The rot has spread faster in IDBI Bank due to too much easy money from the government for too long without any heads rolling
IDBI Bank has incurred the second highest ever quarterly loss among all the banks, of Rs2,184 crore for the quarter ended 31 December 2015. This is the beginning of the end of a once-revered financial institution, which had been set up in 1964 under an act of Parliament. IDBI Bank’s steep fall is not a one-time cleansing as a consequence of Asset Quality Review (AQR) as is made out, but is fundamental and calls for action beyond announcements lest the bank goes down speedily. Good lenders such as HDFC Bank and Kotak Mahindra Bank are not distressed due to economic slowdown, while public sector banks (PSBs) including IDBI Bank are, due to serious management inadequacy as observed by Dr PJ Nayak Committee in May 2014. Here is the evidence.
The first graph shows that IDBI Bank’s exposure in failed corporate debt restructuring (CDR) loans is far higher than other banks relative to the advances and net worth. The situation is particularly precarious since IDBI Bank’s advances include 70% corporate banking portfolio of which over half is infrastructure and core project financing that is almost entirely distressed. The relatively benign retail portfolio is only about 30%, whereas average retail portfolio of other banks is about 45%. On the liabilities side also, IDBI Bank is at a disadvantage with a low 22% of current and savings account (CASA) deposits which carry low cost. Overall, almost half of advances of the bank are feared to be toxic.
What is worrisome is that IDBI bank has come to the brink for second time in 10 years. The first special bail-out package was given to IDBI in FY2005, when it was cleansed of a portfolio of distressed assets by transfer of net non-performing assets (NPAs) of Rs9,000 crore (gross NPAs - Rs12,945 crore) to Stressed Asset Stabilisation Fund (SASF), a trust. The transfer value of Rs9,000 crore constituted IDBI’s investment in 20-year zero-coupon government of India bonds to be redeemed out of recoveries from these NPAs.
At the end of 20 years, the redemption period could be extended by 10 more years. During the past 10 years, despite passing through unprecedented pre-2008 boom period, recovery from SASF has been about Rs5,500 crore so far, and has almost completely tapered off. Thus the shortfall in recoveries from liquidation of secured assets was just 50% of gross NPAs of SASF.
As is evident from day one, this should have alarmed IDBI Bank about its evident asset overstatement and fund diversion by the borrowers, and induced effective due diligence and risk management. The current distress shows that the bank drew no lessons from the past. Instead of setting its house in order, in FY-2005, it merged with itself, its efficient new-generation subsidiary, the erstwhile IDBI Bank and evidently continued with its profligate ways.
But for the treasury income from falling interest rates on government securities during the last two years, the PSB’s profitability would have been under more pressure. Aside from such treasury income, IDBI Bank also realized capital gains from sale of its equity investments in its associate companies such as Care Ratings. Yet it could barely manage to stay in black during last seven quarters (see Graph-2). This shows that IDBI bank has exhausted the avenues to postpone NPA classification and provisioning by resorting to restructurings aside from CDR. Forbearance underlying these restructured assets seems to be getting over, the bank appears to be in trouble compounded also by drying up of capital and treasury gains.
IDBI’s woes become more pronounced when compared with State Bank of India (SBI), which shows signs of distress (Graph-3). While SBI’s December 2015 quarter profit after tax (PAT) has declined sharply, it is still manageable since its CDR exposure relative to its size is significantly low, and the bank enjoys high levels of retail business and CASA.
Failure of Governance or Government?
After IDBI Bank’s initial public offering (IPO) as a financial institution in 1995, the government shareholding had come down to 72.7%. After merger of its subsidiary IDBI Bank in FY2004, the government’s shareholding dipped to 51.2%. Over years, it has galloped to 80.2%. As a result, IDBI Bank has the highest paid-up capital, with relatively low retained earnings and lowest asset base among its peers (Graphs-4, 5 & 6). This constitutes limitless tolerance of the government, which has been injecting equity in the banks without deliverables, and without holding anyone accountable for second failure in ten years.
IDBI Bank, which has an attractive promotion policy also enjoys higher salaries plus perquisites than other PSBs. Whereas PSBs other than SBI generally have two-three Executive Directors (EDs) and around 10-15 General Managers, IDBI Bank has a posse of 11 Executive Directors, 35 Chief General Managers and 133 General Managers. Yet the Bank is in serious distress, and the management cannot be absolved of criminal negligence. The Board of Directors has also proved irrelevant to say the least. The regulator has swung into action only following prodding by the Reserve Bank of India (RBI) Governor, who has diagnosed the malaise.
Governance failure of IDBI Bank stems from the failure of the owner i.e. the government. No organization can survive with such an amorphous management structure as in the PSBs where the owner adopts a perfunctory control function through Board nominees who generally align with interest groups to the detriment of the banks. The contagion spreads among the employees soon. The rot has spread faster in IDBI Bank due to too much easy money from the government for too long without any head rolling. Other banks are catching up soon since the malaise is the same.
The government has to take the bull by horn and go far beyond unimplemented Indra Dhanush. It has to understand that high class banks such as HDFC Bank, and Kotak Mahindra Banks are not chance phenomena, but the result of vibrant executive and board managements, and effective HR and business processes with a system of performance based rewards. It has to be understood that the NPA levels are still grossly understated and will continue to hit IDBI and other banks. The PSB structure has failed and the best course is to transfer all the NPAs and camouflaged NPAs at fair market value to a government funded but professionally run Asset Management Company to resolve, patterned after Korea Asset Management Company, which had resolved NPAs of 118 trillion won constituting 27% of the GDP from 1998 meltdown, admirably. The sanitized PSBs should be privatized to create more banks like HDFC Bank and Kotak Mahindra Bank. The government can continue to own development banks for specific goals as hitherto, with the commercial banking going to the private sector with adequate deposit insurance. Adopting admired but unproven bank structures would only accentuate the crisis.
(The author works in the financial sector and writes in Moneylife under the name of G Manthran)