IDBI DISINVESTMENT : A HYPOTHESIS ON THE NARRATIVE - Bhanu Sripada

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It is being speculated that the government is going to disinvest in IDBI. In this article, let us discuss IDBI’s journey from incorporation to a rise in balance sheet size to increase in NPAs to the Prompt Corrective Action imposed by RBI on the bank to acquisition by LIC to its probable disinvestment now.

IDBI was established by statute in in 1964 to provide credit and other financial facilities to Indian industry. After the public issue of IDBI in July 1995, the government shareholding in the bank came down from 100% to 75%. After being classified as a scheduled bank, in Consequently, IDBI formally entered banking business as IDBI Ltd. from 1 October 2004.



The table above shows IDBI’s advances and NPAs over a 13-year window, and we can observe that the advances increased between 2005 and 2013 and the NPA ratio increased from 2013. This also coincides with the Asset Quality Review and strict implementation of IRAC (Income Recognition and Asset Qualification) norms in 2015-16 leading to stoppage of the “extend and pretend” policy of banks where accounts which turned NPAs were not recognized properly.

But why was IDBI affected significantly more than other banks? For this, we need to understand that banks now have to give customer-based facilities rather than account-based facilities. That is, if a borrower has 2 accounts and one account is an NPA, the other account would de-facto be classified as an NPA immediately. Furthermore, all accounts of the same customer were brought under the concept of a customer identification number where all the accounts of the same customer would be under one file to have proper implementation of this norm. The table given below shows the exposure of IDBI’s top 4 accounts, and the share of the top 4 accounts in fresh slippages. A significant share of fresh slippages were contributed by just 4 accounts as evident from the table.

 



This concentration of credit also was addressed in further norms and process restructuring. However, it was from IDBI’s conundrum that other banks drew lessons as well and then started focusing on “RAM” (Retail, Agriculture and MSME) segments to drive growth.

The decision by LIC to purchase a 51 percent interest in IDBI bank in July 2018 allowed the bank to focus on growing its business. The Bank has lowered its proportion of advances to large corporations and shifted its attention to the retail sector. As of March 2018, retail advances accounted for 45 percent of total advances. The Bank intends to increase its lending to the RAM sectors, which now account for 58% of the total advances (2021 March). To alleviate its NPA problem, the public sector lender has further focused on lowering expenses and selling noncore assets. However, as evident from the branches and the marketing being done by IDBI, is LIC using IDBI to further its agenda while gaining the white knight label? Has the government done the same thing with IDBI to further its agenda which led the bank into the current situation? Is it only going to get better for IDBI once it is free from the shackles of its controlling stakeholders?


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