IDBI Bank's privatisation will be a test case for Modi govt - The Daily Reckoning
The Daily Reckoning by Vivek Kaul
On This Day - 4 November 2015
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IDBI Bank's privatisation will be a test case for Modi govt A  A  A

- By Vivek Kaul

Vivek Kaul
Several news items in the last few days seem to suggest that the Narendra Modi government has plans of privatising IDBI Bank. A newsreport in The Economic Times talks about a "high-level committee headed by the cabinet secretary that will oversee strategic divestments". The report also said that the "the first proposal likely to be examined by the panel will be the sale of the government's stake in IDBI Bank to convert it to a private bank."

The minister of state for finance Jayant Sinha had hinted at something similar last week when he told the media that "we'll consider transforming IDBI Bank in a manner similar to the way Axis Bank was done."

IDBI Bank is among the bigger public sector banks. It is the fifth biggest public sector bank in terms of market capitalisation. It is the seventh biggest in terms of total assets. But it's the tenth biggest in terms of net profit.

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The gross non-performing assets (bad loans) of the bank have been going up over the years. As of March 31, 2009, they stood at 1.38%. By March 31, 2015, they had jumped to 5.9% of total assets. Over and above this, the bank also had restructured assets (where the tenure of the loan or the interest on the loan has been changed in favour of the borrower) worth Rs 20,900 crore as on March 31, 2015. The number had stood at Rs 3,100 crore as on March 31, 2009.

The restructured assets as well as bad loans of the bank have grown at a fairly rapid rate. This clearly tells us is that the restructured assets are turning into bad loans in the time to come. The bank, like many others, has used the restructured assets route to kick the ‘bad loans can' down the road.

The accumulation of bad loans has essentially led to a situation where the net profit of the bank has gone nowhere over the last six years. The net profit for the financial year ending March 31, 2009, was at Rs 859 crore. Six years later, the net profit for the financial year ending March 31, 2015, stood at a similar Rs 873 crore.

Flat profits due to an increase in bad loans essentially explains why the bank is seventh largest public sector bank when it comes to total assets but tenth largest when it comes to profit. In fact, flat profits have essentially led to a situation where the return on assets as well as return on equity of the bank have fallen dramatically over the years. The return on assets has halved from 0.6% as of March 2009 to 0.3% as of March 2015. The return on equity has totally collapsed from 12.1% to 3.9% during the same period.

Currently, the government owns 76.5% in IDBI Bank and any serious plan of privatisation would mean the government bringing down its stake in the bank majorly in the time to come. In fact, the government holding in the bank has gone up "from 65.14% in July 2010 to 76.5% in December 2013 by total equity infusion amounting to Rs 5,300 crore".

There are several reasons why the government should privatise IDBI Bank. First and foremost as I have said in the past, there is no reason that a government should be running 27 public sector banks. There are other more important areas that need its attention.

Second, the return on equity on the government's investment in the bank has fallen dramatically over the years. At 3.9%, it is lower than even the 4% interest that banks pay on their savings bank account. Hence, the government is not being adequately compensated for the investment risk.

How will privatisation help? As TN Ninan writes in The Turn of the Tortoise-The Challenge and Promise of India's Future: "The last quarter century's experience has shown that when the private sector is asked to provide telecom services, run airlines and airports, build and run ports, undertake banking, distribute electricity and even undertake water supply, the result is usually (though not always, for there is no shortage of private banks and airlines that have failed) a substantial improvement on what, the government was doing until then."

This becomes clear from the fact that in the last financial year (April 1, 2014 to March 31, 2015) the private sector banks operating in India made a total profit of Rs 38,219.35 crore. In comparison, the public sector banks made a profit of Rs 37,820 crore.

This despite the fact that the total assets of private sector banks form only around 29.2% of the total assets of public sector banks. Assets owned by private sector banks in India form only 22.6% of the total assets owned by banks in India. Despite this, they are more profitable than public sector banks.

Interestingly, the total profit of public sector banks for the financial year ending March 31, 2013(April 1, 2012 to March 31, 2013), had stood at Rs 50,583 crore. Since then it has fallen by 25.2% to Rs 37,820 crore. The profit of private sector banks has jumped by 31.8% (from Rs 28,995.43 crore) to Rs 38,219.35 crore. Between 2013 and 2015 as the economic scenario has gotten worse, the public sector banks have faltered big time. Meanwhile, the private banks have continued to increase their profits.

IDBI Bank as on March 31, 2015, had Rs 3,56,031 crore worth of total assets. As pointed out earlier it made a net profit of Rs 873 crore during the course of the financial year. Now compare this to Kotak Mahindra Bank which had total assets worth Rs 1,06,012 crore as on March 31, 2015. It made a net profit of Rs 1,866 crore, which was much more than that of IDBI Bank. Similar numbers can be put forward for other private sector banks like IndusInd Bank and Yes Bank as well, in comparison to those of IDBI Bank. These banks are significantly smaller than IDBI Bank but make much more money. [Data sourced from Indian Banks' Association]

The government's 76.5% stake in IDBI Bank is currently worth Rs 10,380.6 crore. If it privatises the bank, chances are whatever equity that it chooses to retain in the bank will end up being worth much more than it currently is, in the days to come.

The question is will the government get around to privatising IDBI Bank? The employees of IDBI Bank have called strike on November 27, later this month, to oppose the government's move to privatise the bank. This shouldn't stop the government from privatising the bank. The good part is that unlike a systematically important institution like Coal India, the employees of IDBI Bank have a limited nuisance value. Hence, a strike by IDBI Bank is not going to hurt many others. And this should help push through the decision.

Further, the government shouldn't stop at IDBI Bank. This will be a test case for it on whether it will be able to continue privatising other public sector enterprises in the years to come.

There are many public sector enterprises which the government has no reason to own.

Like Mahangar Telephone Nigam Ltd.

Like Air India.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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13 Responses to "IDBI Bank's privatisation will be a test case for Modi govt"

AP

Jul 11, 2016

plain and simple.. the people supporting the privatisation in this forum are the ones who never got the chance to join the govt. because they lack the quality. everyone knows what low life thieves the private banks are and India still needs govt. support to move ahead and a govt. trying to sell the govt. property is a perfect example of an inefficient finance manager.

Like (2)

vinay

Apr 13, 2016

I am amused at how narrow standards you used in justifying privatizing idbi bank. You compared total assets and net profit of kotak mahindra and idbi bank. How about comparing total no of casa(current and savings account)? If idbi is giving services to same no of account holders as kotak mahindra and yielding lesser profits, I am ready to accept your logic. I am sure that is not the case. Idbi is providing services to several times more persons than kotak mahindra and yet producing less profits because the section of people which is being served by idbi is not that affluent like the people being served by kotak mahindra.

Like (2)

manmohan khetan

Mar 22, 2016

Thanks Vivek on providing insights on IDBI bank. Surprised to see opposition by staff of IDBI bank. They are afraid of what ? working hard ? Taking correct & hard decision ?

Like (1)

amrendra kumar

Dec 15, 2015

if profitability is the only criteria then yes, all PSU banks should be privatised. But we are looking the issue with a very narrow prism. we need to analyse the charges levied for banking services by PSU and private bank. secondly area of presence meaning therby india not only lives in metro. PSU are mostly operating in rural and semi urban area. Third point is financing agriculture, SME and infra sector. If we look at the loan portfolio of private banks, it majorly consist of home loan, mortgage loan, personal loan, credit card and equipment finance. they dont want to take risk in other sector like large industry, power and infra. If we want to ignore all the important sector , well privatise PSU banks. But believe me, majority of indian farmer, smal business, social sector schemes will suffer.

Like (4)

vinit

Dec 12, 2015

Vivek,what u have wrote and presented in this article is only a side of the story.U have compared net profit,NPA,ROA of public sector banks with that of private banks.Please present other side as well.No of jan Dhan accounts opend by private sector banks is 0.73 lakhs and that of PSB is around 16 crores (Including Regional rural Banks).Same is the case with overdraft in these jan dhan accounts.Also compare no. of branches of private sector banks and psb in rural areas and priority sector lending targets of private and public sector banks.
As far as IDBI bank most of its NPA is on account of lending to infrastructure sector with long gestation period .Many corporate house are enjoying on the loan taken from these psb but these loan have been classified as NPA in bank's book.Per employee profitability and business Of idbi bank is on par or even better than private sector banks. So Profit and ROA are not only things to be considered while making decision .

Like (7)

krishnan vc

Nov 12, 2015

Vivek, I think that we should for something more than profits and money in every business. NONE OF THESE PRIVATE SECTOR BANKS willingly open a RURAL BANK. The perks these guys expect is nonsensical. I have seen managers in PSB's who go by a bus in the morning open shop use aLOTTA for the toilet with one POT OF WATER and close shop ; all by themselves as there are no Class 4 employees to help them; and return by the same bus!! YOU KNOW WHY because there is only ONE BUS SERVICE to that village!!

Like (8)

Krishnan Sivaswamy

Nov 4, 2015

Iam all for privatising Banks and other PSUs. But the only issue is who will give loans to agricultural sector and other weaker sections for that matter even to SMSES.
Private banks will lend only to Adanis and Ambanis even if some of them turn into NPAs ( Kingfisher airlines).

It cannot be the case that SMSES don't need financing. They employ the most.

Like (2)

R Tayal

Nov 4, 2015

Dear Vivek, This is another of those rare occasions when I tend to differ with you. You have chosen a very narrow metric of profits, by which yardstick it is possible to justify privatization of each & every one of PSUs, leave alone IDBI Bank. Post privatization, I agree profits of the bank will increase substantially, but to whose benefit, obviously the new owners. How does it benefit the country, or the govt, or the people at large? That should be the debate. Comparing a PSU bank with a private one is an apple vs orange comparison. They operate not exactly identical objectives. To stretch your argument, if all banks were to be privatized their collective profits will rise significantly, but then who will take care of farmers & priority sector lending. None of us can turn a blind eye to farmers' suicides in return for higher profitability arising from privatization. I am not denying the inefficiency that creeps in with govt/PSU culture but you have to also look at the pitfalls of privatization. And incidentally I am all for privatization of IDBI Bank, but each such case has to be dealt with on holistic considerations and benefit to the nation, rather than profitability of future owners.

Like (6)

amitabh

Nov 4, 2015

Excellent article , well written with good supporting data, yet easy to understand. Look forward to similar such reviews of Air india and mtnl

Like (6)

Satya

Nov 4, 2015

I may not completely agree with privatization of banking sector. The banking penetration and low cost banking products for the poor is offered only by public sector banks. Take any private bank saving accounts, they are loaded with many charges and minimum balance is usually more than Rs 25,000. Only due to RBI's force private banks are offering no-frills account that too with too many restrictions. But you can open a bank account with as low as Rs1000 at any public sector bank.And charges are also minimal.

On the same note I agree that government should not be running 27 banks. Instead restrict it to single digits which covers all parts of the country.

Like (3)
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