IDBI Bank Hopes To Come Out Of PCA Soon, But Can It?

Two years after LIC rescued IDBI Bank, the lender continues to face restrictions by the RBI.

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

Note: On Wednesday evening, the Reserve Bank of India announced that it will remove IDBI Bank from the prompt corrective action framework. You can read the updated report here: RBI Removes IDBI Bank From Corrective Action Framework.

IDBI Bank Ltd., which was put under the Reserve Bank of India’s corrective action framework for weak lenders four years ago, remains hopeful that restrictions placed on it will be lifted soon even as the regulator continues to assess its performance.

As of the quarter ended Dec. 31, IDBI Bank had met three out of four key criteria needed to exit the prompt corrective action framework. Its net non-performing asset ratio has remained under the 6% mark for five consecutive quarters, capital adequacy ratio has remained above the regulatory minimum of 11.5% for five quarters with Tier 1 capital ratio above 8%. Its leverage ratio stood at 5.71% at the end of the third quarter, above the 4% threshold under PCA. Its return on asset has remained positive since March 2020, however, one full financial year of positive return ratios is yet to be achieved.

“We shouldn’t hazard a guess (on timing for exiting PCA) because it’s fully the regulator’s prerogative,” Samuel Joseph Jebaraj, deputy managing director, IDBI Bank, told BloombergQuint. “We can only say we have improved and complied with all the parameters (of PCA).”

Restrictions placed on IDBI Bank do not allow it to expand its large corporate lending portfolio. For retail lending, the bank has been directed to focus only on secured products. On the liabilities side, the bank was asked to cut dependence on high-cost bulk deposits.

This has meant that the lender’s loan and deposit book has actually shrunk. Gross domestic advances for the bank fell to Rs 1.52 lakh crore in December from Rs 1.61 lakh crore a year ago as the bank shed weak large corporate exposures. As of June 30, 2017, a month after the bank was placed under the PCA framework, its outstanding advances stood at Rs 1.87 lakh crore. Its deposits are now at Rs 2.24 lakh crore compared to Rs 2.54 lakh crore when restrictions were imposed. However, the bank’s low-cost current account savings account deposits make up 48.97% of its liabilities now compared to 33.67% when PCA was imposed.

Regulator Unconvinced?

After the bank reported its March 2020 ended quarter earnings, it made submissions to the RBI to exit the framework. The regulator at the time said that it would watch for the impact of the Covid-19 pandemic, which was still unravelling, said Jebaraj.

“At that time (March 2020) we were not sure of what the impact could be. But today we are clear that the worst that we had envisaged has not happened (under Covid-19). Even the RBI’s own estimates on the credit quality deterioration across the sector have not really materialised,” he said.

In January, the RBI’s stress tests had shown that the gross NPA ratio for the banking sector could rise to 13.5% by September 2021, as compared with 7.5% as of September 2020. Under very severe stress, this number could rise further to 14.7%, the stress tests had shown.

While reported bad loans have remained far below the feared levels, the regulator remains cautious. In the case of IDBI Bank, the RBI is likely to review its stance on allowing it to exit from the corrective action framework only after the bank reports its fourth quarter results, a person familiar with the matter told BloombergQuint. Even then, the regulator will go beyond reported numbers and review account level performance to get a sense of the quality of the loan book, this person added.

The bank’s outstanding gross NPA ratio remains high at 23.52%. The pro forma gross NPA ratio, which adjusts for the impact of a Supreme Court bar on NPA classification after August 2020, is higher at 24.33%. Another 4% of advances are currently overdue by 30 days or more and can be seen as additional stress on the bank’s portfolio.

When the PCA restrictions were introduced, the bank’s gross NPA ratio stood at 24.11%.

While IDBI Bank has remained under PCA since 2017, the regulator has relaxed certain restrictions. According to Jebaraj, last year the RBI had allowed the bank to enhance its loan limits by 25% to existing high-rated corporate borrowers. The regulator has also allowed the bank to restart lending to mid-sized corporates.

An email sent to the RBI on March 9 remained unanswered.

Preparing For Stake Sale

In January 2019, the Life Insurance Corporation of India had purchased controlling stake in IDBI Bank and infused Rs 21,000 crore as part of a turnaround plan initiated by the government. Subsequently, the government’s stake in the bank was reduced to 45%.

In the two year since the investment, IDBI Bank has managed to become the largest bancassurance partner for LIC accounting for nearly 48% of business through this route, according to Jebaraj. This helps the bank earn fee income. Moreover, LIC has also steadily shifted funds it collects via insurance premium to IDBI Bank branches. This has helped the lender boost its CASA deposits and earn float income, he said.

The government is now looking to offload some of its remaining shareholding in the bank.

“For this the government has to amend the IDBI Act. It is a little incongruent that a private bank license comes from an Act of Parliament and not through the Banking Regulations Act. So the amendment is necessary. Once that is done, the government is likely to invite proposals,” Jebaraj said. LIC may also choose to sell some of its own stake to give control to the new owner. However, the insurance firm is yet to make its plans clear, he said.

Dhananjay Sinha, director and head of institutional research at Systematix Group, said ensuring IDBI Bank’s exit from the PCA framework would be beneficial for the government as well as LIC as they look to draw in new investors. It will also help in LIC’s own initial public offering.

“During the budget announcement, the government has already spoken about divesting its stake in LIC through a public offering,” Sinha said. “Considering the bank’s improved financials, it would make sense for the government to expedite the exit process for IDBI Bank since it adds to LIC’s overall valuation as well.”