The Managing Director of IDBI Bank Ltd. said the lender is likely to recoup 195 billion rupees ($2.4 billion) on sour debt in its pitch to potential buyers at the company’s planned auction in India. “We are sitting on about Rs 780 billion fully provisioned for bad debts including written off loans and about 25% is likely to be recovered,” Rakesh Sharma said in an interview in Mumbai. “This hidden asset is not reflected in our current valuation and will directly increase the bottom line.”
India plans to sell at least 51% of the $5 billion bank, people familiar with the matter have said, in what is expected to be the biggest sale of the government’s stake in a lender in decades. The planned sale, part of Prime Minister Narendra Modi’s effort to raise Rs 650 billion in divestment proceeds in the year to March 31, marks a test of whether the lender’s reorganization efforts will pay off for shareholders.
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Just four years ago, IDBI had the highest bad debt ratio among banks in the country. Sharma, 64, came out of retirement in 2018 to lead a revamp. A 42-year veteran of the bank, Sharma has cut funding costs, placed greater emphasis on collecting overdue debts and tightened the credit underwriting process. The bank returned to profitability in 2020 after 13 consecutive quarters of losses.
“The underlying issue for many of the bank’s issues was the concentration risk associated with large corporate lending,” he said. “Now the mix of lending has changed in favor of retail lending, and even among businesses, our lending is mostly to those that appraisers consider to be the highest.” IDBI Bank was penalized by the central bank in 2017 with several lending restrictions after its bad debt ratio increased and capital ratios exhausted. Life Insurance Corp. of India acquired 51% of the lender in 2019 to help the government bail out the company. The RBI removed sanctions imposed on the bank last year, clearing the way for its proposed sale.
Since 2018, Rs 324 billion in equity issues to raise capital for bad debts have weighed on the bank’s valuation. That left the lender’s shares with losses of more than 20% over the past five years, compared to a 64% gain in the S&P BSE Bankex Index, the 10-member gauge for bank stocks in the country.
Now government officials and state-backed LIC, which together own about 94% of IDBI Bank’s shares, are in talks over how much of their stakes they plan to sell, people familiar with the matter said. earlier this week. They will officially look to gauge buyer interest as early as the end of September, one of the people said. While the government’s Ministry of Investment and Public Assets Management will lead the sale process, Sharma will present the company’s outlook to bidders. The bank’s digitization push, nationwide presence through 1,886 branches and tight cost controls are among the points Sharma plans to highlight to potential buyers.
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The bank is seeking to recover at least 40 billion rupees of bad debts until March 31, according to the exchange documents. It has separate verticals to focus on recovering degraded consumer and business loans. The CEO continues to monitor the recovery efforts of each of the degraded loans amounting to more than Rs 50 million, and the targeted recoveries are expected to take place within three years, he said. “You’ll find a lot of untapped profit potential in this bank, but not a single unpleasant surprise perusing the books would be my elevator pitch to bidders,” Sharma said.