THE GIST of Editorial for UPSC Exams : 22 October 2019 (LIC should take the lead to revive IDBI Bank (The Hindu))

LIC should take the lead to revive IDBI Bank (The Hindu)

Mains Paper 3: Economy
Prelims level: IDBI
Mains level: Challenges faced by IDBI conversion into a universal bank

Context

• Post 2000, the national development banks — IFCI, IDBI and ICICI — changed their business models to remain relevant in a competitive market. ICICI, which always had visionary leadership, transformed quickly into a commercial bank.
• IFCI, the oldest of the DFIs, and IDBI, the largest, had a public sector set-up with short-term or ad hoc leadership and myopic outlook.

Several challenges faced by IDBI conversion into a universal bank:

• Its efforts to grow fast in the retail and priority sector created several issues.
• Merging with United Western Bank had not given any particular advantage to IDBI.
• The NPA menace, primarily driven by underperformance of the corporate sector, impacted IDBI Bank severely due to predominance of project lending.
• NPA level in the bank surged to 29 per cent, highest in the industry.
• No serious efforts to reduce the headline gross NPA were taken by the bank management, which declared loss after loss for consecutive seven quarters.

Revamping management

• With the change in shareholding, LIC holds 51 per cent, while the government continues to hold a significant share of about 48 per cent.
• With this dual ownership, it looks difficult for LIC to take any unilateral step for its revival, unless LIC can be empowered to take independent decisions on management and strategies.
• The government should divest its holding to private investors.
• Alternatively, it can reduce the owners’ equity by converting it to preference shares or Tier-I debt, together with a rights issue (with the government renouncing the rights in favour of LIC).
• Banking is highly competitive, and the earlier LIC and the government realise the need to create a conducive environment for IDBI Bank succeed, the better it is for both. A retired PSB head has been hired to drive the company.
• IDBI cannot be in status quo mode. What is needed immediately is a dynamic leader who can bring in a new vision, culture and leadership to this ‘private sector bank’.
• LIC should ensure a professional management and an independent board with complete operational freedom.
• IDBI has been losing good clients, particularly during the last 2-3 years when it was under Prompt Corrective Action.
• Aggregate business of the bank, which was more than ₹4.5 trillion in 2017, declined to about ₹3.7 trillion by March 2019. Advances declined from ₹2.7 trillion to ₹1.7 trillion by 2019.

Stressed assets

• Gross NPA of the bank as on March 31, 2019 was ₹500 billion and Net NPA was ₹150 billion.
• With increasing NPAs and shrinking balance sheet, gross NPA ratio surged to 29 per cent, which is unsustainable for a bank in normal circumstances.
• If LIC can manage ownership and management issues, resolution of existing toxic assets will be the least of the problems.
• Stressed asset management has been the forte of IDBI, having had the opportunity of working closely with BIFR, managing the CDR mechanism and creating a Stressed Asset Stabilisation Fund (SASF).
• With the bank having provided significantly for bad assets, management of net NPAs of ₹150 trillion is not difficult.
• In the immediate future, IDBI and LIC should focus on ramping up the banking business and getting back good clients. Recovery from NPAs is crucial for profits in the coming quarters.

Conclusion

• This can be achieved by outsourced recovery services, sale of NPAs to ARCs/distress funds and creation of SASF model trusts by LIC.
• The existing ARC infrastructure which is well-regulated can offer innovative structures for the bank’s benefit.
• It is important that LIC evolve the aspiration to develop a new vibrant private bank under its umbrella.

  Online Coaching for UPSC PRE Exam

  General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q.1) By whom the King Harsha of Kannauj and the Pallava king Mahendravarman-I got defeated?
a) Yajnavarman
b) Pulakesin-I
c) Vikramaditya-II
d) Pulakesin-II

Ans: D
Mains Questions:
Q.1) Discuss the role of LIC’s to revive IDBI Bank.