to AAA or AA rated companies.

The lender came in black for the first time in the April-June quarter of 2020, after incurring losses for 13 consecutive quarters. The losses were due to a surge in non-performing assets, mainly corporate loans. A third of its loan book had turned bad as gross NPAs went up to almost 30 per cent of gross advances.

The bank now says it will be selective in lending, in a calibrated way and target a loan growth of not more than 10 per cent in the next financial year.

“We have strengthened our mid corporate and large corporate groups. So now they are ready to take off in a calibrated manner, selectively. We will not be growing very aggressively. We will not grow more than 8-10 per cent in the first year,” Sharma said.

Stress in loan segment over

Sharma also emphasises that the stress in the loan segment is now over and incremental slippages will be within manageable levels.

“One thing is clear that whatever stress was there in the book, has been recognized. Like we indicated, due to the Supreme Court stay on asset classification, we have not classified certain loans as NPA, but have made provisions for those accounts and income that was not recognised. So when the stay is lifted there is no additional burden on the balancesheet. From that those will move to the NPA,” Sharma said. The gross NPA ratio of the bank is still elevated and was at 23.5 per cent at the end of December 2020. However, but the trajectory is trending down. The gross NPA ratio was 25 per cent at the end of September 2020, and 26.8 per cent in June 2020.

In September 2020, the Supreme Court had directed banks not to declare accounts which were not classified as non-performing assets till August 31 this year as NPAs till further orders.

Provision coverage ratio, which is one of the indicators for the strength of the balancesheet, is 90 per cent for IDBI Bank, excluding technical write-offs, the best in the industry.

In addition, the recoveries and collection are now back to the pre-covid levels, Sharma said.

“Our collection efficiencies are more or less the same as the pre-covid levels. In corporate and retail whatever stress was there, is already recognised. So major stress will not be there. Earlier, the branches were doing the collection and recovery. Now we have engaged some outside agencies,” Sharma said, indicating that recoveries are expected to stay strong.

 

Profitability parameters

As the pressure on bad loans slowly decreased, the bank’s margins started to improve as evident from the October-December earnings.

The net interest margin (NIM) for the third quarter was at 2.87 per cent, which is higher by 60 bps on an year-on-year basis, and 17 bps higher over the preceding quarter.

“Our target is to take net thye interest margin above 3 per cent in the next financial year,” Sharma said. He also added that the return on assets which was 0.51 per cent for the third quarter is expected to inch up to 0.6 per cent in the next year.

In line with the broader market, IDBI Bank’s share price has also moved up in the last one year. However, it is still lower than the price LIC paid for the acquisition, which was Rs 54 per share.