It must be music to the ears of the government of India (GoI) and Life Insurance Corp. of India (LIC). IDBI Bank Ltd, in which LIC and GoI hold 49.24 per cent and 45.48 per cent, respectively, is set to pay dividend for FY23, subject to shareholders’ approval.
The last time it had paid a dividend (7.5 per cent) was in 2015 just before the rut started, which forced the Reserve Bank of India (RBI) to bring the bank in its prompt corrective action PCA fold (in May 2017), restraining its growth. This time, IDBI Bank plans to pay a 10 per cent dividend. It got out of PCA in March 2021.
IDBI Bank is a hybrid animal: A private bank that needs to fulfil certain conditions, which a public sector entity is subjected to. Is the worst behind it? Before I put on a doctor’s robe and do the health check, let’s take a look at what’s happening to its privatisation.
LIC is slated to sell 30.24 per cent, bringing down its stake to 19 per cent. GoI will sell 30.48 per cent, paring its stake to 15 per cent, but this will be treated as public shareholding. This means, after the sale, the combined stake of LIC and GoI will sharply drop from 94.72 per cent to 34 per cent, passing on 60 per cent to the new owner, making it a truly private bank.
There have been speculations in the media on the delay about the process as well as the likely suitors. Reacting to media reports on deferment of IDBI Bank divestment, Department of Investment and Public Asset Management (DIPAM) Secretary Tuhin Kanta Pandey on March 17 tweeted: “Reports appearing in a section of the media indicating the possibility of deferment of IDBI Bank disinvestment are misleading, speculative and baseless. The transaction continues to be on track as per the defined process in the post-EoI stage following receipts of multiple EoIs.” EoI refers to expressions of interest.
DIPAM manages government holding in public sector enterprises.
Media reports are also speculating about the potential bidders. Reportedly, there are five of them, including Kotak Mahindra Bank Ltd; Canadian billionaire Prem Watsa’s Fairfax Group, the promoter of CSB Bank; and Emirates NBD Bank PJSC, Dubai’s government-owned bank and one of the largest banking groups in West Asia in terms of assets.
DIPAM apart, the only entity that is in the know of developments is consulting firm KPMG, transaction adviser to the deal.
The preliminary information memorandum, inviting EoIs for strategic divestment in IDBI Bank, was issued in October last year. Essentially, technical bids were sought. There have been multiple bids and at least one of them has been rejected. Now, consultation with the RBI is on to check how many bidders fit into the regulator’s “fit and proper” criteria to own a bank.
Once this is done, financial bids will be called. IDBI Bank then will have to open up the virtual data room for the bidders. The entire process should be over by December, paving the path for the GoI’s plan of privatisation of two public sector banks.
We won’t have access to the virtual data room but we can analyse the data available in the public domain to check IDBI Bank’s health.
The bank’s current MD and CEO, Rakesh Sharma, took over the assignment on October 10, 2018. He announced the September 2018 quarter earnings, possibly the worst in its history. Ahead of that, in the June 2018 quarter, its gross non-performing assets (NPAs) were 30.78 per cent, and net NPAs 18.76 per cent. In September, the gross NPAs rose further to 31.78 per cent, the highest in the banking sector, while net NPA dropped a tad to 17.3 per cent.
In the September 2018 quarter, its net loss was Rs3,602 crore. For two successive quarters, in December 2015 and March 2016, the bank had posted net losses but bounced back to the black in the next two quarters. The balance sheet was in the red again in December 2016 and remained there till December 2019. By that time, it piled up a net loss of Rs45,064 crore.
Once it returned to the profit track in March 2020, IDBI Bank has not looked back. In FY21, its net profit was Rs2,439 crore, surpassing the highest-ever posted in FY12, Rs2,032 crore. In FY23, the net profit rose to Rs3,645 crore.
In March 2023, its gross NPAs were 6.38 per cent and net NPAs 0.92 per cent. How has the bank brought down the NPAs? It has written off Rs61,700 crore (in banking parlance, it’s called a technical write-off whereby bad loans are parked in branches but do not find place in the balance sheet). It has been aggressive in recovering bad loans — at least Rs5,000 crore every year. Since the written-off loans have already been provided for, such recovery adds to the bank’s bottom line.
Its capital adequacy ratio, the key to a bank’s health, has risen from 6.22 per cent in September 2018 to 20.44 per cent in March 2023.
The provision coverage ratio, which was 68.72 per cent in September 2018, is 97.94 per cent now.
Apart from recovery, it has been upgrading certain loans as the borrowers have been persuaded to pay and is also selling off some bad exposures. Last year, it sold two bad loans worth Rs3,200 crore to the National Asset Reconstruction Company Ltd.
Let’s look at other data points. In September 2018, high-cost bulk deposits formed 34.72 per cent of its total deposits and low-cost current and savings accounts (CASA) were 38.13 per cent. By March 2023, the bulk deposits were down to 12.64 per cent of total deposits and CASA up to 53.02 per cent.
As a result of this, the cost of deposits has come down from 5.41 per cent to 3.71 per cent. Subsequently, the net interest margin or the difference between what a bank pays to the depositors and earns from the borrowers has risen from 1.8 per cent to 3.72 per cent between September 2018 and March 2023.
There is another contributing factor to the bank’s higher earnings. By September 2018, it had parked at least Rs22,000 crore in the Rural Infrastructure Development Fund (RIDF) run by the National Bank for Agriculture and Rural Development. A bank needs to do that when it fails to meet the priority loan targets. The earnings on this were 3.25-3.5 per cent while it was paying much higher interest on bulk deposits. Now, the RIDF investment has shrunk to Rs8,300 crore.
While better asset-liability management has contributed to its profits, IDBI Bank has also de-risked itself from corporate loans, the genesis of NPAs. From 54:46 corporate: retail loan combination in September 2018, the ratio now is 31:69. I understand that the aim is to have a more balanced 40:60 corporate: retail loans combine.
Mortgages and loans against property account for the highest portion of the corporate loans, Rs69,000 crore. Other products in the retail basket are auto loans, personal and education loans, and, of course, gold loans (Rs10,000 crore). It is also dabbling in products such as discounting bills against letter of credit and discounting of trade receivables among micro, small and medium enterprises, large corporations and financiers on the TReDS (Trade Receivables Discounting System), the first receivable exchange in India.
Finally, how is it doing on two key parameters that the investors look for — return on assets and return on equity? They are 1.2 per cent and 16.15 per cent, respectively, better than many of its peers.
There are many challenges ahead of IDBI Bank but it seems to have got its act together and the worst is behind it. We may see some serious suitors for it.
This column first appeared in Business Standard. The columnist is a Consulting Editor with Business Standard and Senior Adviser to Jana Small Finance Bank. His latest book Roller Coaster: An Affair with Banking
