IDBI Bank's M. Damodaran: Restructuring pasha

For 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.

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).

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.