After several false starts and futile attempts, the government finally managed to reduce its stake in IDBI Bank to below 51 per cent, while the 60-year-old state-run insurer Life Insurance Corporation of India (LIC) not only acquired a majority stake in the bank but also emerged as a promoter of a banking entity.
There’s just one more step to go — the nod to rename it as LIC IDBI Bank or LIC Bank from RBI, shareholders, MCA and stock exchanges — and in just a few weeks from now, the ailing bank will make a fresh start.
The incoming promoter, which has long been vying for a banking license, brought with it a mighty `21,624 crore cheque in return for a 51 per cent stake. The much-needed capital lowered the government’s burden to capitalise the bank and improve capital requirements — one of the five parameters based on which RBI places poorly performing banks into the Prompt Corrective Action (PCA) framework.
According to IDBI Bank, its common equity tier (CET)-1 has improved to over 9.3 per cent and it expects to exit the PCA framework by September 2019 now that it has complied with three of the five PCA parameters. The focus will now be on improving the two other metrics: asset quality and profitability.
What’s alarming though are rising bad loans, which widened the bank’s net losses in the recently concluded December, 2018 quarter. The bank continues to have the highest quantum of NPAs as a percentage of total advances (in excess of 31 per cent) and is compelled to make provisions. It also has steep sub-standard and doubtful assets.
Worryingly, even as bad loan woes persist, its net income has been disappointing witnessing a de-growth in the December quarter, solely because of the bank’s conscious decision to slow down corporate lending ( which saw a massive negative growth of 19 per cent in Q3 over last year), while the increase in borrowal accounts (including corporate, retail and others) remained flat from 21 lakh as on September 2018 to 23 lakh as on December, 2018, indicating the slack in credit growth.
Only two segments — retail and agriculture — registered subdued growth at 7 and 5 per cent year-on-year respectively during the third quarter, while all others including industry and services registered a de-growth. In short, the bank is shying away somewhat from lending, which happens to be any bank’s core business.
The bitter NPA experience, where over a quarter of every `100 lent has gone sour, appears to have forced the bank to babysit cash instead of lending and making a dime.
Will this change, now that there’s a change in guard? That’s a possibility, but for IDBI to get back its mojo, it may first want to see signs of loan recoveries and self-generate cash from selling off non-core assets, which it has been trying for sometime.
With LIC coming in, that pile of non-core assets will likely increase with entities like mutual funds getting added to the list to avoid duplication. Now that it can cross-sell products (LIC’s portfolio and vice versa), it could also find a fresh income avenue, though it could be minimal this fiscal.