Five years back, LIC Housing Finance Ltd, the mortgage subsidiary of Life Insurance Corporation of India (LIC), had applied to the Reserve Bank of India (RBI) seeking a banking licence, but did not get it. Now LIC will get a bank.
Is this the transformation of IDBI Bank Ltd ,which finance minister Arun Jaitley had hinted at his February 2016 budget speech (“The process of transformation of IDBI Bank has already started. [The] government will take it forward and also consider the option of reducing its stake to below 50%”)? Or, is it another intermediate step—a sort of warehousing arrangement?
Since its inception, IDBI Bank has been a favourite guinea pig in the laboratory of the Indian financial system. Its earlier avatar, Industrial Development Bank of India, a development financial institution, was set up in 1964 as a wholly-owned subsidiary of RBI. In 1976, the government replaced RBI as its owner and the mandate given to IDBI was to finance, promote and develop industry in India as the lead agency. In July 1995, following a public issue, the government’s holding was pared to 75%.
As it struggled with increasing asset-liability mismatches, the development finance institution had to transform itself into a universal bank. A 2003 Act gave it the status of a company and it became a scheduled bank. To complete the transformation, its own banking arm, set up in 1994, was merged into it in 2005; it even acquired an old private bank to expand its branch network. It also created India’s first bad bank in 2005 by transferring ₹9,000 crore of bad assets to a trust; in the past 13 years, the recoveries have been around ₹5,450 crore.
Probably, no other Indian bank has appointed as many consultants as this one has done, in search of the right business model. The list includes Booz Allen Hamilton, Mrityunjay Athreya, The Boston Consulting Group (twice) and McKinsey & Company in the past 20 years.
Despite all these, IDBI Bank could never reinvent itself. The seeds of failure were sown in the 2003 Act itself, which allowed it to “carry on banking business” but that is “in addition to the business which may be carried on and transacted by the development bank”. So, even after becoming a bank, it could never shed the skin of development banking. In the process, it killed a fine private bank, its own offspring.
Between fiscal 2016 and 2018, it has posted a net loss of over ₹17,000 crore. Its stressed assets are ₹60,422 crore. The pile would have been far higher had it not written off ₹22,623 crore bad loans. In percentage terms, the bad assets are close to 28% of the loan book, the highest among all Indian banks. Its net bad loans of ₹28,665 crore are far more than its current net worth. In the past two years, the bank’s total assets shrank at 3.5 percentage points each.
The gross bad assets may start coming down after peaking around 31%. The bank’s operating profit rose 71% in 2008 to ₹7,905 crore but out of this, ₹4,400 crore was generated through sale of so-called non-core assets.
On the positive side, there are more non-core assets to be sold. It has also redeemed ₹5,000 crore worth of additional tier-1 bonds, saving around ₹530 crore interest annually.
Indeed, IDBI Bank’s net interest margin, a key indicator of a bank’s efficiency, at 1.8%, is the lowest among all banks but with steady redemption of bulk deposits and rise in low-cost current and savings account (37.15% in March 2018), it will rise. Its inability to disburse 40% of its loans to agriculture and other small enterprises under priority sector norms historically forced it to invest the shortfall in the low-yielding Rural Infrastructure Development Fund (RIDF). As its priority loan portfolio expands and RIDF investments get redeemed, its earnings will rise.
Most importantly, its retail asset book has grown to 45%; the quality of such assets is comparable with relatively better-off banks. Simultaneously, the risk-weighted assets have come down from 2.69 trillion in 2017 to ₹2.21 trillion in 2018, freeing up capital.
While LIC will get IDBI Bank’s 140 million customers and 1,900 branches to sell its insurance products, the bank will earn fees and free float money boosting its income and bringing down the cost of funds. In future, LIC could also merge its mortgage unit with the bank. The key to success of the latest experiment with IDBI Bank will be running it professionally and LIC not acting as proxy for the government. DBS Bank, the largest bank in South-East Asia by assets, was set up by the Singapore government as a development financial institution in 1968, four years after IDBI. It is run by its board. The government has nothing to do with it except for earning handsome returns on its investment.