|IDBI Bank's M. Damodaran: Restructuring
the third time in his life, 57-year-old Meleveetil Damodaran, a
former civil servant, has proved he can troubleshoot the most troubled
financial institutions (FIs). The first time was in November 2000,
when he restructured UBI, UCO Bank and the Indian Bank. Then in
July 2001, he was roped in to clean the mess at India's largest
mutual fund company Unit Trust of India, after a rash of speculative
and irresponsible investments by the previous leadership had seen
the intrinsic value of the company's flagship fund (and that of
choice of some 20 million investors at that point in time) erode.
The third time was in June 2004, when he was given additional charge
of the Industrial Development Bank of India (IDBI), once the jewel
among India's FIs that had since fallen on hard times.
| IDBI'S TWIN CHALLENGES
The financial institution became
a bank on October 1, and IDBI Bank will merge with it before
the financial year is over, but the new entity must...
| REDUCE COST OF BORROWINGS
The average cost of IDBI's borrowings is 9 per cent. This should
head south once it merges with IDBI Bank (average rate on deposits:
5 to 5.5 per cent). By some estimates, IDBI should be able to
exit all high-cost deposits by February 2006
Once it transfers around Rs 9,000 crore of (dis)stressed assets
to the SASF (Stressed Assets Stabilisation Fund; more on this
later), the new IDBI Bank will be left with an insignificant
quantum of bad loans
| IDBI'S LIFESTORY
| July 1964:
Created under an Act of Parliament
September 1994: IDBI Bank
October 1994: IDBI Act is
amended to permit public ownership up to 49 per cent
July 1995: Initial public
offering of Rs 10 at a premium of Rs 120 per share
December 2003: IDBI Repeal
Act allowing IDBI to be registered as a bank is passed. The
bill comes into force on July 2, 2004
September 24, 2004: The
trust deed for Stressed Assets Stabilisation Fund is executed
by the trustees
September 30, 2004: The
RBI issues notification for inclusion of IDBI in Schedule II
of RBI Act, 1934
October 1, 2004: IDBI commences
operations as a banking company. IDBI Act, 1964, stands repealed
January-March 2004-05: IDBI
will merge with IDBI Bank. The minimum shareholding of the government
will not fall below 51 per cent
All of this, however, was history, when, on
October 5, Damodaran, Chairman and Managing Director of IDBI, boarded
a flight to New York. This writer doesn't know for sure, but the
stoic Damodaran could well have had a smile on his lips. Five days
earlier, on October 1, IDBI had become a bank. Now, the chairman
was off to meet foreign institutional investors who held 8.29 per
cent of the equity of the FI-turned-bank. According to Damodaran,
the investors had queries regarding the Stressed Assets Stabilisation
Fund (SASF) and the need to become a bank if the firm was still
interested in project and infrastructure finance. "I had to
explain to them that even though IDBI will continue to be in project
loans, we will not deny ourselves the chance of being in more profitable
areas, including fee-based businesses," he says.
Queries about the SASF are only to be expected.
Bad loans-circa 2004, nearly 25 per cent of IDBI's gross assets
were 'bad'-made any financial restructuring of the FI all but impossible.
So, Damodaran sold the government, which owns 59 per cent of the
company, the concept of the SASF, essentially a special purpose
vehicle to which IDBI will transfer Rs 9,000 crore of bad loans
(including the Rs 1,200-crore exposure it has to the Dabhol Power
Company); in return, the Fund will issue to IDBI, zero-coupon, non-tradable,
20-year bonds of the same amount. The Fund will follow up on the
bad loans, and the amount collected will be transferred to IDBI.
In effect, this Rs 9,000 crore, then, is an off-balance sheet, cash-neutral
support extended by the government. And once the Rs 9,000 crore
worth of bad loans are transferred to the Fund, IDBI's net non-performing
assets would account for less than 1 per cent of its total loans.
"The merged entity will start with a relatively clean balance
sheet," explains Rakesh Jhunjhunwala, a trader-investor who
holds a little less than 1 per cent of IDBI's stock.
There are more strands to IDBI's emerging gameplan,
like a new credit committee focussed on creating new assets (and
new high quality assets at that), an improved risk management system
(25 officers have been trained by CRISIL and PricewaterhouseCoopers),
and a planned campaign to get execs to specialise in various sectors
(lending, then, becomes that much more risk-free).
| A TALE OF TWO TRANSFORMATIONS
How IDBI's Universal Bank act is
a whole lot different from ICICI's.
| ICICI (OCTOBER 2002)
» A financial
institution (ICICI) merges with a commercial bank (ICICI Bank);
hence the process requires going to the high court for two approvals
has to make accelerated provisions for NPAs
has to rustle up Rs 25,000 crore to meet CRR and SLR requirements
as a virtual universal bank prior to merger with ICICI Bank.
Acquires NBFCs, launches slew of retail products, rolls out
strong distribution network
SLR: Statutory Liquidity Ratio. RBI insists that banks
have a minimum SLR of 25 per cent
CRR: Cash Reserve Ratio. RBI insists that banks have
a minimum CRR of 5 per cent
IDBI (OCTOBER 2004)
» The financial
institution first becomes a commercial bank and is to then
merge with another bank (IDBI Bank). The process needs to
be approved only by the Reserve Bank of India
government (it owns a majority stake in IDBI) makes a special
dispensation of Rs 9,000 crore through the SASF; all stressed
assets are transferred to this fund
meet with CRR requirements. Gets a five-year regulatory forbearance
for meeting SLR requirements
banking will be driven largely by IDBI Bank's 100-branch network.
Infrastructure finance and corporate banking will be driven
by IDBI's strengths in these areas
There's no denying the need for IDBI to become
a bank. Development FIs have ceased to make commercial sense (their
cost of funds is high and they are prone to asset liability mismatches
because they provide long-term funding with money raised short-term).
Besides, as an FI, IDBI was shut out of the sweet spots in the market,
something Damodaran says the company discovered when it carried
out a pictorial risk-return exercise. "As an FI, we were not
offering all the services that a demanding customer would look for."
The merger with IDBI Bank should address most of these issues. For
instance, it will bring down IDBI's cost of borrowings from the
9 per cent it is at today.
Once the merger is through (and already, there's
speculation about IFCI's merger with the new IDBI), the new IDBI
Bank will be structured as strategic business units: one for development
finance, and another for commercial banking. "The key issue
for IDBI will be the pace at which the merged entity is able to
ramp up its deposit base and expand its distribution network,"
says Rajiv Varma, an analyst at DSP Merrill Lynch. As Samir Dholakia,
Director, Balance Equity Broking, puts it, "The regulatory
concessions are in; now comes the tough part of delivering earnings
growth in a competitive banking environment." Damodaran will
start off, once the merger is through, with India's sixth largest
bank, but to live up to his promise of "being #1 in terms of
size in five years", he will need to transform a sleepy FI
into an aggressive universal bank.
| THE DAMODARAN INTERVIEW
| On the challenges
In IDBI there are two major problems-asset quality
and high cost of funds. Asset quality we have addressed through
SASF and with the arrangements we have put in place, we will
ensure that it will not be adversely affected going ahead. Progressively,
the cost of funds should come down. By February 2006, we should
exit all high cost liabilities.
On government ownership and bad
I don't think the asset quality problem derives from government
ownership. The major reason could have been that institutions
such as IDBI did not have a concept of risk management. You
gave loans on the basis of project appraisals, but it was
not done scientifically. As for government intervention, I
don't see evidence of the government telling me to finance
a project. A little bit of perception is unfair.
On the people aspect
IDBI will select an HR consultant to create an organisation
relevant to a competitive banking environment. We are starting
from a near zero situation. Until now, we had postings, transfers
and promotions, which are not just what go into HR. You need
empowerment, incentives and accountability as well.
On where he sees IDBI Bank
In five years time, I want it to be the number one bank in
On the timeline
On day one (June 2004, when he was reappointed CMD of IDBI),
I said we would convert ourselves into a bank on October 1.
It was an irrational statement based on my belief that I would
be able to push through the idea of the SASF with IDBI officials
and the government. By March 31, 2005, the merger of IDBI
and IDBI Bank should happen; we are working hard to see that
it happens earlier. Then, maybe down the line, we can set
up an asset management company and an insurance company, and
play a more active part in our asset reconstruction company.
The next step
I will start by identifying the future CEO for IDBI.