Four years ago, IDBI Bank had the most toxic loan book in the banking sector, when it found itself put in intensive care by the Reserve Bank of India (RBI). Under the prompt corrective action (PCA), the banking regulator restricted big ticket loans to stem the surge in risky assets. That meant the lender was not allowed to grow, and had to focus its energies on fixing its legacy dud loans and its balance sheet.
Fast forward to today, the bank has managed to improve its score on three out of the four parameters tracked by the regulator, and is out of the PCA scheme. Its capital adequacy ratio now meets the regulatory minimum, after its new owner pumped in around ₹26,000 crore over two years. The bank has also improved its leverage ratio and jacked up its provision coverage ratio to cover for risky assets. Coming out of PCA means there are no restrictions on growth now and the bank can freely lend to big borrowers as well. Of course, it needs to pick creditworthy borrowers to avoid a repeat of its past mistakes.
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The past was indeed terrible. When IDBI Bank was first put under PCA in May 2017, it had a net bad loan ratio of over 15% and had reported a third consecutive quarterly loss. Its gross bad loan ratio was a whopping 24.11% and its capital was eroding at a breakneck pace. IDBI Bank was a corporate lender and suffered because of its exposure to several stressed large borrowers especially those involved in infrastructure projects. PCA scheme worsened the bank’s metrics because of restrictions on lending.
But now that those shackles are removed, will IDBI Bank’s performance improve sharply?
To be fair, the bank must be credited with shoring up its provisions over the years. Its provision coverage ratio is now 97% and the proportion of net non-performing assets is below 2% from the peak of 18.8%.
That said, IDBI Bank is yet to fix its risk management and its slippage ratio. Its gross bad loan ratio is still around the same level when the lender was put under PCA. In short, the bank has just made provisions, but its risk management and quality of loans is still a big concern. The pandemic has not made things easy. Over and above its bad loans, around 4% of its loans are stressed with overdue of more than 30 days or more. This means that incremental provisioning may not subside for the lender. The upshot is that profits may not improve significantly.
The focus now is the planned exit of IDBI Bank’s new owner, Life Insurance Corp. of India (LIC). LIC bought 51% stake in the bank in January 2019. The lender’s share price has surged lately, partly on the back of news of news of the stake sale. Shares have gained 18% since January, outpacing the sector index. For the shares to fly and for the bank too, it needs a private sector investor.