IDBI Bank out of PCA

IDBI Bank out of PCA: An Analysis

The decision of RBI to take IDBI Bank out of Prompt Corrective Action (PCA) on 10th March 2021 came as a surprise. No doubt, the central government (GoI) and LIC of India (LIC), brought in more than Rs.43,000 cr. as equity in the last four years, which helped the bank to maintain CRAR, NNPA ratios above trigger levels stipulated under PCA.  But, it is also a fact that the bank incurred substantial net losses in the last five years. Its Return on Assets (RoA), one of the triggers for bringing a Bank under PCA, was negative till March 2020. Whether RBI acted in a hurry? I attempted an analysis:

    I. PCA Framework of RBI - What is it?:

Matrix:* To bring a bank under PCA framework, the following matrix is used:

Criteria	Indicator	Risk
		Threshold (T1)	Threshold (T2)	Threshold(T3)
Capital (Breach of either CRAR or CET1 Ratio to trigger PCA)	CRAR+CCB (9%+2.5%)=11.5%	<11.5% but>=9%	<9% but >7.5%	<7.5%
	CET1+CCB (5.5+2.5=8%)	>=6.375% but <8%	>=4.875% but <6.375%	<4.875%
Asset Quality	NNPA Ratio	>=6% but <9%	<=9% but<12%	>=12%
Profitability	RoA (Return on Assets) (to be positive)	-ve RoA for 2 consecutive years	-ve RoA for 3 consecutive years	-ve RoA for 4 consecutive years
Leverage	Tier I Leverage Ratio	<=4.0 but >=3.5	<3.5

*used by IDBI Bank in its presentation

Salient Features:

a. Triggers/Threshold: Any Bank which is under threshold risk 2 (T2) in respect of CRAR or CET1 and under threshold risk 1 (T1) in respect of other parameters is normally brought under PCA by the Regulator. Internationally, CRAR, CET 1 and leverage ratios have been identified as the parameters for determining whether a bank shall be brought under PCA. But RBI adopted a stringent approach and added  asset quality and RoA also along with the above three parameters. 

b. Restrictions may be one or all of the following: dividend distribution, branch expansion, management compensation and directors' fees, credit expansion for borrowers below certain rating grades/unrated borrowers, loan concentrations, higher provisions towards NPAs at more than applicable rates, etc.

c. Supervisory/Corporate Governance Actions: 

• special supervisory interactions, 
• strategy related actions (like sustainability of business model and business lines, recovery plans, etc), 
• governance related actions (bring in new management/board, introduce claw back clauses, etc), 
• capital related actions (raise additional capital, review investments made in subsidiaries, reduction in high risk weighted assets/high risk sectors, etc), 
• credit risk  related actions (reduction of NPAs, restrictions on credit to certain borrowers/borrower segments, action plan for recovery, etc)
• market risk related actions (reducing borrowings/bulk deposits, etc)
• HR related actions
• profitability related actions and 
• operation related actions (restrictions on branch expansion, start new business lines, improve leverage ratio by reducing non-fund based business, etc.)

    II. Why IDBI Bank was under PCA?

IDBI Bank incurred net losses in 2015-16 and 2016-17 and its NNPA ratio reached 13.21% (Threshold 3) as on 31st March 2017. Its CET1 (Core equity) went down to 5.64% (Threshold 2) as on the above audit date. Since the bank breached the threshold levels under the PCA framework in respect of NNPA and CET1, it was brought under PCA by the Regulator in May 2017. 

   III. Turnaround Strategies outlined by IDBI Bank:

For the quarter ended June 2017, IDBI Bank made an Analysts Presentation to its investors, which contained "Turnaround Strategies" for bringing the bank out of PCA framework.  They were

 a. Capital Infusion (general mention made in the presentation and nothing specific)

 b. Focussed strategy for NPA resolution (general mention made and nothing specific)

 c. Cost Reduction (To reduce bulk deposits, increase CASA ratio, reduce outsourcing, rental and administrative costs)

 d. Sale of Non Core Assets (reduce/exit investments in non-core areas, sale of non-core fixed assets, etc)

 e. Improving Income (explore working capital demand loans with AAA/AA rated borrowers for increase in interest income and focus on third party products' distribution through subsidiaries and associates)

    III. Achievements in respect of PCA parameters:

• Capital Infusion: To begin with, GoI infused Rs.12471 cr. in 2017-18. LIC, which was holding a miniscule share in the capital of the bank till 2017-18, contributed Rs.21624 cr. in 2018-19 and also became the majority shareholder (51%). GoI and LIC brought in a further equity of Rs.9300 cr. in 2019-20. Rs.1435 cr. was raised by the bank during the current FY 2020-21.  Position of CRAR and CET 1 from 2015-16 to Dec 2020 were as under:                                                                              (Rs. in Cr.)

	2015-16	2016-17	2017-18	2018-19	2019-20	Dec 2020
CRAR %	34466 11.67	28779 10.70	22991 10.41	21250 11.58	21128 13.31	23495 14.77
CET 1 %	23558 7.98	15160 5.64	16392 7.42	16340 8.91	16736 10.54	19444 12.22

 

• NPA Position: 

1.  GNPA levels, which reached a peak of Rs.55588 cr. (27.95%) as on 31.03.2018 has come down to Rs.Rs.37559 cr. (23.52%)  as on 31.12.2020.

2.  NNPA came down from a high of Rs.28665 cr. (16.69%) as on 31.03.2018 to Rs.2411 cr. (1.94%) as on 31.12.2020

• PCR which was 54.96% prior to PCA has improved to 97.08% as on 31.12.2020

• Cost Reduction: The visible cost reduction was observed in respect of decline in Bulk deposits  from Rs.96542 cr. in March 2017 (36% of total deposits) to Rs.28774 cr.  in Dec 2020. (13% of total deposits). CASA ratio has improved from 32% in Mar 2017 to 49% in Dec 2020.(CASA increase is Rs.25,400 cr. in absolute terms)

• Sale of Non-Core Assets: In 2017-18, the bank divested its investments in CCIL, SIDBI, NSE, NSDL and realised Rs.3453 cr. By sale of fixed assets, it realised Rs.955 cr. It also reduced its stake in IDBI Federal Insurance by 23% (now holding 25% only) and realised Rs.507 cr.  

• Improving Income: Net Interest Income which was stagnating around Rs.5700 cr. levels till March 2019 achieved a Y-o-Y growth of 18% and reached Rs.6978 cr. in FY 2019-20. NIM improved from 1.62 to 2.61 during the same period. Other Income (Non interest Income comprising fee income and others), which declined sharply in 2018-19, showed a growth of 35% Y-o-Y and reached Rs.4470 cr. in FY 2019-20. Operating Profit at Rs.5112 cr. for the year ended March 2020 was 12% higher than the corresponding figure reported in FY 2016-17. Operating Expenses did not come down appreciably. 

• Change in Business Focus: Corporate versus Retail exposure in total credit changed from 60:40 as on 31.03.2017 to 40:60 as on 31.12.2020.  Corporate Advances outstanding, which was at Rs.127035 cr. in Mar 2017 stood at Rs.63971 cr. in Dec 2020.  Retail outstanding went up from Rs.83574 cr. in Mar 2017 to Rs.95692 cr. in Dec 2020.  

• Concentration Risk: Non Fund Based exposure, which was Rs.79611 cr. as on 31.03.2017 has declined to Rs.46474 cr. as on 31.03.2020 

• Risk weighted Assets(RWA): Total RWA, which stood at Rs.268989 cr. as on 31.03.2017 has been progressively reduced and stood at Rs.159078 cr. as on 31.12.2020.

• Profitability: The bank, which incurred net losses aggregating Rs.45,064 cr. from 2015-16 to 2019-20, has shown a net profit of Rs.847 cr. in the nine month period ended Dec 2020. (up to Q3FY20). RoA, which was consecutively negative for the last five years, is reported at 0.38 % as on 31.12.2020

• Leverage Ratio: (Total advances to CET 1) This was always complied with. The ratio is healthy at 5.71 as on December 2020 as against regulatory prescription of 3.5

    IV. Comments on the performance: 

1. CET1/CRAR: Though GOI and LIC infused Rs.43,395 cr. from FY 2017-18 to 2019-20, CET1 and CRAR remained around the same level  in FY 2017-18, 2018-19 and 2019-20 due to huge provision requirements. Incidentally the current CET1/CRAR levels are still less than the CET1/CRAR figures of Rs.23,558 cr./Rs.34,466 cr. respectively reported as on 31.03.2016. However the CET1 and CRAR ratios have improved mainly on account of reduction in risk weighted assets.

2. Gross NPA: While the reduction is not much in percentage terms during the last 33 months (from 27.95% as on 31.03.2018 to to 23.52% as on 31.12.2020), amount wise, the GNPA has come down from Rs.55,588 cr. to Rs.37559 cr. during the same period. But this appears to have been made possible, more due to write-offs (which reduce GNPA level) accounting for Rs.49307 cr. from 2015-16 to Dec 2020.

3. NNPA: from a peak level of 16.69% as on 31.03.2018 is reduced to 1.94% as on 31.12.2020, more on account of fresh capital brought in during the said period. (NNPA reduced by Rs.26,254 cr. from 31.03.2018 to 31.12.2020; however the aggregate operating profit during the same period was Rs.13,375 cr. only)

4. Profitability and RoA: The bank has reported positive in both PAT as well RoA in the last four quarters beginning March 2020. But the figures are modest and are mainly due to lesser provision requirements during the same period. The results are also to be seen along with moratorium/ restructuring relaxations by the regulator and emergency credit lines extended, as advised by GoI in the COVID lockdown period. Probably the audited financials for Fy 2020-21 and the first two quarters of FY 2021-22 will determine, whether the bank is really out of the stressed asset era of 2016-20.

5.  Change of Corp:Retail Mix: The position has reversed from 60:40 to 40:60 now.  But this is more due to reduction in exposure to corporate advances (100% reduction) than to do with the increase in retail advances (15% increase)

6.  Cost Reduction: Reducing bulk deposits from 36% to 13% and improving CASA to nearly 50% of total deposits are huge positives and the bank is able to make a lot of ground in retaining the total deposits more or less at the same level.

7.  Sale of Non Core Assets: The bank has done well in this area. It should double up its efforts to off load some of the subsidiaries, which together account for a total income of Rs.265 cr. and only IDBI Trusteeship Services has achieved an impressive profit of Rs.35 cr. in comparison to the total income reported. This will help the bank management to focus much more on core areas.          

V. My Views on RBI Decision: 

RBI should have waited till publication of the audited financial results before lifting the bank out of PCA for the following reasons:

· RoA is added by the regulator as one of the parameters under PCA, recognising that achieving  retained earnings from operations is as important as capital infusion to improve the CET1/CRAR of a bank. IDBI Bank is yet to show net profit in a full financial year.  The PAT is also modest at Rs.847 cr. for the nine month period and is not sufficient to meet even a small hike in impairment provisions.

·    Though NNPA ratio is less than 2, it should be seen in correlation with GNPA ratio, which is still ruling high at 23.52%. The huge difference between the two indicate that the recovery plan and execution thereof (part of credit related action), is still not in place. GNPA ratio would have been much higher due to fresh slippages, had not the bank written off Rs.49,307 cr. from the GNPA outstanding in the last four years. The SMA reported by the Bank as on 30.09.2020 is significant at Rs.7860 cr., of which Rs.5826 cr. pertain to corporates. 

·    As per Financial Stability Report published by RBI, the GNPA is likely to go up from 7.5% as on 30.09.2020 to 13.5% as on 30.09.2021 for the banking system as a whole, under baseline scenario. The rationale appears to be the stress anticipated in the financial system post COVID scenario. Also, the final picture on stressed assets which are restructured or otherwise will emerge only by 31.03.2021 for non-corporates and by 30.06.2021 for corporates (Last dates for implementation of restructuring). There is no reason why IDBI Bank, which is operating in the same ecosystem, should not see a spike in GNPA levels in that scenario. 

·       As seen earlier, CRAR ratio improvement is on account of capital infusion (mainly used towards increasing NPA provisions) and reduction in RWA. A good amount of reduction in RWA is due to write off of GNPA. Now the bank will be able to expand its credit freely in the absence of restrictions. From the credit portfolio, it is observed that it could not penetrate in the retail in a big way (its total growth in retail in the last four years is 15% only). It may have to look for increasing its exposure in corporate advances, some of which might be low rated/unrated.   And fresh capital have to be raised from the market to meet the increase in RWA. 

However GoI might not be interested in bringing any fresh equity, since RBI has changed the PSB status of the bank already. RBI again may not agree for any increase in the shareholding of LIC beyond 51%. So the option might be to go in for Tier I or Tier II bonds at a perpetual cost. In this regard, the Bank has proposed a draft scheme for setting off Accumulated Losses (Rs.45586 cr.) of the Bank as on April 01, 2021 against the Securities Premium Account (Rs.49669 cr.). If it is approved, the bank may go to the market for issue of AT1 bonds, as its profit and reserves can be used for coupon payments on such AT1 bonds.* But with SEBI now ruling that AT1 bonds shall be treated as having 100 years maturity, instead of treating them as short term, is already having an effect on the NAV of such bonds. So, the attraction for AT1 bonds might decline/might come at a higher cost to the issuer. So raising fresh capital will be an issue at least in the short term (say 3 years) for the bank.

·       Notwithstanding the PCA matrix, which attaches importance to asset quality and return on assets, an impression is being created that infusion of capital adequate to take care of provision requirements so as to bring down NNPA level and reduction of RWA (partly through GNPA write off as well) are sufficient grounds to remove a bank from PCA framework.

V.Viswanathan

18th March 2021.

* As per RBI directions issued in 2017, coupon payments on AT1 bonds can be paid only if the profits retained (current plus previous years) plus reserves representing appropriation of net profits including share premium but excluding share premium, revaluation reserves, etc is in excess of accumulated losses and deferred revenue expenditure. The draft scheme, if approved, permits the bank to wipe off the entire accumulated losses from the share premium account. If this is done, then the bank's reserves becomes positive even without the remaining balance in the share premium account and can be used for coupon payments for AT1 bonds, in case of any need.

Source:  IDBI Bank Analysts presentation and RBI Circular and press releases on PCA