IDBI Bank has regained its mojo post the much needed capital support from the Life Insurance Corporation of India (LIC). The bank has come out of the Reserve Bank of India (RBI)-imposed prompt corrective action (PCA) by improving its fundamentals and reworking its core strategy. Having turned the corner, IDBI Bank is now focusing on strengthening its book by focusing on the retail business to get back to the high growth trajectory. Much of the pain on account of large corporate non-performing assets (NPAs) is addressed.
On Retail front, the Bank continues to be strong in mortgage space, gold loans and auto loan among others, said Suresh Khatanhar Deputy Managing Director of IDBI Bank in an exclusive interview with Moneycontrol on 28 May.
Going ahead, the bank will continue to have corporate loan business but on high potential proven business model /groups, Khatanhar said. For the banking industry, Covid presents challenges and the growth recovery will shape up depending on the progress of the vaccination and nature of lockdowns, he said in the interview.
IDBI bank has gone through a painful phase (PCA, capital shortage etc). Are the bad days over?
Bank was put under prompt corrective action (PCA) in May 2017 mainly due to effectuating Asset Quality Review exercise across banks. The asset quality impact was felt in the industry mainly in large EPC (Engineering, procurement, and construction), infrastructure accounts. IDBI being a Development Financial Institution played key role in finance core sectors of the economy proactively for overall economic development of the country, was not insulated from the impact.
How did the bank use the PCA period?
PCA period was productively and effectively utilised for revisiting the products, policies, Risk management practices and business model of the bank. Efforts were channelised in de-risking portfolio and improve risk-weighted assets through internal efficiencies for capital conservation. An efficient team was deployed for resolution / recovery of NPLs to optimise recoveries at fast pace.
The portfolio was rebalanced with higher focus laid on building granular risk mitigated book, as bank adopted Retail Bank model. Accordingly the ratio of the lending book has shifted in favor of Retail at 62:38 presently, as against 33:67, before Bank was put under PCA. Advanced organisational structure is put in place, to enable the business model scalable.
With focus on market friendly products and dedicated collection / Recovery vertical, to manage quality book, and digital initiative on underwriting, monitoring, value added products, the necessary ingredients are in place.
And the capital levels have improved...
Yes. With above initiatives and capital support from GOI / LIC, the bank could gradually enhance PCR to 97 per ent, thereby addressing the challenges faced by the bank in the past. The bank has surpassed all the PCA parameters prescribed by RBI and accordingly PCA stands lifted.
There was no restriction in deposit side and we have adopted appropriate strategies in this direction and today we are having very good liability franchise with our CASA deposits above 50%.
How has LIC ownership change the bank?
LIC, a largest life insurance company of the country had been looking for an advanced bank to effectively manage its growing operations, and acquiring a bank was a strategic decision. Accordingly, during Jan 2019, they decided to infuse capital to acquire controlling interest in the bank.
For a bank also it was timely support to help tide over the challenges and it was win-win proposition for both the organisations. The capital support helped achieve Regulatory Capital requirement as also helps improve other key financial parameters, for turnaround of the Bank.
Moreover, the Bank has identified several business synergies with LIC to optimize business opportunities, in addition to being the largest Bancassurance partner of LIC.
What are the focus areas at this point?
The PCA parameters and guidance enabled deep dive into the bank business model as outlined above and helped adopt a robust business model with advanced risk appetite framework, for conducting business on sound footing, post PCA. Our liability franchise is well established and we are comfortable on this front. Having adopted Retail Banking model, we have set internal guidance to conduct business in ratio of 55-60: 45-40 on an ongoing basis. Towards this all necessary enablers are put in place.
Could you talk about the segments focused within the retail portfolio?
On Retail front, we continue to be strong in Mortgage space, our thrust on Gold loan, Auto loan, Personal loan, SME loans is growing with adoption of digital journey for enhanced customer delight. On Corporate front we propose to focus on high potential proven business model / groups, penetrate with risk appetite parameters in existing well performing assets, mid corporate accounts with adequate mitigation for controlled risk and profit optimisation. Thrust on digital penetration and initiatives are growing rapidly and business model is robust and scalable.
What is outlook on asset quality?
Past 15 months of pandemic and in particularly second wave of COVID has softened the economic activity across globe. The Govt. /Regulators have proactively taken appropriate measures to control stress situations. However, with advent of aggressive vaccination drive and larger awareness, the situation is improving faster, which will help revive the economic conditions faster.
With regard to IDBI Bank, as over 90 per cent of the retail book is mortgage profile backed, largely residential, controlled quality of underwriting standards and profile of the borrowers, the quality is largely under control. Collections as on March 2021 were at pre Covid levels even post the Supreme Court order, which lends sufficient level of confidence.
On corporate book the stress is already managed during PCA period and balance book quality is relatively safe. Having said this, are not complacent and have further tightened monitoring, control, follow ups we and customer engagement to take prompt corrective measures, where necessary.
How has Covid impacted the business?
While green shoots were visible during Q 4 (2020-21), the second wave has been severe and has affected large proportion of the population leading to lockdowns in several places. However, this time economy was not unaware of the impact and strategic lockdown has made the market heterogeneous. Some business impact is expected but may not be as steep, as was seen in the first wave. With adequate awareness of handling COVID related issues now, creation of facilities, vaccination drive and the economy is likely to be back on its feet sometime soon.
Could you give us a sense on the loan recast progress?
The scheme is now open and available up to Sept 2021 and already momentum has started. Our field teams have started engaging with customers proactively to assess the borrowers impacted under pandemic and where necessary initial dialogue for resolution has commenced including assessment of need based assistance. Our endeavor is to effectively respond to the situation and reach out to maximum number of needy customers, on high priority.
Which are the segments where you see higher stress?
Economic activity across discretionary service sector is presently hit and its revival will largely be guided by the vaccination drive. India being large population country, it may take some time to achieve satisfactory level of vaccination but the efforts are in right direction and pace appears fast. While consumption demand is likely to improve in short term, the acceleration of investments will help sustain the recovery.
Sectors like Hospitality, Restaurant and aviation are largely impacted apart from self-employed, Micro and Small units/business in containments zones.
What are the three biggest risks at this point for banking industry?
This time the virus spread is deeper penetrated in rural areas too unlike only urban area in Covid 1.0. This may have significant impact on earning in rural sector and in turn will impact the larger population and their repayment capacity. Timely resolution as per RBI’s package and vaccination is key monitorable. The normal monsoon, as expected would positively contribute toward good rural income.
Most of the Banks are having good amount of liquidity and deployment opportunities in earning assets are becoming challenge at present, given pandemic related economic parameters.
Conventional banking delivery models would face big problem due to Covid related restriction. It’s very critical to adopt innovative service delivery models for the Banks. Digital adoption and cost reduction would be key challenge for the Banks.
Apart from the measures announced, do you think RBI should go for another round of loan moratorium?
At the recent meeting of CEO of Public sector banks and private banks with Governor of RBI, it was expressed that support for large accounts and moratorium (May be for a quarter) till resolutions are implemented, May be considered. Given the situation on the ground where large population is presently attending to health related issues arising for pendemic and lockdown conditions, the above request appears reasonable.
Are digital lenders a threat or opportunity for traditional banks?
Digital lending is an emerging market in BFSI space and predominantly it’s managed by new startups, NBFCs with help of Fintech companies by adopting latest technological architecture by use of Artificial intelligence. The new sets of digital lenders are changing the entire architecture of the industry by providing algorithm based banking experience. However, presently, barring few, these companies have less capacity of lending on their own; as such they are not immediate challenge to the formal banking sector.
This time lag and wide acceptability of the innovative lending provide immediate opportunity to the formal banking players through value based tie ups in order to take advantage of their infrastructure and financial muscles. As timely action is the key in such disruption; early mover will have the edge. Many formal lenders of the industry have already started various steps towards digital lending in Retail loan space.
What are your digital initiatives?IDBI Bank as a part of its digital initiative had already launched various digital initiative including end to end digital lending journey for Retail, MSME and Agri loans with latest API technologies for customer delight. Bank has initiated partnerships with fintech companies for co lending to reach the unbanked areas of the country.