IDBI Bank is a template of the deep rot in public sector banks

G Manthran 16 February 2016

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)

Comments

User

mathivanan palraj

9 years ago

The government, whenever wants, sells stocks to public and raise funds. Poor people buy these stocks and help the government, but the government lets down these poor people thereafter. If the government is irresponsible, then poor people have no place to go.

Rajendra Ganatra

10 years ago

Two sentences from the last paragraph have turned out prophetic:

1: It has to be understood that the NPA levels are still grossly understated and will continue to hit IDBI and other banks.

2. Adopting admired but unproven bank structures would only accentuate the crisis.

A paltry Rs. 55.52 crore profit in the July-September 2016 quarter confirms the first. There is no news yet of any corrective measure. The bank is drifting dangerously.

Axis Bank structure was being advocated as panacea for IDBI Bank. Its sharp decline confirms the second sentence. Axis Bank structure will not help IDBI Bank.

The Bank must be privatized after cleansing of its NPAs by transfer to bad bank.

Gautam Chatterjee

1 decade ago

Good, hard-hitting and well researched articulation.

Mahesh S Bhatt

1 decade ago

I was Investor in IDBI which gave pathetic returns since 1997.

India is Highly Corruptly Developed Economy with great Developing story of its Growth.

It also offers poor Quality of Service at excellent prices for great Customer Retention.

Amen

Mahesh Bhatt

B. Yerram Raju

1 decade ago

The best Chairman that IDBI saw was in R.K. Talwar and R. Damodaran. Such tribe is now a dream. But this dream has to be realised for all the PSBs. Government has to search for them as they did for the RBI.

pannvalan

1 decade ago

Whether being in public sector or private sector, unless banks have the professional expertise and well embedded corporate ethics, they will face the same fate as IDBI. Another point is, CMDs, EDs and other Directors of banks must have their responsibilities fixed and made accountable for very costly wrongs what the author has termed as 'criminal negligence'. Flexibility and transparency in decision making and voluntary disclosures will pave the way for greater success.

B. Yerram Raju

1 decade ago

This is not a lone sordid story. This is the new avatar private sector bank.
Several public sector banks are bleeding. Raghuram Rajan made the right moves to hit the nail on the head. But the rot is within. All the PSBs have a director from the RBI and GoI on the Board and have Risk management and Audit Committees mandatorily set up. But what have they been doing all these years? If they have been at corrections but unheeded by management, what action the RBI has taken?
Further, there is now nothing public in PSBs. When the banks were nationalised, they had the mandate to serve the agriculture, rural development, small scale industries, small businesses, ( now christened as MSMEs)and other neglected sectors and weaker sections of population under the priority sector categories. After liberalisation banks' social purposes gave space for profit maximisation. Technology was supposed to provide the speed of access and execution of schemes. But, banks have now become the slaves of machines and men behind the enterprises seized to matter. Branch Managers are now instructed by the machines. Master circulars roll out but the employees read only for scaling up in their posts. If these instructions are to be followed they should have encryption in the machine before them. Brains behind the machines to serve the customers have now been consigned to the cupboards. IDBI Bank is no sole exception.

Gopalakrishnan T V

Replied to B. Yerram Raju comment 1 decade ago

Now PSBs are working to generate bad debts. Financing of agriculture SME sector etc is not lucrative for banks as the loot from such financing is not attractive. Financing King Fischer like proposals are paying very well whether the economy benefits or not? who cares?

P b Sarma

Replied to Gopalakrishnan T V comment 1 decade ago

What the RBI and MOF are doing for more than 10 years in UPA regime?How long term loans to Infrastructure and power projects were given without proper clearances from environment and coal linkages Etc?In most of the cases estimates were inflated and funds were syphoned off irresponsibly.Why criminal action is not taken for diversion and misuse of funds?Everything went on with the knowledge of politicians cutting across the party lines.Who can hang the King?

B. Yerram Raju

Replied to P b Sarma comment 1 decade ago

Politicians have their own agenda all right. But what about the Boards? Can the directors get off with impunity? It is time we call for arresting the rot in governance from the government that promised better governance and less government. The officials of the government who sat on the IDBI Board deserve Modi's attention.

B. Yerram Raju

Replied to Gopalakrishnan T V comment 1 decade ago

Very well said.

Dipakkumar J Shah

1 decade ago

I D B I Bank ahd done a great mistake , cheating to Public , by opening Savings Bank Account as senior citizens , No of any minimum balance requirement, ie zero balance. Now from July 2015 without taking consent of customers side in writing for change to Rs 5000 Minimum Balance Requirement???
You should take action for this wrong doings.

Dipakkumar J Shah

Replied to Dipakkumar J Shah comment 1 decade ago

Banking Ombudsman claimed to be Indepndent , but recently my Complaint Gaainst same had bee rejected. You can appreciate the side by... ALways in All oer the country..CCCCCCCC

R.Asokkumar

1 decade ago

Everybody is aware of the problems being faced by PSBs in general which are as under: 1.Crony Capitalism resulting in undeserving people launching big projects 2. Political interference in appointment of CEOs, sanctioning of loans and compromise settlements 3. Lack of professionalism 4. Lack of accountability. Specific problems for IDBI Bank: 1. IDBI was not as nimble-footed as ICICI,Term Lender in 'managing' NPAs. 2. The top brass was not equipped to handle a Bank 3. The merger of IDBI Bank with IDBI was a colossal mistake resulting in killing of a profitable Bank and the salary levels of merged entity shooting up 4. Top heavy management structure as pointed out in thearticle. Solutions are also well known as mentioned in the P J Nayak Committee report. Is the present Govt willing to take the necessary bold steps

Tomy Sebastian

1 decade ago

While we appreciate the need for enhancing the asset quality of PSBs, we shall not forget the great contributions made by PSBs in nation building. I have a question to those advocating for privatisation of PSBs- who will be benefitted by privatisation ? May be a handful of top executives with ESOP options and the so called investors. Are these great, 'efficient' new generation private banks doing anything meaningfully in agriculture or SME financing? How many are extending education loans and how much? Can a common man or a farmer walk in to these efficient banks and get a loan? Clearly No! Aren't the staff harassed like anything? Is the general public or common man or staff are not benefitted, what is the great fun in privatising PSBs.

The need of the hour is bring out the cheating done by big corporates by swindling money from PSBs. Take strong legal action. Will the media and the establishment support that? We need to appreciate the fact that the so called efficient banks have not funded core projects and hence not affected. There are no benefits derived by these banks for the society. PSBs shall declare a moratorium for corporate exposure and concentrate on retail lending.

Thiagarajan Sundaravadivelu

Replied to Tomy Sebastian comment 1 decade ago

Absolutely right

manoharlalsharma

1 decade ago

making history in banking how politics work for political gain at the cost of u r hard earned taxes.

Dhiraj Dave

1 decade ago

During March 31 1996 to March 31, 2015; IDBI price movement has been from Rs 68 per share to Rs 72 per share giving 19 year CAGR share price return of 0.3% p.a. There would some additional return of around 1-2% for dividend yield, which would still make share holder return to around 2% p.a.
This is against market return of 14-15% p.a. in Senex and 39.3% p.a. Axis Bank (with 17 years price history on NSE)
While issue about public benefit etc are fine, but then find muncipal corporation by government rather then such institution which appears to work along with wrong business group with indefinite access to government resource!
When someone in comment mentioned about benefit of Dams, one is conveniently forgetting about Loan to Essar group/Kingfisher/ Jaypee and what not. Are these were also social projects?
Writer has correctly brought out picture of IDBI in my opinion.

SuchindranathAiyerS

1 decade ago

When IDBI Bank first came to be, The RBI Department of Public Debt transferred the servicing of Government Bonds to them. Sometime in 2001-2002. They made a mess of it. I was forced to open an account in IDBI to receive the interest on Bonds. The interest would not be credited on time, the account was not properly maintained, it was typical insouciant Public Sector Satrapi of the highest order and in keeping with the highest traditions of any India Judge, Cop or Bureaucrat (or telephone, gas water, sewage, hospital or other service provider, to be fair). I wrote several letter of complaint to RBI. I heaved a sigh of relief when the servicing of Public Debt was transferred to the Stock Holding Corporation of India. They are tardy with the TDS certificates, but by Government standards, are fairly good otherwise. My abiding impression of IDBI since when I was a Banker, long before a stint as an NRI put enough net-o- tax money in my pocket to fritter away on Inflation eaten Government Bonds is that it is an Indian Babu Dom with Reservations, Corruption and Non Accountability ruling the roost and a primary channel for Crony Capitalism. (State Financial Institutions are even worse than the Central ones)

Sathisha Narasimhia

Replied to SuchindranathAiyerS comment 1 decade ago

After all the above if we think the average profit per employee in IDBI Bank is more than the peer the top management is to be well structure d.

Radhakrishnan Subbiah

1 decade ago

I have no relationship with IDBI. Still for the last 2 weeks I've getting SMSs for a new A/c (opened by someone, not me).
I wrote to the bank about this.
All I get is a mail asking for my mobile no ( wonder how they sent the SMSs ??!!).
This is IDBI, as far as I know.
Can you trust such a bank??

Rajendra Ganatra

1 decade ago

I spent best part of professional life in Industrial Development Bank of India, and I am saddened to see this. Granted that PSBs’ financial distress has resulted from funding infrastructure and core projects but as I had pointed out in my article “How Banks are Evergreening Bad Loans”, the distress is a lot due to project financing without adequate risk mitigation.
IDBI Bank has had a glorious past, and is credited with promoting high class institutions such as SIDBI, NSE, and CARE etc. It still has some of the finest minds working for it. The IDBI Brand is too precious to be allowed to vanish. But for IDBI, we would not have had high class companies such as Tamil Nadu Newsprint, and Kerala Minerals & Metals Ltd., etc. IDBI as a government owned institution was good at one point has turned distressed now apparently because of topmost executive and board inadequacies. Following steps can retrieve not only IDBI Bank, but also other PSBs.
1. Selection of truly high class CEO and appoint for 10 years or 65 years of age whichever is lower. In no case, the tenure should be less than 5 years. After retirement, the best performing CEO can continue on the board as mentor-director.
2. Give good package to the employees, but more in the form of ESOPs so that every employee works to enhance shareholders’ value. Ensure measurable performance parameters with effective reward system for performance.
3. Implement Indra-dhanush without delay.
4. Cleanse the balance sheet by transferring large NPAs to Bad Bank which the government must set up, and other NPAs to ARCs. Give requisite forbearance to the bank for transfer to ARCs.
The current government has reportedly stopped giving diktats to the banks to sanction debt. So this is the right time to reform the banking system. Privatisation is still unproven, and let’s have French model of state-owned banks.

Ramesh Poapt

Replied to Rajendra Ganatra comment 1 decade ago

dear, I believe IDBI have imm prop.of mkt val.of trillions of rs is security ex.land etc.(of etstwhile IDBI,(3-4 decades old)if that can be liquidated properly.Can this be a blessing in disguise? Being ex IDBIn, you may hv view on this.

Rajendra Ganatra

Replied to Ramesh Poapt comment 1 decade ago

It has some great residential quarters in Mumbai and number of cities across India, and some these have appreciated by even more than 200 times. Their present value can be captured in the balance sheet in terms of IndAS which aligns with IFRS. It will not help. Even sale will not help. Transfer of bad assets to Bad Banks and proper business thereafter is the only way to regain past glory.