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.
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.
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Fast forward to today, the bank has improved its score on three 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.
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The bank has also improved its leverage ratio and raised its provision coverage ratio to cover for risky assets. Coming out of PCA means that 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 ensure that it avoids a repeat of its mistakes.
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 large stressed borrowers, especially those involved in infrastructure projects. The PCA scheme worsened the bank’s metrics because of restrictions on lending.
Now that those shackles have been removed, will the bank’s performance improve sharply?
To be fair, the lender 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 (NPAs) 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 are still big concerns. The pandemic has not made things easy.
Over and above its NPAs, around 4% of its loans are stressed with overdues of more than 30 days or more. This means that incremental provisioning may not subside for the lender. The upshot is that its profits may not improve significantly.
The focus now is the planned exit of IDBI Bank’s new owner, Life Insurance Corp. of India, which had bought a 51% stake in the bank in January 2019. The lender’s share price has surged lately, partly on the back of the 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.
