What LIC Needs To Do With IDBI Bank

Many employees of IDBI Bank Ltd across India, mostly from rural areas, are seeking advice from their seniors on how to cope with the fallout of the government ceding control of the lender. They fear that the prestige and job security of being part of a government-run organization will be lost. Some of them had even taken dowry by virtue of being a “government servant” and now dread facing their in-laws.

The truth is, IDBI Bank is not being privatized. Yes, Life Insurance Corp. of India (LIC) will hold the majority 51% stake and turn it into a subsidiary, but LIC itself is wholly owned by the government. Instead of using taxpayers’ money, policyholders’ money will be used to keep the bank alive. And, the government is not divesting its stake. LIC will infuse fresh capital into the bank. Over the last one year or so, quite a few investors took a close look at IDBI Bank but none of them were willing to buy it, looking at the balance sheet.

This week, IDBI Bank will have its last annual general meeting in the current avatar and also announce the June quarter earnings. With the government not releasing any recapitalization funds for the bank in the current fiscal year, its health is expected to deteriorate further in June.

Gross non-performing assets (NPAs) which were 27.95% of advances in March will inch closer to 30% and the net NPAs which were 16.69% will also rise. The only bank which can put up a semblance of a fight with IDBI Bank on this front is Chennai-based Indian Overseas Bank. In the June quarter, its gross NPAs were 25.64% and net NPAs, 15.1%. IDBI Bank’s net worth which dropped from ? 17,146 crore in March 2017 to ? 16,156 crore in March 2018, runs the risk of being entirely eroded after adjusting all bad assets.

Indeed, its operating profit rose 71% last year but this was boosted by sale of non-core assets; the income from banking business (net interest income) actually dropped 2%. Being covered by the Reserve Bank of India’s (RBI) so-called prompt corrective action (PCA), the bank shrank both its loan assets and deposit portfolio last year. The number of employees, branches and ATMs also declined.

It had provided for ? 19,126 crore for bad assets last year, 62% higher than it had done in 2017. If it continues with this aggressive provisioning, then capital will shrink further and probably drop below regulatory requirement. In March, although its capital adequacy ratio under Basel II norm was 10.41% (from 10.7% a year ago), its so-called Tier I capital and capital conservation buffer ratio stood at 7.73%, lower than the regulatory requirement of 8.875%.

So, LIC money will be manna from heaven for the bank. The big question is what LIC will do with IDBI Bank. Does it have the expertise to run a bank? (We all have seen the progress of India Post in running its payments bank.) Probably, it has developed quietly. After all, it’s not just IDBI Bank, the state-owned insurer seems to be taking care of 31-year-old Infrastructure Leasing & Financial Services Ltd too, an infrastructure development and finance company with too many subsidiaries and special purpose vehicles. It cannot have both banking and infrastructure business on its plate without knowing what to do with them.

The fresh capital will help IDBI Bank clean up its book but how will it prevent generation of bad assets in future? This is possible only if LIC professionalizes the management. And, this must start with restructuring the board.

Not every board member of the bank has the credentials to be there. A loss-making bank’s senior executives can fly economy class on flights to cut cost but not the board members. Similarly, they also need to be put up at five-star hotels and not the guest house of the bank. And, since they don’t earn much as directors, the bank often has to entertain requests for iPhone, iPad and cars for personal use. This could be the story of every bank under PCA.

Theoretically, it is a win-win situation both for the bank as well as LIC. While LIC which already has 290 million policies will get IDBI Bank’s 140 million customers and 1,900 branches to sell its insurance products, the bank will get fresh capital and earn fees and free float money which will boost its income and bring down the cost of funds. Besides, LIC already has a housing finance subsidiary and there is business synergy as IDBI Bank too is into housing finance. But to reap the benefit of all synergies, the culture has to change. Otherwise, IDBI Bank will remain the banking sector’s Air India.

This column first appeared in www.livemint.com

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Tamal Bandyopadhyay, consulting editor at Mint, is adviser to Bandhan Bank. His latest book `From Lehman to Demonitization’ has recently been released

His Twitter handle is @tamalbandyo. Comments are welcome at [email protected]