Almost every week, Mahesh Kumar Jain, IDBI Bank Ltd’s managing director and chief executive officer (CEO), catches a flight from Mumbai—where the bank is headquartered—to Delhi to meet officials of the finance ministry who represent the majority owner of the bank, and discuss ways of turning it around. Jain flies economy class, as part of the austerity drive that the bank has launched to cut costs.
His record at Indian Bank—which he had led first as an executive director holding charge of managing director and CEO (between June and November 2015) and then as the boss till he took over the IDBI Bank assignment on 3 April 2017 in a sudden swap that sent IDBI Bank chief Kishor Piraji Kharat to Indian Bank— was impressive, but can he turn around IDBI Bank?
Laden with bad assets, IDBI Bank over the past two fiscal years has posted Rs10,738 crore in losses. Its gross non-performing assets or NPAs which were 5.88% of its loans in 2015 jumped to 21.25% in 2017—the second highest among all Indian banks. After setting aside money or providing for the bad assets, its net NPAs during this period rose from 2.88% to 13.21% of loan assets.
However, these ratios do not exactly reveal the enormity of its problems. Its net NPAs of Rs25,206 crore are far higher than its net worth or capital and reserves and surplus. And if we add the restructured assets worth Rs27,821 crore to its gross NPAs of Rs44,753 crore, total stressed assets of the bank are more than Rs72,500 crore, close to 40% of its loan book.
I understand that around Rs22,000 crore of its restructured loans are on the “watch list”; in the worst-case scenario, 60% of this can slip into NPAs in the current fiscal year. Of the 12 large bad assets representing about 25% of the gross bad loans in the banking system which the Reserve Bank of India (RBI) has identified for immediate reference for bankruptcy proceedings, IDBI Bank has exposure to all barring one, Electrosteel Steels Ltd. For two such accounts, it is the lead bank—Jaypee Infratech Ltd and Lanco Infratech Ltd. Its exposure to these 11 cases is Rs19,500 crore.
I don’t know whether Jain’s sudden shift from Indian Bank to IDBI Bank is a reward for his work or a punishment, but for sure, no banker would envy his job.
How will IDBI Bank earn money and make enough profits to take care of its ballooning bad loans? At the moment, out of its Rs1.91 trillion loan book, it does not earn a rupee from around Rs55,000 crore worth of loans (NPAs plus part of its restructured loans). Also, from about one-fourth of its investment book of Rs93,000 crore, its earning is far less than its cost of funds as this money has been invested in the Rural Infrastructure Development Fund or RIDF of National Bank for Agriculture and Rural Development which offers 4-4.5% yield.
The blended cost of deposits for IDBI Bank is more than 6%, higher than many of its peers. Banks in India need to disburse 40% of their loans to agriculture and other small enterprises under the so-called priority sector norms; any shortfall in meeting this target can be invested in RIDF, which was created in 1995-96. At 1.62%, IDBI Bank’s net interest margin or the difference between what it earns deploying the money and what it spends on mobilizing it is the lowest in the Indian banking industry.
In a candid conversation with me last week, Jain explained his plans to turn around the bank.
He wants to focus on a capital-light business model. This means IDBI Bank will try to sell down many of its existing loans to corporations and lend only to those segments where capital requirement is relatively less and earnings are more. Presumably, the focus will be on retail loans where the quality of assets for most Indian banks is far better than corporate loans. Currently, corporate loans account for 62% of IDBI Bank’s loan book. Jain plans to have a corporate and retail loans mix of 50:50—on the model of Indian Bank. His concerns about preserving capital is justified as IDBI Bank’s core Tier I capital or equity and reserves is perilously low—just about 5.64%; including bonds, it’s 7.81%.
Around Rs50,000 crore worth of high-cost bulk deposits of the bank are due for redemption this year. This will help it reprice these deposits. IDBI Bank is now offering 6.65% on its one-year fixed deposits. Its low-cost current and savings account is close to 32%, growing over 20% year on year, and Jain wants to maintain this growth.
Last year, the bank’s loan book shrank by Rs25,000 crore but its deposit portfolio grew by Rs3,000 crore. It deploys the excess money in the overnight market meant for banks and earns far less than what it pays for its deposits. Jain wants to change the fund management strategy. He wants his executives to first identify loan assets and then focus on raising deposits to back such assets. The emphasis is also on earning more fees and cross-sell more banking products to IDBI Bank’s 140 million customers. Now, the bank sells 1.2 products to each customer, far less than what most others do.
The focus is also on cutting costs by relocating many of its large branches and settling for smaller outlets as well as shifting the back offices out of prime locations. By doing this, the bank will save on lease rentals. It is also cutting down cost of outsourcing for housekeeping as well as security guards for branches and ATMs by merging or cutting shifts at night when the customer flow is minimal.
Predictably, the emphasis is also on recovery of bad loans. Till recently, at IDBI Bank, both origination of loans as well as recovery of bad loans were done by the same set of people. Now, there is exclusive focus on recovery of bad assets. Three dedicated teams are working on it—for those loans where IDBI Bank leads the consortium of banks, where it is a member of a consortium, and where it is the sole lender. In the past few years, its recovery of bad loans has not been great. Before the RBI directive on large bad loans, it had moved the insolvency court for only two cases but none has yet been admitted.
Finally, Jain’s team is in the process of identifying the so-called non-core assets that IDBI Bank can get rid of to generate cash. One such asset is IDBI Federal Life Insurance Co. Ltd where the bank’s ownership is 48%. It also owns big and small stakes in a string of companies, including IDBI Trusteeship Services Ltd, Small Industries Development Bank of India, Asset Reconstruction Co. (India) Ltd or Arcil, National Securities Depository Ltd, NSDL E-governance Infrastructure Ltd, National Stock Exchange of India Ltd and Clearing Corp. of India Ltd. Barring Arcil, it plans to liquidate its stake in every company. In some cases, including the life insurance outfit, the talks have already begun. It could generate around Rs5,000 crore by selling off its stakes in these companies.
Besides, it has subsidiaries such as IDBI Intech Ltd, a technology firm in the banking and finance space, and IDBI Asset Management Ltd.
Its real estate assets can also fetch some money but the sale of real estate may not be worth pursuing as they have already been revalued and the appreciation in value added to its capital. Besides, it would need to pay the so-called capital gains tax on the money generated through such sales.
Jain is in the process of appointing a consulting firm to help IDBI Bank identify ways to push up income, bring down cost and stitch an overall strategy to bring it back on the rails. Initially, the mandate will be for nine months and it can be extended by another nine months.
It’s difficult to find fault with Jain’s menu, but it’s a standard turnaround plan for a sick bank and doesn’t display any out-of-the-box thinking. The key to the success of his plan is how well it is implemented. And, even if this plan is flawlessly executed, it will be a long haul. For sure, IDBI Bank will post yet another hefty net loss in the current fiscal year; after the damage-control exercise, it will show some improvements in 2019; and by the most optimistic estimate, things will stabilize for the bank in 2020.
Jain can strategize a three-year turnaround plan only if he is able to cross the first hurdle on 30 August when IDBI Bank needs to pay Rs166 crore for the first coupon payment of its so-called additional tier-1 (AT-1) bonds.
Investors have serious doubts whether it will be able to service the coupon payment of these unsecured, non-convertible perpetual bonds. The rating agencies have already downgraded IDBI Bank’s AT-1 bonds, citing its weak capital position. For such bonds, the issuing bank can skip coupon payments if it doesn’t have enough profits or distributable reserves and its core capital falls below a certain level. At 5.64%, IDBI Bank’s core equity capital ratio is weak; another big dose of net loss in the June quarter will bring it down below 5.5%—the trigger for a default. The regulator can always take a position that the investors took risks while buying such bonds which typically pays a higher coupon and even if the bank defaults, they should have nothing to complain about.
Unless RBI makes an exception and allows it to use its statutory reserves to pay the coupon for AT-1 bonds even while it is making losses, default is staring at IDBI Bank. The only way it can be saved is if the government is willing to pump in fresh capital. Rating agencies estimate that IDBI Bank needs at least Rs10,000 crore capital and half of it must flow now to offset the losses this year, beginning the June quarter.
Incidentally, IDBI Bank was the first to raise the AT-1 bonds in October 2014. The last such bond was issued by the bank in January 2017. Including the AT-1 bonds, its total outstanding debt is around Rs26,000 crore.
In his February 2016 budget speech, finance minister Arun Jaitley said the government would look at paring its stake in IDBI Bank to less than 51% and his then deputy Jayant Sinha had spoken about transforming IDBI Bank “in a manner similar to” Axis Bank Ltd. The government was planning to kick-start its privatization drive with IDBI Bank. Privatization is a difficult proposition; turnaround will also have to wait.
For the time being, Jain’s biggest challenge is saving the bank from defaulting. Without the backing of the government and the regulator, he cannot do so.