We have followed a capital light strategy, laying more emphasis on growing our retail book
Rakesh Sharma , MD & CEO, IDBI Bank
IDBI Bank has had a chequered history. Starting as a development finance institution during the capital starved era of the 60s, IDBI was set up in July 1964. Along with the other development finance institutions, ICICI and IFCI, IDBI played a major role in shaping the industrial landscape of India. With the liberalisation of the economy and access to global capital, the need for a specialised development finance institution soon lost its importance.
The Act under which IDBI was set up was repealed in 2003 and a new bank, Industrial Development Corporation Bank, was incorporated in 2004. The IDBI undertaking was subsequently transferred to this bank. An organisation which had earlier helped in setting up several financial institutions by infusion of equity of the likes of SIDBI, National Stock Exchange, NSDL, ARCIL, was transformed into a bank.
ICICI had likewise transformed itself from an institution to a bank. While ICICI Bank is currently ranked among the top three banks of the country with a market cap of Rs5 lakh crore, IDBI has somehow not been able to successfully transform itself to a universal bank.
One of the reasons was that some of the infrastructure assets built up over the years had gone bad and the bank harboured losses for several years in a row. It was placed under the PCA (prompt corrective regime) in 2017. This effectively placed curbs on big-ticket lending and large expenditure even as it put in place a turnaround plan. In December 2020, the RBI declared that the bank was out of PCA, thereby giving more operational freedom to it and paving the way for divestment.
For the last two years, the bank has been on a recovery trail and has been in the black, reporting profits. In FY2020-21 it reported a PAT of Rs1,359 crore followed by a profit of Rs2,439 crore in FY2021-22.
“We have followed a capital light strategy, laying more emphasis on growing our retail book,” explains Rakesh Sharma, MD & CEO, driving the current turnaround initiatives. A post graduate in economics with CAIIB, Sharma has more than three decades in SBI, besides being the MD and CEO of Canara Bank and Lakshmi Vilas Bank. “On the liabilities side we have progressively brought our high-cost bulk deposits down in favour of retail deposits, effectively bringing down the cost of funds. Within retail, structure retail (against collateral) now accounts for nearly 37 per cent of the retail book. The focus has been on improving out digital footprint.”
Nearly 68 per cent of the bank’s accounts are linked with UPI with only 6 per cent doing business by going to branches. Sharma points out that while degrowing the book (during the PCA regime) was inevitable, the initiatives taken have helped in improving profitability with net interest margins progressively moving up. They currently stand at 3.93 per cent in FY2021-2022 as against 2.03 per cent in FY2019-20. Sharma is confident that the profit growth is sustainable in the coming years. “IDBI will see all-round growth in the coming years.”
As a part of our strategy we have reduced corporate lending progressively
Samuel Joseph Jebaraj, DMD, IDBI Bank
“As a part of our strategy we have reduced corporate lending progressively,” says Samuel Joseph Jebaraj, DMD in charge of corporate lending. Samuel Joseph, BE (Hons) MBA, has been a banker, having spent the better part of his career with EXIM Bank. Over the last 25 years he has gained experience in various sectors in human resources, international finance, risk management, rural finance and small-scale industries finance. He has been the DMD in IDBI since September, 2019. Lending to the corporate sector has been brought down to 37 per cent. The ideal ratio should be between 55-60 to 45-40 per cent, he says.
The bank has recalibrated its sectoral exposure and limits have been put on lending to corporates which have been classified as cautious, highly cautious, normal and selective. Limits for single borrowers have likewise been set more conservatively. For AAA customers the maximum exposure of the bank has been pegged at Rs1,100 crore while for a BBB it is Rs220 crore. “The focus has been on building assets of midsized companies.” Samuel Joseph explains that while corporates used the Covid period to deleverage, investment demand will pick up now. “The capital cycle cannot wait forever.”
Many banks have, over the last few years, followed a similar strategy of growing the retail book and reducing their overall exposure to corporates. One of the reasons has been the heightened level of non-performing assets in the banks’ books. In the case of IDBI the gross NPA as a percentage of total advances had gone over 27 per cent in 2018 and NNPA to 16.69 per cent.
In FY2021-22 it has been brought down the GNPA to 19.14 per cent and 1.27 per cent. Gross NPAs are, however, still at elevated levels. The good part is that provision coverage is also high, at nearly 94 per cent. While delinquencies in retail are still present, the low ticket size and diversified asset base do not make any significant dents as a default by a single large corporate borrower would do.
“IDBI brand is still premium and has very good recall,” says Suresh Kishinchand Khatanhar, DMD in charge of retail banking. “Besides the growing retail book, the adoption of retail is high as are our service standards which match any private sector or even foreign bank.” Khatanhar, M.Com, CAIIB and ICWA, has more than 35 years’ experience in banking, having served in Dena Bank and the erstwhile IDBI Bank before the merger with IDBI.
“IDBI is future-ready,” he exclaims emphasising that “IDBI has a strong retail book. We have rebalanced our portfolio, improved our yields and mitigated risks by putting adequate measures in place. CASA is 57 per cent”. All services are being offered under one roof, including digital onboarding of customers. The bank has built a scalable organisation. The average ticket size of its housing loans is between Rs20-25 lakh of which 94 per cent is mortgaged.
IDBI brand is still premium and has very good recall
Suresh Kishinchand Khatanhar, DMD, IDBI Bank
The bank, which has tie-ups with NBFCs and fintech companies, is all geared up to expand its branches and hire more people, now that it is out of the PCA regime. Even while digital footprints have increased, more branches are necessary, says Khatanhar. “Face to face interactions cannot be done away with totally. If everything is done digitally, we will be a fintech company and not a bank.”
Underperformer in stock markets
While the bank has posted good results for two years in a row, stock markets do not seem too enthused. The share price of IDBI Bank has come down from a high of Rs65 in October 2021 to touch a 52-week low of Rs32, last fortnight. While it is easy to dismiss the movements of the share prices on the grounds that the floating stock is very low at 5 per cent the fact is that the share prices have given negative returns across one year, five years and 10 years.
Over the last 10 years the absolute returns have been -66 per cent. Compare this to the BSE Sensex having gone up by 220 per cent (as per the analysis done by Marketsmojo.com). SBI, one of the largest banks, has given more than 100 per cent returns over 10 years, private sector bank HDFC and ICICI Bank have given more than 300 per cent returns. Bank of Baroda and Axis Bank have likewise given superior returns.
One view is that one of the key requirements for transforming a bank the size of IDBI Bank is good professional leaders. These leaders need to be given full freedom with zero interference from the government or quasi-government owners. This was one of the key factors which enabled ICICI to transform itself successfully from a developmental financial institution to a commercial bank. IFCI and IDBI failed in this respect and both have been floundering while ICICI Bank is now ranked amongst the top two private sector banks. In the case of PSU banks, SBI grooms leaders from its own cadre. Leaders are not randomly shifted from one bank or another.
“The top leaders also need to be given enough time to lead the transformation. There are numerous instances of leaders like Aditya Puri, Uday Kotak and KV Kamath who have led their organisations for a decade or more to make a significant and meaningful impact,” says Gunit Chadha, a career banker who is now the founder of APAC Financial Services, a new-age NBFC aimed at providing finance to small and micro enterprises in semi-urban and rural markets.
Chadha, who headed IDBI Bank from 2000-2003 says: “Giving the leader time empowers him to make strategic and structural decisions which take more than a few years to bear fruit. A leader with a limited term may take only tactical decisions which can show results in the short term but may not be strategically significant or sustainable.”
Chadha, ex-CEO Deutsche Bank in India and Asia Pacific, played a significant role in the transformation of Deutsche Bank in his region and points out that IDBI was the largest project finance institution in India. “To transform a giant institution does have a high difficulty factor, especially when the assets are predominantly long-term. Such a transformation takes a decade or more and now one does see green shoots, for sure.” The top leadership currently is good and has successfully steered the bank back on the profitability path. And the path ahead can only get better.
The top leaders also need to be given enough time to lead the transformation
Gunit Chadha, Founder of APAC Financial Services
“It is largely a perception problem as IDBI, despite having LIC as the largest owner, is still seen as a PSU Bank,” remarks Ajay Bagga, an investment consultant who served in several leading financial institutions in leadership roles over the last three decades. “Since 2000 the search for a strategic partner has been going on but to no avail.” Bagga points out: “IDBI has good project appraisal skills and a good distribution network but it is still regarded as mired in uncertainties.”
The perception of a PSU bank being a capital guzzler and wealth destroyer is fairly widespread. Dilip Bhat, Jt MD Prabhudas Lilladher Private Ltd, a leading stock broking and advisory services says: “The perception problem of a PSU tag is a major issue. Several PSU banks have not fared well and have seen huge wealth destruction over the years. The DNA of an institution cannot be changed overnight. The perception about a PSU bank being vulnerable to political pulls and pressures still persists. While IDBI may have good skill sets for project appraisal, what is required is a strong board of directors, like in the case of the private sector banks. A board which is empowered and allowed to function independently.” Bhat believes that privatisation can be a panacea for IDBI.
Perceptions are built over years and it is difficult to change them. Better communication and more frequent engagement with investors may help. Many leading groups like Tatas and Bajaj regularly send out updates about the working of the company post their half-yearly results. Perceptions about legacy problems at IDBI still persist.
Aniruddha Sarkar, CIO and Portfolio Manager, Quest Investment Advisors, says: “Investors do not wish to get into any companies where concerns abound. Public sector banks are avoided as they have been passing through a bad phase. The rationale is that if any exposure has to be taken to banks, it is better to have exposure in the top three or four banks. Large banks, not midsize or small size banks. This thinking of investors will not change, despite the sharp price correction and value correction which we are witnessing currently.”
Sunil Singhania, founder Abakkus Asset Manager LLP, agrees: “Smaller banks, including PSU banks, are out of favour with investors across the board. The performance does not inspire investors nor provides them with any confidence about their sustainability.”
LIC, as the majority shareholder, has played its part in nursing IDBI and putting it back on the profitability path. However, it cannot spread itself thin and run a full-scale universal bank. And it will be in the interest of all stakeholders to get a good strategic partner for the bank.
Talking about providing solutions for getting strategic partners Bagga says: “The best way would be to merge it with another PSU bank which will take care of its existing staff. A private sector entity will find it difficult to culturally mesh with the practices followed in a PSU bank. The government should try to interest Japanese banks which are looking to build infrastructure assets and have patience capital at their call.”
The government this time has already ticked the right boxes in a bid to woo a right partner for IDBI. Earlier, when there was talk of investment, leading institutions like ADB and IFCI had evinced interest. While they may not be interested in running a commercial bank, they would certainly be interested in providing funds for infrastructure. In which case it may well be in the interest of the government to look at restructuring the bank to serve its potential investors’ needs. There is certainly no point in selling the bank at a cheap price when the share prices are at their 52-week lows. Only a genuine banker will be able to gauge the intrinsic value and turn the bank into a wealth creator.