People stand outside a branch of IDBI Bank Ltd. in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

IDBI Bank Looks To Separate Its Retail, Corporate Lending Verticals

IDBI Bank has submitted a revival plan to the government seeking to separate its corporate and retail banking operations, three people aware of the development told BloombergQuint on the condition of anonymity. The plan was submitted two months ago, said one of the people quoted above while adding that the government is open to the idea.

Separating IDBI’s operations and demerging the retail business into a “good bank” may allow the government to bring in a private investor at attractive valuations, said the second person quoted above.

IDBI Bank declined to comment on the plan. Emailed queries to a finance ministry spokesperson did not elicit a response.

The plan comes against the backdrop of surging bad loans on the books of IDBI Bank. As of the quarter ended March 2018, 28 percent of IDBI Bank’s loan book had turned bad. Most of the bad loans are corporate loans. The lender reported a net loss of Rs 5,663 crore for the January-March quarter.

The government has been keen to sell stake in IDBI Bank for some time now. At the time of the Union Budget 2016-17, the government had said it would consider the option of bringing its stake down to below 50 percent in IDBI Bank. However, the plan has failed to take off because of the poor quality of the bank’s loan book.

Currently, government owns 85.96 percent in the lender, according to data on exchange’s website.

The third person quoted above said that one way to address concerns of potential investors would be to segregate the retail and corporate assets. The government could then go ahead and sell stake in the retail bank. A separate entity, which holds the corporate loans, could focus on resolving the stressed assets.

IDBI is the only lender where the government can reduce stake without a change in legislation. The bank, which started as a development finance institution, functions under the IDBI Act. This allows the government to reduce its stake in the lender to below 51 percent. In the case of nationalised banks, a minimum 51 percent government shareholding is mandatory as per the Bank Nationalisation Act.

The government is keen to send a message via IDBI Bank that it is committed to banking sector reforms, the third person quoted above said.

How Strong Is IDBI Bank’s Retail Franchise?

IDBI Bank had gross advances of Rs 1.98 lakh crore as of March 2018. Of this, retail advances stood at 45 percent or Rs 88,599 crore, shows an analyst presentation on the bank’s website. The share of retail advances has risen from 40 percent in March 2017 and could rise further as the bank shifts focus away from corporate lending.

At a press conference last week, MK Jain, chief executive officer of IDBI Bank said that the lender intends to halt corporate lending and focus on its retail book. The bank will also continue to rationalise costs by cutting down on some unviable branches, Jain said. IDBI Bank hopes to become a digital bank in the future, Jain added.

Apart from its retail loan book, IDBI Bank has a steady deposit franchise. It’s low-cost CASA (current account and savings account) deposits stood at just over Rs 92,000 crore or 37 percent of the total deposit base. Term deposits stood at Rs 1.55 lakh crore.

The bank also has over 1,900 branches and 3,200 ATMs.

Any plan to separate the retail and corporate operations of the bank would be subject to approvals from the Reserve Bank of India. IDBI is currently under the RBI’s prompt corrective action framework due to its high level of bad loans.

The RBI, however, may not be in favour of the plan, the third person quoted above said as it is not clear which entity would be responsible for resolving the stressed assets.