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NOV. 21, 2004
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The iPod Effect
Now you see it, now you don't. All sub-visible phenomena have this mysterious quality to them. Sub-visible not just because Apple's hot new sensation, the handy little iPod, makes its physical presence felt so discreetly. But also because it's an audio wonder more than anything else. Expect more and more handheld gizmos to turn musical.


Panasonic
What route other than musical would Panasonic take, even for a phone handset, into consumer mindspace?

More Net Specials
Business Today,  November 7, 2004
 
 
BANKING
Goodbye IDBI, Hello IDBI Bank
The inside story of how a beleaguered financial institution is set to become a happening universal bank.
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.

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

IMPROVE ASSET-QUALITY
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 is born
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
» ICICI has to make accelerated provisions for NPAs
» ICICI has to rustle up Rs 25,000 crore to meet CRR and SLR requirements
» Works 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
» The 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
» Will meet with CRR requirements. Gets a five-year regulatory forbearance for meeting SLR requirements
» Retail 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 assets
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 India.

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.

 

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