IDBI Bank CEO Says It Can Recover $2.4 Billion in Bad Loans

(Bloomberg) -- IDBI Bank Ltd.'s chief executive officer said the lender is likely to recoup 195 billion rupees ($2.4 billion) on soured debt in his pitch to potential buyers amid India's planned auction of the firm.

“We are sitting on about 780 billion rupees of fully provided for bad loans, including written-off loans, and around 25% is likely to be recovered,” Rakesh Sharma said in an interview in Mumbai. “This hidden asset is not reflected in our current valuation and will directly boost the bottom line.”

India is considering selling at least 51% of the $5 billion bank, people familiar with the matter have said, in what is set to be the biggest sale of the government's stake in a lender in decades. 

The planned sale, part of Prime Minister Narendra Modi's efforts to raise 650 billion rupees in divestment proceeds in the year to March 31, marks a test of whether efforts to revamp the lender will pay off for the share holders. 

Just four years ago, IDBI had the highest bad-loan ratio among banks in the nation. Sharma, 64, came out of retirement in 2018 to helm a revamp. 

A 42-year banking veteran, Sharma has brought down funding costs, increased the focus on recovering soured debt and tightened the credit underwriting process. The bank returned to profitability in 2020 after 13 straight quarters of losses.

Bad Loans

“The underlying issue for many of the bank's problems was the concentration risk associated with lending to large corporates,” he said. “Now the lending mix has changed in favor of retail lending, and even among corporates, our loans are mostly to those that raters consider of the highest grade.”

IDBI Bank was penalized by the central bank in 2017 with several restrictions on lending after its bad-loan ratio surged and capital ratios depleted. Life Insurance Corp. of India acquired 51% of the lender in 2019 to help the government bail out the firm. The RBI removed sanctions on the bank last year paving the way for its proposed sale. 

Since 2018, 324 billion rupees worth of share issuances to raise capital for bad loans have weighed on the bank's valuation. That has left the lender's shares with losses of more than 20% in the last five years compared to a 64% gain at the S&P BSE Bankex Index, the 10-member gauge for banking stocks in the country.

Imminent Sale

Now, government officials and state-backed LIC, which together own about 94% of IDBI Bank's shares, are in talks about how much of their stakes they plan to sell, people familiar with the matter said earlier this week. They will formally seek to gauge buyer interest as soon as the end of September, one of the people said.

While the government's Department of Investment and Public Asset Management will run the sale process, Sharma will pitch the business's prospects with bidders. The bank's digitization push, presence across the country through 1,886 branches, and strict cost controls are among points that Sharma plans to highlight to potential buyers. 

The bank is seeking to recover at least 40 billion rupees of bad loans through March 31, exchange filings show. It has separate verticals to focus on recoveries of soured loans to consumers and companies. The CEO continues to monitor recovery efforts on each of the soured loans amounting to more than 50 million rupees, and the targeted recoveries are expected to happen within three years, he said. 

“You will find a lot of potential for untapped profits in this bank, but not a single unpleasant surprise while going through the books would be my elevator pitch to bidders,” Sharma said.

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