R Jagannathan: IDBI's undeserved bailout

MICROVIEW

For a man whose institution has just been rescued from irrelevance with a huge Rs 9,000 crore handout, IDBI Chairman M Damodaran does not quite act the part of a penitent supplicant.

On Day One of IDBI's resurrection as a bank he has airily talked about aiming for the No 2 slot in the banking industry, possibly by gobbling up a hapless public sector bank.

Not so fast. In case anyone has failed to notice, the begging bowl still hasn't left his hands. Among other things, IDBI is looking at favoured treatment from government, whether it is a five-year SLR holiday, easier priority sector lending norms or other indulgences on the way to merging itself with its subsidiary, IDBI Bank.

I wish Damodaran luck""and he has had plenty of that with UTI""in his efforts to convert IDBI into a successful bank. But rewards should follow performance""and not the other way around.

The government should not be offering him a public sector bank on a platter till he has actually proved himself at IDBI. His KRAs (key result areas) must include superior performance in recovering the NPAs that have been happily transferred to the Stressed Assets Stabilisation Fund (SASF).

The IDBI bailout""a thoroughly undeserved one""is the worst possible way of lending a helping hand to any financial institution. It sends all the wrong messages: that underperformers will be rescued and performers will be penalised (by unleashing unfair competition against them).

Not only that. By allowing IDBI to shift all its lousy assets, including Dabhol, into a separate vehicle (the SASF), the government has additionally given Damodaran a free ride to profitability""something the market is celebrating by piling into IDBI stock.

The stock has added nearly Rs 4,000 crore in market cap from its 52-week lows. In effect, the taxpayer has paid Rs 9,000 crore for punters to enrich themselves.

Unlike the earlier recapitalisation of banks, IDBI has got away with murder. The rest of the banking system got recap funds as equity. They had to work hard on asset recovery and take substantial hits on the P&L account by higher provisioning.

IDBI starts with a clean slate. This is not a turnaround that Damodaran can be proud of; at best it is a tribute to his ability to get the finance ministry to write him large cheques""something that other institutions would kill for. It happened at UTI; it has happened again at IDBI.

The second reason why this kind of bailout is wrong is the negative message it sends out to those who actually did a turnaround the hard way. Five years ago, ICICI was in as big a mess as IDBI.

To pull the institution back from the jaws of slow death its management worked overtime to execute a strategy that would keep investors happy even while the balance sheet was being cleaned up.

It is only now out of the woods. But IDBI has breezed through without any pain""and currently commands a better P/E than ICICI Bank, SBI and a whole lot of superior performers like Corporation Bank or OBC. There cannot be a surer way to demoralise performers than by rewarding underperformers.

In fact, the contrast is starker when one compares IDBI with its own banking subsidiary. Unlike the parent, IDBI Bank's management took a hard hit on the bottom line to clean up its books and built a retail strategy that would make it competitive.

Under former CEO Gunit Chadha, the top team at IDBI Bank did all the right things and created a base on which IDBI can now raise itself as a retail powerhouse. But where are the miracle workers of IDBI Bank?

They are all gone, leaving IDBI with the priceless gift of a decent retail brand. Perversely, IDBI Bank commands a P/E of just around seven while IDBI gets nearly 20. The performers have got it in the neck; the non-performers (so far) are walking away with the glory.

If the government wanted to bail out IDBI, it could have done many things differently. One, it could have offered it a smaller recap (say, Rs 2,000 crore) and asked Damodaran to work on recoveries.

An even better way to reward performance would have been to hand over the good assets of the institution to its banking subsidiary, and convert IDBI into an asset recovery company. Damodaran could have been made chairman of this asset recovery company and asked to work his miracles.

He has demonstrated his ability to get the government to cough up large sums of money for various failed institutions; he can even now be asked to use those skills to coax his borrowers""those who created the NPAs in the first place""to pay up. That, and not IDBI's metamorphosis into a bank, is his acid test of leadership.

rjagann@business-standard.com