The Hindu Business Line : Reengineering IDBI

THE UNCERTAINTY OVER the banking status of IDBI is over even as it comes at the cost of losing a quality institution like IDBI Bank. The board of IDBI Bank took an "in principle" decision favouring a merger with IDBI, which is not surprising as IDBI and SIDBI, the Indian promoters, hold 69.39 per cent stake in IDBI Bank, with IDBI alone holding a 56 per cent stake. A reversemerger of IDBI with the Bank looked feasible when IDBI became a zero-NPA entity with the Union Budget setting up a Rs 9,000-crore Stressed Asset Stabilisation Fund to clean up its balance sheet. But that has not come to pass. ICICI, for instance, could reverse-merge with ICICI Bank as the two were private players — an option not available to IDBI. For a start, the Government and the RBI had to abide by the provision in the Industrial Development Bank of India (Transfer of Undertaking and Repeal) Act, 2003, insisting on government holding in IDBI never falling below 51 per cent to be a public sector entity. While this provision prima facie, need not have hindered a reverse-merger of IDBI with its stablemate, IDBI Bank, as the government stake at no point would have dropped below the plumb line of 51 per cent, the proposition is not without legal challenge necessitating a reference back to Parliament with its consequent delays.

IDBI Bank could have been left alone with IDBI trying to build itself into a bank on the terms set by the 2003 Act. Instead, the Government and the RBI have created a new public sector bank and botched up the 1993 policy allowing private banks promoted by institutions. Over the years, IDBI has been helped by government largesse with the Rs 9,000-crore package being, one hopes, the last. As part of the restructuring strategy, public sector banks and FIs with exposures to IDBI were assured of payment of contracted interest rates (which were on the higher side) till maturity by the government. In turn, the government stood by IDBI in taking on the financial load arising from the differential between the contracted interest rate and the agreed interest rate of 8 per cent by banks and FIs; besides, the banks and FIs agreed to a rollover of their bond exposures.

IDBI also gained from reworking loans to the steel and textiles industries, apart from earning an exemption from CRR, SLR and certain taxes for five years for becoming a bank. Interestingly, IDBI will be a bank under the Banking Regulation Act and is not required to obtain a licence from the RBI. No banking institution has been favoured more. The word going round is that a fit IDBI will be able to raise funds while the merged IDBI Bank will provide the brand flavour to build an asset portfolio matching SBI's. That is premised on the personnel in IDBI, long used to development banking, turning sharp bankers. Some of them may have been trained at the SBI Training College in Hyderabad. But that may not be an effective substitute for experience that can be gained only by playing the market and from processing corporate loans in a fiercely competitive milieu. Some of the best hands in IDBI Bank have left; some more may leave as the government and the RBI seem to be most comfortable with public sector banks. Is it curtains for the new breed of private sector banks?

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