Tamal Bandyopadhyay: Can this man revive IDBI?

Vaddarse Prabhankar Shetty had managed a Rs 45,000-crore balance sheet and 24,000 employees for four years as a chairman of Kolkata-based Uco Bank.

In his next assignment, he was given a balance sheet of Rs 1,10,000 crore and 45,000 employees to manage at Canara Bank in Bangalore. This stint lasted for just about four months.

Now, Shetty is heading Industrial Development Bank of India Ltd (IDBI), the 41-year-old development finance institution that became a bank in October last year.

IDBI has an asset base of Rs 63,846 crore (as in September 2004) and an employee strength of about 2,400. It will grow by another Rs 15,000 crore worth of assets and about 2,500 employees once its merger with its 11-year-old subsidiary IDBI Bank gets a nod from the Reserve Bank of India (RBI).

Shetty will be at the helm of IDBI till June 2007. In this period, he needs to integrate the two entities and, more importantly, transform IDBI from an anaemic development financial institution to a vibrant commercial bank. Can he do this?

Shetty did turn around Uco Bank. After a gap of 11 years, and accumulated losses of Rs 2,545 crore, Uco made a net profit of Rs 36 crore in March 2000 "" the year he was elevated to the chairman's post at the bank from that of executive director.

Since then, he nursed the bank back to health with care and some tough decisions and took it to the capital market.

Prima facie, reviving IDBI could be an easier task because it never went into the red and is a much bigger brand than Uco Bank. After all, it has extended Rs 2,76,000 crore towards thousands of projects over the past four decades.

But if one takes a closer look at IDBI, it becomes clear that it could turn out to be a tougher assignment for Shetty. Reeling under an acute identity crisis (is it a bank or a development finance institution?), IDBI Ltd has stopped growing for quite sometime now.

In 1995-96, its net profit crossed the Rs 1,000-mark to reach Rs 1,007 crore. The following year, it rose to Rs 1,144 crore and in financial year 1998, the net profit zoomed to Rs 1,501 crore.

That was the end of the heady days. Its net profit slumped from Rs 1,259 crore in financial year 1999 to Rs 401 crore in 2003. Last year, the net profit increased to Rs 465 crore but it was an 18-month year for IDBI (from April 2003 to September 2004). 

What's on the balance sheet?
IDBI Ltd                                                                          Rs crore
	1999-00	2000-01	2001-02	2002-03	2003-04*
Sanctions	17387.5	15890.8	10194.8	6213.8	11242.1
Disbursements	17073.4	17488.6	11175.5	6572.3	7060.5
Equity capital	659.5	652.8	652.8	652.8	652.8
Reserves	8365.7	8473.8	6001.4	6292.2	5146.5
Networth	9025.2	9126.6	6654.2	6945	5799.3
Total assets	72285.4	71783.4	66642.6	63115.8	63846.4
Total Income	7859.6	7834.8	7175.8	6371	8223.3
Net profit	947	691	424.3	401.4	465
* April 2003-September 2004
IDBI Bank                                                                     Rs crore
	1999-00	2000-01	2001-02	2002-03	2003-04
Capital	140	140	140	140.08	214.24
Reserves	119.56	128.12	160.91	214.21	404.03
Net worth	259.56	268.12	300.91	354.29	618.27
Deposits	3448.17	3526.19	5234.49	6032.3	10048.16
Advances	1604.64	1732.64	3099.27	4325.19	7398.92
Investment	2123.92	2466.66	2417.81	2410.88	3914.02
Total assets	4516.08	4928.4	6641.15	7928.72	13002.2
Total income	478.92	602.04	631.32	763.14	947.03
Net profit	60.99	19.36	52.42	71.1	132.45

Similarly, sanctions and disbursements of the institution have also been dipping. Over the past five years, sanctions dropped substantially from Rs 17,387 crore in 2000 to Rs 11,242 crore in 2004. During this period, disbursements dropped even more sharply "" from Rs 17,073 crore to Rs 7,060 crore.

Shetty's predecessor Meleveetil Damodaran was at the helm from October 2003 to February 19, 2004. A large part of this time was spent holding dual charge of both IDBI as well as UTI.

To Damodaran's credit, he arrested the downfall of the institution. He slashed the lending rates sharply and brought back IDBI into the market by starting sanctioning new loans and disbursing the old ones.

In five months between October last year and February this year, IDBI sanctioned Rs 8,203 crore and disbursed Rs 3,333 crore. Some of the reputed business houses such as the Tatas, the Birlas, the Ambanis and a few premier public sector undertakings, which left the IDBI fold over the past few years, have also started to come back.

Damodaran also addressed some important structural issues. He pushed the merger of IDBI Bank with the institution, and to cut the flab, introduced a voluntary retirement scheme (VRS) for the first time in IDBI's history.

Then, Rs 9,000 crore worth of bad assets were carved out of the IDBI balance sheet by establishing a stressed asset stabilisation fund (SASF).

This has swept away the legacy non-performing assets (NPAs) of the institution.

Finally, Damodaran also succeeded in lifting the drooping spirits of IDBI executives. At least some of them have regained their aggression to pursue business.

However, that's only the beginning of the revival story. Damodaran had spoken about taking over a bank to make IDBI a bigger entity and giving the State Bank of India a "run for its money".

Shetty too, after he took over the assignment, spoke about acquiring a bank. But first, he needs to oversee the merger of IDBI Bank and IDBI. There are other issues as well.

First, the technology platforms of the two entities need to be integrated. In fact, IDBI does not have any technology platform at all. It needs to integrate its 19 branches and 82 deposit mobilisation centres and then, in the second phase, IDBI Bank's 117 branches need to be brought on one platform.

Second, one VRS may not be enough for IDBI to get rid of the extra flab. Its pay roll is still heavily loaded in favour of non-officers. Financial institution ICICI, on its way to becoming a bank, offered three VRSs to weed out non-performing employees.

The average age of employees at IDBI is much higher than at IDBI Bank. Similarly, the average salary level of employees at IDBI is much lower than their counterparts in the bank.

By keeping the bank as a separate business unit (SBU), IDBI can only delay some of the unpleasant human resource development-related decisions that are best taken sooner than later.

Already, some of the senior executives at the IDBI Bank's retail division have left to join a foreign bank that has been planning a big retail foray in India.

Then, there are regulatory issues. A bank needs to fulfil the norms of statutory liquidity ratio (SLR), cash reserve ratio (CRR) and priority sector lendings.

Under the SLR norms, a bank needs to put in 25 per cent of its liability in government bonds. The CRR "" cash reserve to be kept with the RBI "" is now 5 per cent, and 40 per cent of advances should be lent to the priority sector which includes agriculture and small-scale industries.

IDBI has already fulfilled the CRR norms. It has been given five years to achieve the SLR norms. However, the priority sector lending issue has not yet been sorted out.

Since it does not have any exposure to agriculture and small-scale sector, IDBI wants the RBI to consider the long-term infrastructure loans in its portfolio for fulfilling the priority sector norms.

If the RBI does not grant this wish, IDBI will have difficulty in raising its exposure to the priority sector even if it is given a few years to do that.

The most difficult task for Shetty is to bring down the cost of funds and push up the net interest margin (NIM) "" the spread between the cost of funds and the interest earned on this fund. IDBI has been trying to address the issue by pre-paying its old high-cost debt by new money raised at a cheaper rate.

Still, the average cost of fund for IDBI is about 8 per cent against a commercial bank's cost of 4.75 to 5 per cent. Similarly, IDBI's NIM could be around 1 per cent, against the banking industry average of 2.7 to 3.4 per cent.

Even after becoming a bank, IDBI cannot solve this problem overnight because it can access demand deposits only after spreading its network across the country.

Three committees (Booz Allen & Hamilton in 1997, Mrityunjaya Athreya in 1999, and Boston Consulting Group in 2001) worked over four years to discover the fact that IDBI cannot continue as a development financial institution and must convert itself into a bank.

After that, the government took another three years to make it a bank. That too, with a rider that despite becoming a bank, IDBI must continue with its development finance activities.

Shetty may not find it easy to realise IDBI's dream of having the best of both worlds ""profitability of a commercial bank and social responsibility of a development finance institution.