With 32% NPAs on its books, IDBI Bank is now the bad loan King in India: Ring a bell, dear LIC policyholder?

IDBI Bank is now the bad loan King among Indian banks. At the end of September, with 31.78 percent of its total loan book turning bad, the lender now occupies the top slot in the NPA (non-performing asset) chart beating all other fellow contenders.

In fact, this is the second consecutive quarter when IDBI Bank is retaining its top rank in the NPA charts. In the June quarter, its gross bad loans to total advances stood at 30.78 percent.

Also, the minimum capital adequacy ratios of the bank have fallen below the regulatory requirements of 9 percent under Basel-III. Right now its CRAR (Capital to Risk (weighted) Assets Ratio) stands at 6.22 percent while Tier 1 is the lowest among public sector banks (PSBs) at 4.22 percent. Put together, the bank is staring at a big capital void. And this happens to be the target bank Life Insurance Corportation (LIC) is in the process of acquiring using policyholders’ hard-earned money.

In the NPA scorecard, UCO Bank follows after IDBI Bank with 25.37 percent, Indian Overseas Bank with 24.73 percent followed by Dena Bank 23.64 percent. This means for every Rs 100 the bank has lent, around Rs 32 is not coming back, going by its September quarter earnings figures. This GNPA figure was 25 percent in the corresponding period of last year. In absolute terms, IDBI bank’s bad loans now stand at close to Rs 61,000 crore compared with around Rs 51,000 crore in the year-ago period.

The bank is under the prompt corrective action (PCA) of the Reserve Bank of India (RBI), which means it presently faces severe lending restrictions including taking further credit exposure until its books are set in order. Naturally, the business will have to shrink till then.

In the September quarter, the total income of the bank was also down at Rs 6,162.14 crore as against Rs 8,302.42 crore in the year-ago period. The hit on net income came because of significantly higher provisions which almost doubled to Rs 6,579.83 crore for the quarter, up from Rs 3,261.42 crore in the year-ago period. Not surprisingly, the net loss of IDBI Bank widened to Rs 3,602.49 crore during the September quarter of 2018-19 as against a net loss of Rs 197.84 crore in the corresponding quarter of the previous financial year. The widening hole in the bank’s balance sheet simply means that it will need a significant capital infusion to stay afloat in the business. The buck happily stops at LIC’s table.

In the first place, how did an insurance company that has no major prior experience in handling banking business end up taking over one of the worst-performing banks in the country? Beginning with the UPA-era, the central government has been scouting for potential buyers for smaller state-owned banks to push ahead with their privatisation agenda.

This was after several experts, including the P J Nayak committee, had recommended that the government exit its majority stake in state-run banks to kick off the next round of banking reforms. Yet, nothing worked as there was no special interest from the private sector to take ownership of badly-governed, inefficient and NPA-ridden state-run banks. Various programmes announced to set things right in the public sector banking (PSB) space only helped to make headlines but the structural problems remained the same.

An exterior view of Life Insurance Corporation of India's (LIC) headquarters is seen in Mumbai September 18, 2014. LIC Chairman S. K. Roy said he was "very bullish" about the banking, pharmaceutical, metals and IT outsourcing sectors because of expectations for a cyclical recovery and a stabilising rupee currency. Roy added LIC was headed for a "very good year", both in terms of its market investments and its core insurance business. The chairman said he expected growth of 12 percent in insurance premiums this fiscal year, in line with 13.4 percent last year. REUTERS/Danish Siddiqui (INDIA - Tags: BUSINESS) - GM1EA9I1C5401

An exterior view of Life Insurance Corporation of India's (LIC) headquarters in Mumbai. Reuters

The hunt for potential buyers continued after the Narendra Modi-government took over the baton, but it too did not meet with any success. With no interest coming from private investors, the government turned to its favourite milch cow, LIC and asked it to do the job.

The insurer, with no significant prior experience in dealing with complex banking operations, agreed to take a majority stake in one of the worst-performing banks in the country. That’s how one can sum up the LIC-IDBI deal.

In other words, the LIC-IDBI Bank deal is a perfect shortcut to kick off the government's privatisation agenda that has been stuck for long. But it will not necessarily send a good signal to the investor community because there is no fresh private money coming in. LIC is basically using the funds collected from its customers to buy out a bank. It takes off some burden from the government that is saddled with capital-hungry, zombie banks. But, what does the deal really mean for LIC?

The continuing deterioration in IDBI Bank’s numbers should prompt LIC’s policyholders to question the rationale of the insurer in acquiring a loss-making bank. The question has been repeatedly asked is now even more relevant after every quarter of deterioration in the asset quality of the bank. No analyst will consider LIC-IDBI deal a wise move by the insurer. This is a time when even some of the biggest banking institutions in the country are struggling to find financial stability on account of rising bad loans or NPAs. Already, LIC holds stakes in all the 21 public sector banks (PSBs), and in at least six of them, it holds an over 10 percent stake.

Public sector banks' NPAs and capital adequacy ratio
Bank Gross NPAs (%) Gross NPAs (Rs cr) Capital adequacy ratio-Basel III
IDBI Bank 31.78 60,875 6.22
UCO Bank 25.37 29,581 7.57
Indian Overseas Bank 24.73 37,110 9.16
Dena Bank 23.64 16,140 10.10
United Bank 22.69 15,163 7.82
Central Bank 21.48 37,411 8.71
Bank of Maharashtra 18.64 16,873 9.87
Allahabad Bank 17.53 27,236 7.07
Corporation Bank 17.46 21,714 11.04
Oriental Bank 17.24 25,673 10.35
Punjab National Bank 17.16 81,251 10.08
Bank of India 16.36 61,561 10.93
Andhra Bank 16.36 27,623 12.17
Union Bank 15.74 50,157 11.55
Syndicate Bank 12.98 27,131 10.95
Bank of Baroda 11.78 55,121 11.88
Canara Bank 10.56 45,233 12.62
Punjab & Sind Bank 10.02 7,202 10.66
SBI 9.95 205,864 12.61
Indian Bank 7.16 12,334 12.73
Vijaya Bank 5.86 7,557 13.56
As on 30 September 2018; Data source: CapitalinePlus

What about synergy? One can argue that as the IDBI Bank promoter, it can look at cross-selling its products to bank customers and manage IDBI just like it treats LIC Housing Finance. But, for that did it needs to buy a bank? Unlike the housing finance arm, it is getting into multiple problems by picking a majority stake in one of the most problematic banks in India. Shouldn’t LIC focus on its core business at a time when it is losing market share?

LIC remains the market leader in the insurance sector, but it is also losing market share to private players over years. LIC’s market share has fallen to 67.32 percent as of March this year from 75.44 percent in March 2014.

Does LIC have enough expertise or a plan to clean-up IDBI's balance sheet? Merely providing capital won't be enough. LIC’s immediate task will be to cut down the NPAs on IDBI Bank’s books. The question is: How will LIC explain to its customers the huge capital burden that falls on it to keep the bank afloat?

A one-time investment will not be enough to fill the capital void in the bank. The lender will require huge chunks of capital infusion every year. This is evident from the ‘begging bowl syndrome’ of state-run banks; every year these entities line up before North Block for capital for survival and are never able to fend for themselves, which is what their private sector counterparts do. IDBI Bank’s worsening financial position would mean LIC will have to generously loosen its purse strings, which is ultimately the policyholders’ money. Ring a bell, dear policyholder?

--With data support from Kishor Kadam

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Updated Date: Nov 15, 2018 14:40:51 IST

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