How To Kill A Bank In India

In his February budget speech, finance minister Arun Jaitley said the government would look at paring its stake in IDBI Bank Ltd to less than 51%. Jaitley’s statement came a few months after his deputy Jayant Sinha had spoken about transforming IDBI Bank “in a manner similar to” Axis Bank Ltd.

The government is planning to kick-start its privatization drive with IDBI Bank, a lender that is majority-owned by the government, but culturally tries to mimic a private bank. Even then, it won’t be easy. The first to oppose the move was Delhi chief minister Arvind Kejriwal who urged Prime Minister Narendra Modi to halt the process. Kejriwal is opposed to the idea of the government making money by selling its shares in IDBI Bank. Technically, the government does not necessarily need to sell its stake to pare its holding; it can reduce its holding by raising fresh capital from new investors.

In March, Life Insurance Corporation of India raised its stake in IDBI Bank from 7.21% to 14.37%, following a preferential issue of shares. The government now owns close to 74% stake in the bank and the rest is held by the public.

A team from World Bank’s private investment arm International Finance Corp. was seen camping at the bank’s headquarters in Mumbai in April, doing the so-called due diligence. CDC Group Plc, a development finance institution in the UK, and US private equity firm TPG Capital, too, have been apparently keen to buy a stake in IDBI Bank.

Its original avatar, Industrial Development Bank of India (IDBI), was set up as a project finance institution in July 1964. Till early 1990s, it was the largest term-lending institution, enjoying the privilege of receiving cheap long-term funds from the government which helped IDBI extend term loans at reasonable rates. Besides, it did not need to pay tax on its profits. It could also convert 20% of its loans given to a company into equity at par, after a few years.

By 1992, when India embraced economic liberalization, IDBI started giving short-term working capital loans and even aspired to convert itself into a bank but the militant trade unions did not allow that to happen. So, it floated a private bank as a subsidiary when Reserve Bank of India (RBI) opened the doors for new banks.

Early this century, as the flow of cheap funds dried up and rival project finance institution ICICI got merged with ICICI Bank Ltd for survival and growth, IDBI started sinking into a quagmire of shrinking balance sheet, rising non-performing assets (NPAs) and eroding profitability. Since IDBI itself was not a triple-A-rated entity, it could not offer loans at competitive rates, and old-economy outfits such as the Tatas, Birlas, Ambanis and some of the premier public sector undertakings started deserting IDBI even as ICICI Bank was creating retail assets at a furious pace.

By 2003, its net profit slumped to Rs.401 crore from Rs.1,501 crore in 1998. There was also a dramatic drop in sanctions and disbursements of loans and rise in bad assets. IDBI wanted to become a bank but the Parliamentary Standing Committee on Finance suggested that the lender should stay away from the retail business.

For IDBI, the search for the right kind of business model started in 1997 when it hired Booz, Allen & Hamilton to suggest a recast. In 1999, management consultant Mrityunjaya Athreya took another look at it. In 2001, Boston Consulting Group walked in for yet another reality check and McKinsey & Co. is probably the last consultant to have helped the institution find its path.

In September 2004, a new company was incorporated as Industrial Development Bank of India Ltd with which its subsidiary, IDBI Bank Ltd got merged in April 2005. A year later, it took over an old private bank, United Western Bank Ltd, to expand its branch network and collect retail deposits.

In May 2008, it was rechristened IDBI Bank Ltd but the new name could not cement the cracks created out of three different cultures: a development finance institution, a modern bank and a highly unionised old private bank.

To maintain profitability, it started selling family silver in the form of non-core assets but could never get its act together even after cleaning up its balance sheet by carving out the bad loans and creating the so-called Stressed Asset Stabilisation Fund, a euphemism for a bad bank. RBI too gave it a five-year regulatory forbearance on the mandatory bond buying requirement when it became a bank.

Now IDBI has 1,847 branches and 3,340 ATMs across 3,378 locations but low-cost current and savings accounts still contribute just 25% of total deposits, the lowest among banks of its size. Similarly, its net interest margin at 1.96% is thin.

Despite having a decent cost-to-income ratio, it is a laggard with 8.94% gross NPAs and 4.6% net NPAs in December 2015. Loan growth has been stunted and, in the first nine months of fiscal 2016, it had posted a loss of Rs.1,929 crore. Corporate loans still account for more than two-third of its loan book.

It has been a lost decade for IDBI Bank. Still, it has around 6.5 million customers and 13% capital adequacy ratio. If new investors come in and the bank is privatized, it can be resurrected but that should happen fast. IDBI Bank has been suffering from an identity crisis. There was a flight of talent after the private bank in its fold was merged and a leadership crisis at the top only aggravated the crisis. It never focussed on growing the retail business and the acquisition of United Western Bank added branches but complicated the culture, making it three banks under one roof.

A reverse merger with its subsidiary bank would have served it better but the old guards were afraid of losing their authority. In the process, a fine modern bank crumbled under the burden of a development finance institution which has not been able to find its path.

Tamal Bandyopadhyay, consulting editor at Mint, is adviser to Bandhan Bank. He is also the author of Sahara: The Untold Story and A Bank for the Buck.

His Twitter handle is @tamalbandyo

Comments are welcome at [email protected]

This blog first appeared in www.livemint.com