IDBI Bank expects to return to the black in the third or fourth quarter of FY2020. Besides whittling down its pile of bad loans, the bank, now a subsidiary of Life Insurance Corporation of India (LIC), wants to re-start lending to corporates, albeit cautiously, once the Reserve Bank of India lifts restrictions under the prompt corrective action (PCA) framework.

The Managing Director & Chief Executive Officer, Rakesh Sharma, in an interaction with BusinessLine emphasised that barring the profitability/ return on assets parameter, his bank could tick on all the other boxes relating to capital, net non-performing assets (NNPAs) and leverage, to come out of the PCA framework.

Though LIC picked up a 51 per cent controlling stake in the bank in FY2019 by investing Rs 21,624 crore in a preferential issue of equity shares, Sharma said it is not involved in the day-to-day operations of the bank. More than 100 points of synergy have been identified between LIC and IDBI, including customer acquisition, collection of premium by the branches and payment of premium by the customers.

Excerpts:

What is LIC's role in the bank?

LIC has supported us by infusing a good amount of capital and some synergies are emerging. Apart from that, the bank runs as it did earlier. LIC controls the bank through the board. It is not involved in the day-to-day operations. We are a professionally managed bank. The LIC Chairman is the non-executive Chairman of our bank and it has four nominee directors.

More than 100 synergy points have been worked out, including salary accounts of their staff members, mobilising agents' accounts, collection of policy premiums, maintaining the accounts of their zonal offices, and providing them cash pick-up facilities. We have announced a concession in home loans to LIC employees, agents (10 basis points each) and policy holders (5 bps). Home loan demand from this segment is slowly picking up.

Now that we are a subsidiary of LIC, besides selling its policies, we are extending the best services to the LIC ecosystem -- employees (over 1 lakh employees), agents (over 11 lakh) and policy holders (about 29 crore). It is a win-win situation.

As a subsidiary of LIC, is there any conflict in your bank and LIC Housing Finance being in the same line of finance business?

LIC HF is a separate, listed company. We have both been in the same line of business and continue to do so today. They have their clientele and we have ours. Of course, some agents of LIC work as Direct Sales Agents of LIC HF. But LIC has 11 lakh agents. So, even if 10 per cent of the agents work with us, the remaining 90 per centcan work with them. There are so many housing finance companies and banks which are in the housing finance business. The size of the cake is large and there is opportunity for everyone. Of course, RBI has given us five years’ time to take a decision on whether there should be any synergies worked out between LIC HF and our housing finance business. So, we have sufficient time.

Your gross NPAs at 29.43 per cent of gross advances is high. What steps are you taking to tackle this situation?

In the current scenario, you should look at net NPAs, which were at 17.30 per cent at September-end 2018. We have been able to bring it down to 5.97 per cent within one year through recoveries (which are continuing) and ageing provisions. Apart from that, we also made some accelerated provisioning. Recovery will take its own time.

As far as recoveries are concerned, IDBI, as a development financial institution, was doing only corporate advances. That is why 70 per cent of our advances were to the corporates. Whatever problems have occurred were mainly in the corporate sector.

If you look at our total NPAs (technically written-off accounts plus GNPAs), 73 per cent is either referred or admitted (to the National Company Law Tribunal). Now, in the Tribunal, which came into existence about three years back, initially there were very good recoveries, then certain issues (relating to interpretation and litigation) cropped up. And the government has also introduced various amendments to streamline the resolution process. With clarity emerging on the role/ rights of financial and operational creditors, most of the resolutions will pick up speed. Once that happens, we will be the biggest beneficiary. This will help us bring down GNPAs.

Are you putting any of your stressed assets on the block?

We are planning to sell more than 20 assets (from sectors such as infrastructure, power, roads, petrochemicals), including cases which are in the Tribunal, aggregating Rs 9,300 crore. We will explore further opportunities. This is one of the options. The decision on recovery/ resolution will be decided on a case-to-case basis -- tribunal, one-time settlement, restructuring, etc. We had estimated a total recovery of Rs 13,000 crore, including recovery from written-off accounts, recovery by way of credit of interest, upgradation and sales to asset reconstruction companies, for the year. I hope we will be able to achieve this.

Around Rs 13,000 crore of our NPAs (out of the total Rs 52,000 crore) are fully provided for. In line with our policy, we can do a technical write-off. So, our GNPA can come down by almost 7-8 per cent. This we can do any day. But there are certain issues. That is why we are not doing it. But once recoveries happen, GNPAs will automatically come down.

Why did you build up such a high provision cover?

Our provisioning at 91.25 per cent, I think, is the highest in the banking industry. We have built up a robust Provision Coverage Ratio and simultaneously reduced the net NPA below 6 per cent. I am quiet hopeful that recoveries will be much more than that (provision coverage) and the extra money we get will be credited to the profit. So, we will not be required to make any extra provisions. And the current quarter's profit will be sufficient to take care of slippages during the quarter and give some profit also.

I am not saying that there will be no provisioning pain, because our net NPA is still around Rs 7,900 crore. It has to be provided for in the next two to three years.

When will IDBI Bank return to the black?

Our operating profit in every quarter last year was in the range of Rs 800-900 crore. The operating profit in the fourth quarter, was good (Rs 1,396 crore). We have improved the overall operations efficiency. So, as a result, the operating profit in the September quarter was Rs 1,009 crore, as against Rs 850 crore in the September 2018 quarter. So, there has been a year-on-year (yoy) growth of 19 per cent and quarter-on-quarter (qoq) growth of 6 per cent. By improving CASA (current account, savings account) deposits, which used to be at 38.13 per cent of total deposits in September 2018, to 44.87 per cent now, our cost of deposits has come down. And we have brought operating expenses under control. Similarly, we have reviewed our charges and improved overall efficiency. Then, of course, LIC synergies have also helped. So, the first thing is to improve operating profit. We were earning operating profit every quarter. But the provisions were high because of ageing provisions and slippages. So, going forward, when our ageing provisions and slippages come down, the provisioning burden will reduce to that extent.

We are in the business of banking. Now, if we raise deposits but do not lend, then how do we earn profit? Of course, we have to be cautious, do better business and business with less risk. Now we are well prepared. So, with all these things, unless we increase our business, we will not be able to improve our income. So, although we have been able to increase our operating profit to Rs 1,000 crore, it will be difficult to go beyond that unless we improve our advances. So, that is why coming out of PCA is very important. For the morale of our employees, for our reputation in the market, for customer confidence, it is really important that we come out of PCA. Hopefully, by this quarter (Q3) or latest by next quarter (Q4), we should be back in the black. Thereafter, we should be able to maintain profitability.

When will you be out of PCA?

In a way, I feel, putting us under PCA in May 2017 has helped -- we have managed our risk-weighted assets (RWAs) by making higher provisioning. And by utilising capital efficiently, we have been able to reduce our RWAs. The RWAs to total credit, which was 110 per cent in March 2017, has come down to 77 per cent.

In the case of high risk rated advances, we have exited from wherever we could -- either by reducing the limit or asking them (clients) to leave. If we make higher provisioning, the RWAs also come down. Purification of accounting (internal cleansing of our books) also helps -- through a proper filling up of security in the system and a proper classification of performance bank guarantees and financial bank guarantees. Also, since we were under PCA, we were doing mainly retail advances, mostly mortgage based. 90 per cent of our structured advances are backed by mortgages. So, the risk weight is less. So, all these measures taken together have helped us reduce the risk-weighted assets.

During the last two-three years, we have further strengthened our risk management policies, underwriting policies, reviewed group and individual exposure norms, revised our credit rating based underwriting formats, introduced risk-adjusted return on economic capital (RAROC) based pricing. So, with all these measures, we feel we are well equipped to go for fresh advances. Now, we can come out of PCA.

The problem is while GNPAs are coming down despite the slippages, and net NPAs are also reducing, our balance sheet size is shrinking. Now, to arrive at net NPA percentage, the net NPA has to be divided by net advances. But net advances are shrinking as we are exiting or are not able to renew the limits for some good customers, limiting our ability to grow.

How is your retail advances portfolio growing?

In retail advances there are three parts -- structured retail assets (home loans, education loans, loan against property, auto loan, vehicle loan, etc), MSME (micro, small and medium enterprises) and agriculture. This has grown by 7 per cent. We have not been able to grow much in agriculture and MSME because we were unable to lend even to partnership firms and companies under PCA. Many MSMEs are either partnerships or companies. So, we are not able to increase our exposure. We were able to increase our exposure only up to Rs 5 crore that, too, to individuals. That is why in structured retail assets, we have been able to grow by 18 per cent y-o-y in the first and second quarters. But in MSME and agriculture, our growth has been lesser, maybe 5 per cent or 6 per cent. So, overall, retail growth has been 7 per cent. The ratio of corporate to retail advances was 47:53 as at September-end 2019 against 54:46 as at September-end 2018 and 70:30 four years ago. Our target is a ratio of 45:55 by the end of this financial year.

Our structured retail portfolio has NPAs of around 1.50 per cent, which is as good or equal to other banks. Now, other banks started doing retail advances much earlier. We started a little late. Because almost 70 per cent of our advances were to the corporate sector, we suffered because the sector was beset by problems.

What is LIC's expectation from its investment in your bank?

LIC expects value for its money. First, we should come out of PCA. Secondly, once we start generating profits, we can raise equity on our own and give them dividend so that they can realise the value of their investment. They are our stakeholders. So, naturally, they must get value for their investment.

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