Opinion

Tumultuous journey of a development bank

Arindam Gupta | Updated on August 26, 2021

With privatisation on cards, IDBI Bank has finally turned the corner. Continued focus on industrial finance has been its undoing

It came as a surprise to many when on March 14, 2019, the RBI categorised IDBI Bank as a private bank with retrospective effect from January 21, 2019. Technically speaking, it could be termed a public sector bank (PSB) as the Central government and LIC together own more than 94 per cent equity of the bank. LIC currently has 49.24 per cent stake in the bank and also its full management control. The government owns 45.48 per cent, with the remaining 5.29 per cent being held by non-promoter shareholders.

Giving IDBI Bank a private sector tag lacks logic; it is akin to saying LIC is not a government company. Till now, LIC has been a wholly-owned public sector undertaking (PSU) awaiting its first initial public offering of shares sometime in the early part of the next calendar year.

The Centre is in need of a huge amount of funds, more so due to the Covid pandemic, to meet its commitments. The easiest path it has chosen is disinvestment of government-owned undertakings. Both IDBI Bank and its majority shareholder LIC are on the list; LIC is planning to sell about 10 per cent of its shares initially. But for IDBI Bank, the proposed sale will be total. The Cabinet in May had given in-principle approval for the same along with transfer of management control from LIC.

Some estimates indicate the government is looking to raise ₹60,000 crore from the total sale. As many as seven well-known firms, including JM Financial, EY and Deloitte, are in the race for being appointed as lead manager by the Department of Investment and Public Asset Management (DIPAM).

Development bank

Looking back, Industrial Development Bank of India (IDBI) was incorporated in 1964 as a development financial institution, a category popularly termed as a development bank. In contrast to the more inclusive functions of commercial banks, IDBI and ICICI concerned themselves with industrial finance specifically.

Till the 1980s, neither faced any competition from commercial banks as the latter were not allowed to give term loans. In 2005, IDBI was reverse-merged with its commercial banking arm, IDBI Bank, after which it was categorised by the RBI under a new sub-group, ‘Other public sector banks’. It became India’s second universal bank, after a very similar chronology of events created ICICI Bank in 2002.

Such mergers were expected to attain operational synergies. But that did not happen for IDBI Bank because of its policy of sticking to industrial financing in line with the erstwhile IDBI. Till 2010, the retail segment accounted for only 13 per cent of the bank’s total advances. Most defaulters belong to the ‘industrial borrower’ category. Thus, the bank’s gross non-performing assets (NPAs) rose to ₹55,588 crore in March 2018 — nearly 28 per cent of its total loan book. This was the highest among all banks.

The bank’s core equity Tier-1 ratio stood at 7.42 per cent as of March 2018, which is just marginally above the minimum requirement of 7.37 per cent. This led to a bailout of IDBI Bank by LIC under direct government intervention. The government and LIC consequently infused a total of ₹9,300 crore into the bank.

In profit zone

After five long years, IDBI Bank finally reported a profit of ₹1,359 crore last fiscal; it had reported a net loss of ₹12,887 crore in 2019-20. The bank has claimed that it could achieve all the prompt corrective action (PCA) parameters, except return on asset. PCA is a framework under which banks with weak financial metrics are put under watch by the RBI.

As the insurance regulator IRDAI is also of the view that LIC should not hold more than 15 per cent stake in the bank or any other concern as a general principle to control operational risk, the recent disinvestment decision was only expected.

Before LIC increased its stake in three tranches via preferential allotments from the bank — in October 2018, December 2018 and January 2019 — it held only 7.98 per cent in the bank. But if LIC and the government sell their stake in one go, the bank will truly turn into a private bank overnight.

The older private banks like HDFC Bank, Axis Bank and ICICI Bank are popular among customers, and so are some of the newly established ones banks like Kotak Mahindra Bank and Bandhan Bank which offer higher rates of interest on their savings bank accounts.

Hence, it is unlikely that IDBI Bank will see any significant reduction in its customer base because of the proposed privatisation. But the employees of the bank may have grounds for concern, as they joined the bank knowing it is a PSB. Now if the bank goes private, they may lose the benefits associated with a PSB, job security being the most obvious.

The writer is Professor of Commerce, Vidyasagar University, Midnapore

Published on August 25, 2021

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