IDBI Bank's privatisation will be a test case for Modi govt

Nov 4, 2015

- 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.

Advertisement
 Vivek Kaul's 
 "Easy Money" 
 Get This Trilogy Worth Rs 1,215 For FREE! 
 Vivek Kaul's Easy Money Book setsVivek Kaul, Editor of the Daily Reckoning, is a master storyteller. And in this trilogy, he tells us probably one of the most important stories that has yet been told... the story of Money.

A highly recommended read that teaches you lessons that could help you avoid the next global meltdown. Don't Miss It!

Claim your Free set worth Rs 1,215 now...

Hurry! We only have limited copies of Vivek Kaul's "Easy Money" Trilogy books to give away.
 

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.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Recent Articles

A New Infrastructure Boom March 26, 2019
Selva Freigedo talks about the potential in 5G network and how it could transform the way we communicate.
A 40 Somethings Guide to YouTube Hits March 20, 2019
Vivek dwells into a new YouTube phenomenon.
As the Economy Slows Down, Maruti and Two-Wheeler Companies Cut Production March 19, 2019
The country's largest car maker has cut production by more than a fourth.
In Supporting Demonetisation, RBI Behaved Like an Old Uncle Not Willing to Take a Stand March 13, 2019
The minutes of the meeting of the RBI Board which happened before demonetisation have been released.

Equitymaster requests your view! Post a comment on "IDBI Bank's privatisation will be a test case for Modi govt". Click here!

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

vijay Damle

Nov 4, 2015

IDBI was initially a private bank like ICICI Bank. Unfortunately IDBI was asked to be merged into the Bank . AS IDBI itself was a Development Finance Institution , it had its own disadvantages or directed lending compulsions. Unless banks are unshackled from directed lending and/ or political interference through Board nominations this malice would continue. Why to blame only IDBI Bank? The Banks should have only one regulator RBI and no second back seat driver like FM. Indian Banks would perform under professional leadership comparable to any international bank including performance by their employees.

Like (1)

KETAN NANIVADEKAR

Nov 4, 2015

Absolutely true Vivek,, Its high time Govt moves out of such Institutions ....

Like (1)

Thomas

Nov 4, 2015

Sorry to say that PS banks have been orphans, with no top
authorities taking any interest.Govt allowed PS Banks senior managers unrestricted freedom.It was misued by some senior officials like Jain.As a result NPA's of PS banks shot up into thousands of crores, while dishonest officials reped huge personal profits like Jain.
Controlling authorities should realize it is the taxpayers money that some unscrupulous officials like Jain have been playing with.
On the contrary Mgmts of private banks have solid checks and balances.Look at small private banks like Fed.Bank doing well.
kindly persuade authrities to ensure Rs 2000 crores is not loaned agaist a security of 200 crores.How will you recover the money ? Why share prices of all PS banks gone down badly whereas Private banks are doing well.
Normally security value should be at least 25% above loan amount.
I have lost money in State Bank and Canara Bank.
Kindly exercise strict watch over bank loan issues.
Thank you.

Thomas

Like (1)
<<Prev   
Equitymaster requests your view! Post a comment on "IDBI Bank's privatisation will be a test case for Modi govt". Click here!