IDBI Bank, out of PCA, faces tightrope act between growth and reducing NPAs

Deck clears for government's stake sale; improvement in lender's finances key to invoke investor interest

It’s taken the Reserve Bank of India (RBI) more than a year to be convinced that IDBI Bank can indeed hold its head above water. With the RBI on Wednesday freeing the bank from the restrictive prompt correction action (PCA) framework, Asutosh Mishra of Ashika Stock Broking is confident that just as interest is gradually returning to public sector bank stocks, a similar outcome is likely for private lender IDBI Bank. “The rerating possibility is very high,” he adds.

IDBI Bank’s present promoter — Life Insurance Corporation of India (LIC) —had picked up 51 per cent at an average price of Rs 63 a share; it held 49.24 per cent as on December 31, 2020 (Q3). While it may take a while for LIC to gain from its investment (stock now at Rs 38.25), restrictions being lifted sets the stage for the government to sell its 45.48 per cent stake in the bank.

For IDBI Bank too, with PCA lifted, the time has arrived for it to walk the talk on improving its financials and cashing in on growth opportunities. While it has beefed up its lending practices over the past three years and has significantly re-hauled its retail business — both on the deposit and lending sides — the continued risk aversion in the system could make loan growth a tricky part for the bank.

PCA restrictions and synergies with LIC compelled the bank, reckoned a corporate-heavy lender, to look beyond its comfort zone. The bank’s retail-to-corporate loan mix has improved to 60:40 in Q3 against a corporate-heavy book in FY18. The bank’s structured retail portfolio, comprising mortgages, auto loans and personal loans, grew at over 15 per cent year-on-year in FY20, though it hit a pause in Q3. Retail growth slowed to just over 1 per cent and overall advances declined by 6 per cent year-on-year. If IDBI Bank should focus on sharply bringing down its gross non-performing assets (NPA) ratio from 23.5 per cent in Q3 (24.3 per cent without considering the apex court’s stay on asset classification), its loan book in totality should fire up.

Although the net NPA ratio is down to 1.94 per cent in Q3 (from 5.25 per cent a year ago) and the provisioning coverage ratio is among the best in industry at 97 per cent, whether it can improve loan growth without compromising on asset quality is the challenge.

“IDBI Bank has been extremely selective in even increasing the credit limit on some existing corporate exposures,” an industry expert pointed out. “But if loan growth has to improve, that approach won’t help,” he added. Clearly, the immediate task is to strike a balance between growth and asset quality.

After all, with Rs 30,000 crore infused into the bank since FY18 by the government and LIC to clean up its books, another bad loan mess cannot be afforded. Also, how IDBI Bank balances growth and NPA reduction will hold the key if the government should find a worthy buyer and value for its stake.