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IDBI: Will it sail through? - Views on News from Equitymaster
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  • Dec 22, 2001

    IDBI: Will it sail through?

    Established in 1964, by the Indian Government under an act of Parliament, Industrial Development Bank of India (IDBI) is today the country’s second largest financial institution (FI). The institution, which was created for broad based industrial development, is currently suffering from unhealthy financial conditions.

    Financial institutions were set up with the principal objective of providing term finance for fixed asset formation in the industry. IDBI was entrusted with the additional responsibility of acting as the principal financial institution for coordinating the activities of institutions engaged in the financing, promotion and development of industry.

    Not only this. IDBI set up the Small Industries Development Bank of India (SIDBI) as its wholly owned subsidiary to address the specific needs of the small-scale sector. It has extended significant support in the development of capital markets through formation of Securities & Exchange Board of India (SEBI), National Stock Exchange of India (NSE), Credit Analysis and Research (CARE), Stock Holding Corporation of India (SHCIL) and National Securities Depository (NSDL) among others.

    The institution’s strength lies in its diversified portfolio across different industries, regions and sectors. It has core competencies in project financing leveraging its large balance sheet size. This allows IDBI to take higher single party exposure. It also has fairly good retail network with sizable investor base, which helps the institution in adequate mobilization of resources.

    Over the years, IDBI has transformed itself from a single-product lending institution into a diversified financial service provider for the corporate sector through its wide range of products and services. It has set up specialised subsidiaries in the areas of commercial banking, investment banking, broking, insurance and software services. With its hands full, IDBI is now preparing a road map for transformation into a globally competitive universal bank. However, its sinking financial health is delaying its plan to become a universal bank.

    The institution, which was operating successfully over the last three decades, is marred by financial troubles in the past four years. IDBI’s earnings declined at a compounded annual rate of 23% since FY98. Its return on networth too dropped sharply to 7.5% in FY01 from 18% in FY98. Since its formation, IDBI has focused on long term project lending. Steel, electricity generation and textile industries formed major part of its advances. With a downturn in the industrial cycle IDBI failed to recover its dues from these industries resulting in a substantial rise in non-performing assets (NPAs) and loss of revenues.

    Credit exposure to top 5 sectors
      Credit exposure
    Industries as a % to total loans
    Steel 13.30%
    Electricity generation 10.80%
    Cotton textiles 9.40%
    Fertilizers 5.20%
    Refineries and oil exp. 4.80%
    Total 43.50%

    Cotton textiles and steel industry together accounted for 23% of its gross NPAs as on March 2001. Apprehensions are also raised about its exposure of Rs 23 bn to the Dabhol Power Project, which is currently under controversy (5% of IDBI’s total loans). Read more here (14th December- story no. 1) IDBI’s gross NPA ratio of 18.5% (Rs 109 bn in value terms) is a factor of concern. Its net NPA ratio of 14.2% is also the highest amongst FIs and banks. Lower provision coverage and a gradual deterioration in asset quality have escalated these ratios. (IDBI’s provision coverage at 23% is much lower compared to 50% for ICICI and other public sector banks.) Inability of the institution to recover its loans and clean up accounts has only weakened its financials over the last four years. Although, IDBI has initiated steps to improve asset quality by making higher provisions (Rs 4.3 bn in first half of FY02) and emphasizing on restructuring to arrest further slippage in asset quality it has still not come out of the woods.

    Over exposure to cyclical
      FY00 FY01
    Top 5 NPAs Rs bn % to total Rs bn % to total
    Cotton Textiles 9.7 13.80% 9.7 13.30%
    Steel 6.9 9.70% 7.2 9.90%
    Food Products 5.5 7.70% 5.6 7.70%
    Chemicals 5.1 7.20% 5.4 7.40%
    Metal Products 4.8 6.70% 4.7 6.50%
    Total 31.9   32.7  

    The rating agency Crisil has already downgraded IDBI’s rating due to mounting NPAs. International rating agency Moody’s has also changed the foreign currency debt ratings of IDBI to stable from positive. The recent change in ratings by both domestic and international rating agencies is likely to impact negatively its deposit programme in the current year. It would be a challenging task for the institution to raise money either from domestic or overseas markets at lower cost.

    IDBI failed to arrest the crisis situation and consequently faced a steep deterioration in financial performance in the current year also. Its earnings took a severe hit and declined by 47% during the first half of the current fiscal. Operating income and profits before tax have however, remained flat. An improvement in interest margins by 100 basis points to 20.8% was offset by increase in cost to income ratio to 30% (from 28% in 1HFY01) and higher provision for non-performing assets (NPAs).

    Click here for first half performance.

    A rise in interest margins came on the back of its efforts to restructure debts. In FY01, IDBI repaid high cost debt amounting to Rs 39 bn and aims to repay further Rs 30 bn loans in the current year. With a retirement of high cost funds, IDBI’s cost of rupee borrowing declined by over 93 basis points to 11.2% in FY01 from 12.4% in FY00.

    On the loan disbursement side also, IDBI is following cautious policies. In FY01, IDBI’s total disbursements at Rs 175 bn grew marginally by 2.6%. This was largely due to a drop of 18% in project finance loans. The institution is now concentrating on short term lending to improve asset liability management (ALM). Focusing on fee-based income could help it minimize the losses from lending to fund based loans. It aims to foray into M&A consultancy and housing finance. Both these areas, highly competitive but growth opportunities are immense and are relatively low risk businesses. It would offer avenues for growth in retail business for IDBI. The institutions’ corporate customer base and brand name could be leveraged to obtain a critical business mass.

    The strategies of the institution seem to be going on the right track. A gradual transformation into a universal bank, consolidation of business, diversification of portfolio, management of NPAs and cost cutting are the key factors which would determine its financial performance in the coming years. But before that happens tough economic environment would continue to drag down its performance in view of its high exposure to cyclical industries.



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