|»The Daily Reckoning by Bill Borner|
IDBI Bank's privatisation will be a test case for Modi govt
4 NOVEMBER 2015
- By Vivek Kaul
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.
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.