IDBI Bank, which has seen nearly a fifth of its loan book go bad, will be asked to curtail costs, rejig its deposit base and push recoveries to try and chart a course of recovery over the next 18 months.
According to a government official familiar with the matter, IDBI Bank is one among at least ten lenders who are being asked to sign a memorandum of understanding (MoU) in return for capital infusion. The MoUs are intended to lay down targets that the bank would need to achieve over an 18-month period, said a second person familiar with the plan. The progress on these targets would be tracked quarterly to ensure that banks remain on track, the second person said.
In the case of IDBI Bank, the MoU will lay down conditions related to the bank’s cost-to-income ratio, which needs to be brought down, said the first person quoted above. For the financial year ended March 2017, IDBI Bank saw its operating expenses rise by 24 percent, with employee costs up 31 percent. Total income over this period rose 2 percent, leading to a 15 percent decline in the bank’s operating profit for the year.
Curtailing the cost-to-income ratio will be a major part of the MoU, said the second person quoted above while adding that the broader idea is to push up the return on equity. The first person quoted above explained that the bank is being asked to look at a range of measures including pushing up recoveries of bad loans, re-looking at rental costs, along with considering sales of property and non-core assets.
The bank is also being asked to bring down high cost bulk deposits further. According to an analyst presentation on the bank’s website, bulk deposits accounted for 36 percent of the total deposit base of the bank as of March 2017, down from 47 percent last year. The bank’s proportion of low cost current account savings account (CASA) deposits is also below peers at 31.46 percent.
In response to a query from BloombergQuint, IDBI Bank said that it has formulated a strategy which will look at aggressive recovery of bad loans and and prevention of further slippages. The bank will also look at reducing exposure to corporate loans and increase its retail lending portfolio. Reducing operational costs, sale of non-core assets and cross selling of retail products are also being looked at to strengthen the bank’s position.
Too Little, Too Late?
The MoUs, seeking these improvements in the bank’s parameters, are being signed as three way agreements between the government, the management and the employee unions.
CH Venkatachalam, general secretary of the All India Bank Employee Association told BloombergQuint that while the unions have signed an MoU agreeing to discuss cost reduction measures, they are yet to get any intimation of firm targets applicable to individual banks. SBI Capital Markets is finalising MoUs to be signed with individual lenders following discussions with the bank management.
Venkatachalam, however, argued that the answer to problems of banks like IDBI does not lie in tinkering with costs.
There is no point in tightening costs when the real problem lies in NPAs that are system-wide. The government must take responsibility for resolving these NPAs and capital needed to provide for bad loans.CH Venkatachalam, General Secretary, All India Bank Employee Association
Indeed, the situation at IDBI Bank and many other public sector lenders has deteriorated to worrying levels. On Tuesday, rating agency ICRA downgraded debt securities of IDBI Bank due to the sustained weakness in the bank’s earnings and the resultant fall in its tier-1 capital base.
For fiscal 2017, the bank reported a net loss of Rs 5,158 crore. This is the second consecutive year of losses for the bank, which reported a net loss of Rs 3,665 crore in fiscal 2016. The bank has a gross non performing assets (NPA) ratio of 21.25 percent and a net NPA ratio of 13.21 percent – the second highest in the industry.
The bank has also seen its capital base erode significantly.
According to the bank’s analyst presentation, the common equity tier-1 ratio (CET-1), including the capital conservation buffer (CCB), fell to 5.64 percent as of March 2017 compared to 7.98 percent in March 2016. The overall capital adequacy ratio for the bank fell to 10.70 percent.
At current levels, the bank’s CET-1 ratio is below the regulatory minimum, while its overall capital adequacy is only marginally higher, noted ICRA in its rating note on Tuesday. Given the current capital ratio, the bank may be stretched to pay out dues on its Additional Tier-1 bonds, the rating agency said.
High levels of losses have also significantly eroded the bank’s distributable reserves, which the bank can use to service the coupon on its Additional Tier-I (AT-I) bonds. As per the terms of the AT-I instruments, the bank will be constrained from servicing the coupon on these bonds, unless it reports profits and improves its CET-I levels (including CCB) above regulatory levels by divestments of non-core assets and raising fresh capital before the coupon payment datesICRA Rating Note
The bank, in its response to BloombergQuint said that it would look to improve its capital adequacy ratio by raising fresh resources from the government as well as the market at an appropriate time. It will also look to reduce its risk weighted assets.
The bank continues to enjoy support from Government of India, our principal shareholder who has recently infused Rs 1,900 crore capital in the bank. We are also selling select non-core assets to raise capital and will churn our corporate loan book to reduce the risk weight of our portfolio.IDBI Bank Response
The MoU Route
While the need for capital across public sector banks is apparent, the government has set aside only Rs 10,000 crore for infusion into these lenders in the current year. The government has maintained that more capital would be made available if needed, but it wants banks to first get their house in order.
Speaking at a press conference on May 5, Finance Minister Arun Jaitley said any government capital being put into these banks will now come together with the signing of MoUs. The MoUs would include specific provisions related to immediate cash release measures such as sale of assets, closure of non-profitable branches, and reduction of overhead costs, Jaitley said while adding that more medium-term measures such as business turnaround initiatives and strengthening of credit appraisal processes would also be part of the agreement with banks.
The government has already committed significant amounts of capital to state-owned banks, noted consultancy firm McKinsey & Co. in a report released last week. According to McKinsey, the government provided a total of Rs 93,000 crore to these banks between 2009 and 2016. In fiscal 2017, banks got another Rs 25,000 crore, while Rs 10,000 crore each will be infused in fiscal 2018 and fiscal 2019.
“Indian banks may have to explore options for further capital infusion, considering both the size of the challenge and the degree of support they require,” said McKinsey.
Other options, going by IDBI’s experience, may not be easy to come by. Attempts by the government and the bank to draw in strategic investors and raise equity from the markets have both failed to materialize so far.
This article has been amended to include the bank’s responses which were sent on Thursday evening after the article was first published.