Industrial development bank of India

Vision

"To be trusted partner in progress by leveraging quality human capital and setting global standards of excellence to build the most valued financial conglomerate"

Mission

"We will leverage our people, technology, speed and financial capital to: be the banker of first choice for our customers by delivering high quality, world-class products and services. Expand the frontiers of our business globally. Play a proactive role in the full realization of India's potential. Maintain a healthy financial profile and diversify our earnings across businesses and geographies. Maintain high standards of governance and ethics. Contribute positively to the various countries and markets in which we operate. Create value for our stakeholders".

INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI)

IDBI is the apex institution in the area of long term industrial finance. It was established under the IDBI Act 1964 as a wholly owned subsidiary of RBI and started functioning on July 01, 1964. Under Public Financial Institutions Laws (Amendment) Act 1976, it was delinked from RBI. IDBI is engaged in direct financing of the industrial activities as well as in re-finance and re-discounting of bills against finance made available by commercial banks under their various schemes.

The objectives of this institution are to create a principal institution for long term finance, to coordinate the institutions working in this field for planned development of industrial sector, to provide technical and administrative support to the industries and to conduct research and development activities for the benefit of industrial sector.

It raises funds by way of market borrowing by way of bonds and deposits, borrowing from Govt. and RBI, borrowing abroad in foreign currency and lines of credit.

Its functions include:

Direct loans (rupee as well as foreign currency) to industrial undertakings as defined in the Act to finance their new projects, expansion, modernization etc. soft loans for various purposes including modernization and under equipment finance scheme underwriting and direct subscription to shares/debentures of the industrial companies. sanction of foreign currency loans for import of equipment or capital goods. -short term working capital loans to the corporate for meeting their working capital requirements. -refinance to banks and other institutions against loans granted by them.

Of late, with the reforms in the financial sector, IDBI has taken steps to re-shape its role from a development finance institution to a commercial institution. It has floated its own bank IDBI Bank as also a Mutual Fund.

During the financial year 1999-2000 IDBI's total sanctions were Rs.28308 cr (19.2% increase), the total assets were Rs.72169 cr, net worth at Rs.9025 cr, capital adequacy ratio of 14.5%, DER 6.8:1 and PBT Rs.1027 cr (1301 cr previous years). To meet emerging challenges, it has been introducing new products, setting up Mergers &AcquisitionsDivn, increasing fee based business such as corporate advisory services, credit syndication, debenture-trustee ship etc., setting up of IT sector subsidiary-IDBI Intech Ltd, venture capital fund, joint ventures and transfer of not less than 51% of IDBI's share capital in SIDBI to PSBs as a result of SIDBI (Amendment) Act 2000 effective from 27.03.2000.

Industrial Development Bank of India (IDBI) is the tength largest bank in the world in terms of development. The National Stock Exchange (NSE), The National Securities Depository Services Ltd. (NSDL), Stock Holding Corporation of India (SHCIL) are some of the institutions which has been built by IDBI. IDBI is a strategic investor in a plethora of institutions which have revolutionized the Indian Financial Markets. IDBI Bank, promoted by IDBI Group started in November 1995 with a branch at Indore with an equity capital base of Rs. 1000 million.

Industrial development bank of India played a catalytic role in industrialization of the country for about four decades as one of the all India development banks and also as the apex banking institutions in the field of long term industrial finance. it under the functions as a principal financial institution for coordinating the functions and activities of all India term lending institutions and to some extent the public sector banks.

As the development financial institutions model became unviable. the bank was transformed into a banking company with effect from October 1,2004.it now undertakes complete range of banking activities but development finance remains its core function.

IDBI AS APEX BANK

IDBI was established in 1964 as a wholly owned subsidiary of the reserve bank of India. in February 1976, it was delinked from reserve bank and the entire share capital was transferred to central govt. in march 1994,the idbi act was amended to empower the bank to issue its equity capital to person other than central govt providing the govt. holding was not to fall below 51%. consequently the bank make its first public issue of equity in July 1995,which was the largest equity offering in Indian stocks market till then .the majority of its shares are still held by the Central govt. Though the percentage holding of govt has declined to 58.48 percent at the end of March 2005.

Main functions of IDBI

IDBI is vested with the responsibility of co-coordinating the working of institutions engaged in financing, promoting and developing industries. It has evolved an appropriate mechanism for this purpose. IDBI also undertakes/supports wide-ranging promotional activities including entrepreneurship development programmers for new entrepreneurs, provision of consultancy services for small and medium enterprises, up gradation of technology and programmes for economic upliftment of the underprivileged.

IDBI's role as a catalyst

IDBI's role as a catalyst to industrial development encompasses a wide spectrum of activities. IDBI can finance all types of industrial concerns covered under the provisions of the IDBI Act. With over three decades of service to the Indian industry, IDBI has grown substantially in terms of size of operations and portfolio.

Developmental Activities of IDBI

Promotional activities

In fulfillment of its developmental role, the Bank continues to perform a wide range of promotional activities relating to developmental programmers for new entrepreneurs, consultancy services for small and medium enterprises and programmers designed for accredited voluntary agencies for the economic upliftment of the underprivileged. These include entrepreneurship development, self-employment and wage employment in the industrial sectorfor the weaker sections of society through voluntary agencies, support to Science and Technology Entrepreneurs' Parks, Energy Conservation, Common Quality Testing Centers for small industries.

Technical Consultancy Organizations

With a view to making available at a reasonable cost, consultancy and advisory services to entrepreneurs, particularly to new and small entrepreneurs, IDBI, in collaboration with other All-India Financial Institutions, has set up a network of Technical Consultancy Organizations

(TCOs) covering the entire country. TCOs offer diversified services to small and medium enterprises in the selection, formulation and appraisal of projects, their implementation and review.

Entrepreneurship Development Institute

Realizing that entrepreneurship development is the key to industrial development; IDBI played a prime role in setting up of the Entrepreneurship Development Institute of India for fostering entrepreneurship in the country. It has also established similar institutes in Bihar, Orissa, Madhya Pradesh and Uttar Pradesh. IDBI also extends financial support to various organizations in conducting studies or surveys of relevance to industrial development

FUNCTIONS

Besides providing assistance to industries directly, IDBI also provided assistance to industries through other financial institutions and banks. Thus the assistance provided by IDBI fell in two broad categories viz.,(a) direct finance to large and medium enterprises, and (b)indirect finance through other financial institutions.

FUNCTIONS OF IDBI

DIRECT FINANCE

  1. Project finance
  2. Underwriting and subscription to shares and debentures
  3. Guarantees for deferred payments and loans
  4. Bill discounting
  5. Equipment finance scheme

INDIRECT FINANCE

  1. Refinance of term loans
  2. Rediscounting
  3. Support to shares and bonds of other institutions

PROJECT FINANCE;

IDBI provides project finance for new projects and for expansion, diversification and modernization of existing projects. Project finance is provided by way of;

  1. Term loans in Indian rupees and foreign currencies.
  2. Underwriting
  3. Direct subscription to equity capital and
  4. Deferred payments guarantees.

The term loans are secured by a first charge on the movable and immovable fixed assets of industrial concerns. These loans are repayable in quarterly installments depending upon the projected cash flows of the borrower. IDBI insists upon the projected cash flows of the borrower. IDBI insists upon the minimum promoters contribution of 25% of the project cost and debt equity ratio of 1.5;1. It charges up front fee @ 1.05% of the loan amount and underwriting commissions @2.5% of the amount underwritten

EQUIPMENT FINANCE

Equipment finance is also provided in rupees vend foreign currencies for acquiring specific machinery equipment. The eligible borrowing concern must be financially sound companies and should have been in operation for least 5 years. It should have earned profits during the last 3 years and must have dividend paying capacity of not less than 2 years. The net worth of company must be above rs 5 crore.

Assistance is provided to the extent of 70 % of the cost of equipment plus taxes /duties, transportation and installation charges,\amount of loan ranges between RS 3 crore and RS 25 crore.

Other conditions Are: promoters contribution must between 30%, debt, equity.

ASSET CREDIT

Under this form of assistance, line of credit is granted which is valid for one year .only rupee loans are granted for acquiring new machinery equipment up to 85% of the cost of equipment including taxes, duties, transportation and installation charges, other terms are similar to those of equipment finance.

Corporate loans

These loans are provided in rupees vand foreign currencies to financially sound companies with net worth of not less than rs 10 crore and having been in commercial operations for 5 years and making profit consistently for last 3 years. Such loans are guaranteed to finance capital expenditure and long term working capital . Assistance is provided from minimum of rs 5 corrupt 70% of the cost of the capital goods or raw materials, components etc.to be purchased.

Promoter's contribution must be 30% of the cost of capital goods, raw materials, components to be purchased, loan should be repaid within 5 years. Upfront fee of 1.05% of the loan amount is charged at the time of issue no letter of intent.

WORKING CAPITAL LOANS;

Such loans are provided to meet the loan component of the working capital finance required by the companies already assisted by IDBI with a net worth of not less than rs 15 crore. Assistance is provided up to 80% of the working capital gap with minimum of rs 2 crore. These loans are repayable over a period of 12 to 18 months, with roll over facility at the discretion of idbi.

Other terms are debt equity ratio not more than 3; 1, current ratio not less than 1; 25; 1, interest coverage not less than 2; 1

DIRECT DISCOUNTING OF BILLS

IDBI directly discounts the bills of exchange drawn by financially sound companies which have been in operation for At least 3 years and have not defaulted to financial institutions, in connection with sale of machinery equipment. IDBI fixes annual limit of discounting of bills which are repayable over period of 2 to 7 years. Assistance is provided up to certain percent of the total value (including insurance, taxes, and freight). IDBI requires security in the form of bank guarantee or co-acceptance by a bank.

RATES OF INTEREST ON LOAN

Financial institutions are now free to determine their own lending rates. At present IDBI prescribes 3 prime lending rates. Long term prime prime lending rate, loans exceeding 5 years.

Medium lending rate....period exceeding 3 to 5 years

Short term lending ......for period less than 3 years

RATE OF INTEREST IN THE PAST

VARIABLE INTEREST RATE SYSTEM

From December 1993, they have introduced variable interest rate structure for lending. It is alternative to existing fixed interest rate system, and is optional to the borrowers.

Under the variable interest rate system, a rate is charged on the basis of percentage points over the banks long term prime lending long term prime rate, which is determined with reference to the anchor rate derived from the weighted average cut off yield obtained from auction of 365 days treasy bills conducted by reserve bank of India at fortnightly intervals. It is revied half yearly intervals. A make factor is added to the anchor rate towards term spread ,administrative costs , tax and dividends and payments and credit risk on prime lending.

FLOATING PRIME LENDING RATE INTRODUCED

IDBI have introduced a new floating rate from January 2000. While retaining its fixed lending rate at 13.5^%. The new floating rate was fixed at 150 basis points over the average yield on the five year govt. Papers for previous six months. Taking advantage of the easy liquidity conditions in the international markets and depreciating foreign currencies, IDBI Bank dramatically increased its external commercial borrowing between FY04 and FY07 (as the green line in the Borrowing Mix of IDBI graph shows). While this strategy has served it well in the past, the recent turmoil in the international credit markets have caused its borrowing costs (over LIBOR) to widen. The global currencies- American dollar and euro have also appreciated with respect to the Indian Rupee, increasing their borrowing costs. An inability to improve the funding mix in favour of low cost deposits hampers the bank's ability to improve its net interest margins in line with the competition. Prolonged dependence on wholesale deposits will cause the net interest margins for the bank to be volatile and could result in some loss of market share, especially in the retail lending portfolio. In the domestic market, RBI had tightened domestic liquidity conditions in 2008 and first half of 2008 through cash reserve ratio increases, repo rate hikes and other mechanisms. Interest rates have been eased in the last quarter of 2008 and this should further boost the bank's net interest margin

INDIRECT FINANCE

REFINANCE OF TERM LOANS

Besides the all development banks, other institutions like state finance corporations , state industrial development corporation and commercial banks also provide term loans to industrial units. The salient features are

Refinance to banks in the state of Orissa, Bihar, Jammu and Kashmir, and north east states only

Line of credit to all state financial corporations, state industrial development corporations

REDISCOUNTING OF BILLS

IDBI introduced bill rediscounting schemes in the year 1965, the main objectives are;

By providing deferred payments facilities to the manufactures to enable them to push up the sales of their products by offering their prospective purchaser.

To help extension of modernization of the existing industrial units, there by contributing to the industrial progress of the country.

RESOURCES OF IDBI

The Industrial Development Bank of India Limited commonly known by its acronym "IDBI is one of India's leading public sector banks and 4th largest Bank in overall ratings". RBI categorized IDBI as "other public sector bank". It was established in 1964 by an Act of Parliament to provide credit and other facilities for the development of the fledgling Indian industry. It is currently the tenth largest development bank in the world in terms of reach with 975 ATMs, 568 branches and 352 centers. Some of the institutions built by IDBI are The National Stock Exchange of India (NSE), The National Securities Depository Services Ltd. (NSDL) and the Stock Holding Corporation of India (SHCIL) IDBI BANK, as a private bank after government policy for new generation private banks.

SHARE CAPITAL

The share capital of 1DBI, contributed by central govt. amounted to rs 753 crore as on 1991. The capital adequacy rate is about 14.5%, the bank has raised up to 1500 crore as their share capital. Consistently the adequacy rate is also showing increase.

BONDS AND DEBENTURES

These constitute the biggest source of funds for IDBI. As on March it was about 57,619 crore, the major part was issued in rupees while us dominated dollar as foreign currencies notes accounted 2043 crore, bonds issued in rupees fall under following categories;

  • Bonds guaranteed by govt. of India
  • Tier I bonds
  • Term money bonds
  • Capital gains bonds and fixed deposits
  • Credit rating

BONDS GUARANTEED BY GOVT OF INDIA

IDBI raised a substitantial portion of its resources through bonds issued in the capital market. These are govt. guaranteed bonds which carry low risk and meets statutory requirements

TIER 1 BOND

IDBI issued to govt.in the lieu of borrowing from rbi and govt. of india. They are ranked junior to all borrowings, deposits, and sub ordinate debts and was issued in 2002.

TERM MONEY BONDS

Short term funds for 3 to 6 months have been raised by IDBI through term money bonds. The rate of interest on these bonds is market related. These banks attract funds from commercial banks, cooperative banks, and discount and finance house of India.

CAPITAL GAINS BONDS AND FIXED DEPOSITS

They are also used for raising money in the both whole sale and retail market for mobilizing resources. the suppliers of funds are banks, trust, and other fixed deposits.

CREDIT RATING

IDBI'S rupee bonds are rated as a++ by crisil, icra, and fitch, indicating high safety with regard to timely payments of interest and principal.

BORROWINGS

They are eligible to borrow funds from

  • Reserve bank of India
  • Govt. of India
  • Other sources

FOREIGN CURRENCY BORROWINGS

They also raise funds in foreign currencies through borrowings to meet need of borrowers;

  • Bonds and debentures issued in foreign currencies.
  • Borrowings in foreign currencies

ASSET SECURITISATION

It is the process of pooling and repackaging the cash flows of illiquid

Financial assets into marketable securities , which can be sold to the investors.

FEE BASED SERVICES RENDERED BY IDBI

MERCHANT BANKING

It takes into consideration various banking activities;

  • Issue management
  • Corporate advisory services
  • Credit syndication
  • Valuation and corporate structuring

DEBENTURE/MORTGAGE TRUSTEESHIP

They used to accept these assignments in respect of bonds and debentures issued by companies. They also act as mortgage trustee agent to foreign lenders as part of corporate trustee services. it was set up IDBI trusteeship services ltd.

FOREX SERVICES

IDBI opens letters of credit and effects foreign currency remittances on behalf of its borrowers for import of capital goods and services.

The bank also disburses foreign currencies loans towards domestic projects related rupee expenditure.

SUBSIDIES OF IDBI

IBN's fast growing insurance subsidiaries continue to burn cash and negatively affect its bottom line. These losses are due to the special treatment of policy writing and one-time acquisition costs by Indian GAAP. In the life insurance business, most companies amortize one-time customer acquisition commission and policy writing costs over the term of the policy, however, Indian GAAP doesn't allow amortization of these costs and so, as the insurance business grows it negatively affects IBN's bottom line. In the long run, these policies do generate significant earnings and this is just a short term issue.

IBN's stock has taken a beating due to the US banking crisis and some short term issues we discussed above; in the long run, IBN has a proven business model, a good franchise with a strong management team and high growth prospects.

IDBI BANK LTD.

Financial Results (as on March, 2006)

  • Sales: US $ 5.79 billion (US $ 3.18 billion in March,2008-09)
  • Profits: US $0.569 billion (US $ 0.360 billion in March,2008-09)
  • Assets: US $ 56.3 billion (US $ 30.06 billion in March,2008-09)

IDBI CAPITAL MARKET SERVICES LTD.

Industrial Development Bank of India (IDBI)

The Industrial Development Bank of India (IDBI) was established on July 1, 1964 under an Act of Parliament as a wholly owned subsidiary of the Reserve Bank of India. In 16 February 1976, the ownership of IDBI was transferred to the Government of India and it was made the principal financial institution for Coordinating the activities of institutions engaged in financing, promoting and developing industry in the country. Although Government shareholding in the Bank came down below 100% following IDBI's public issue in July 1995, the former continues to be the major shareholder (current shareholding: 52.3%). During the four decades of its existence, IDBI has been instrumental not only in establishing a well-developed, diversified and efficient industrial and institutional structure but also adding a qualitative dimension to the process of industrial development in the country. IDBI has played a pioneering role in fulfilling its mission of promoting industrial growth through financing of medium and long-term projects, in consonance with national plans and priorities. Over the years, IDBI has enlarged its basket of products and services, covering almost the entire spectrum of industrial activities, including manufacturing and services. IDBI provides financial assistance, both in rupee and foreign currencies, for green-field projects as also for expansion, modernization and diversification purposes. In the wake of financial sector reforms unveiled by the government since 1992, IDBI evolved an array of fund and fee-based services with a view to providing an integrated solution to meet the entire demand of financial and corporate advisory requirements of its clients. IDBI also provides indirect financial assistance by way of refinancing of loans extended by State-level financial institutions and banks and by way of rediscounting of bills of exchange arising out of sale of indigenous machinery on deferred payment terms.

IDBI has played a pioneering role, particularly in the pre-reform era (1964-91),in catalyzing broad based industrial development in the country in keeping with its Government-ordained 'Development banking' charter. In pursuance of this mandate, IDBI's activities transcended the confines of pure long-term lending to industry and encompassed, among others, balanced industrial growth through development of backward areas, modernization of specific industries, employment generation, entrepreneurship development along with support services for creating a deep and vibrant domestic capital market, including development of apposite institutional framework.

Narasimam committee recommends that IDBI should give up its direct financing functions and concentrate only in promotional and refinancing role. But this recommendation was rejected by the government. Latter RBI constituted a committee under the chairmanship of S.H.Khan to examine the concept of development financing in the changed global challenges. This committee is the first to recommend the concept of universal banking. The committee wanted to the development financial institution to diversify its activity. It recommended to Harmonies the role of development financing and banking activities by getting away from the conventional distinction between commercial banking and developmental banking.

In September 2003, IDBI diversified its business domain further by acquiring the entireshareholding of Tata Finance Limited in Tata Home finance Ltd., signaling IDBI's foray into the retail finance sector. The fully-owned housing finance subsidiary has since been renamed 'IDBI Home finance Limited'. In view of the signal changes in the operating environment, following initiation of reforms since the early nineties, Government of India has decided to transform IDBI into a commercial bank without eschewing its secular development finance obligations.

The migration to the new business model of commercial banking, with its gateway to low-cost current, savings bank deposits, would help overcome most of the limitations of the current business model of development finance while simultaneously enabling it to diversify its client/ asset base. Towards this end, the IDB (Transfer of Undertaking and Repeal) Act2003 was passed by Parliament in December 2003. The Act provides for repeal of IDBI Act, corporatization of IDBI (with majority Government holding; current share: 58.47%) and transformation into a commercial bank. The provisions of the Act have come into force from July 2, 2004 in terms of a Government Notification to this effect. The Notification facilitated formation, incorporation and registration of Industrial Development Bank of India Ltd. as a company under the Companies Act, 1956 and a deemed Banking Company under the Banking Regulation Act 1949 and helped in obtaining requisite regulatory and statutory clearances, including those from RBI. IDBI would commence banking business in accordance with the provisions of the new Act in addition to the business being transacted under IDBI Act, 1964 from October 1, 2004, the 'Appointed Date' notified by the Central Government. IDBI has firmed up the infrastructure, technology platform and reorientation of its human capital to achieve a smooth transition.

IDBI Bank, with which the parent IDBI was merged, was a vibrant new generation Bank. The Pvt Bank was the fastest growing banking company in India. The bank was pioneer in adapting to policy of first mover in tier 2 cities. The Bank also had the least NPA and the highest productivity per employee in the banking industry. On July 29, 2004, the Board of Directors of IDBI and IDBI Bank accorded in principle approval to the merger of IDBI Bank with the Industrial Development Bank of India Ltd. to be formed incorporated under the Companies Act, 1956 pursuant to the IDB (Transfer of Undertaking and Repeal) Act, 2003 (53 of 2003), Subject to the approval of shareholders and other regulatory and statutory approvals. A mutually gainful proposition with positive implications for all stakeholders and clients, the merger process is expected to be completed during the current financial year ending March 31, 2005.

The immediate fall out of the merger of IDBI and IBDI bank was the exit of employees of IDBI bank. The cultures in the two organizations have taken its toll. The IDBI BANK now is in a growing fold. With its retail banking arm expanding further after the merger of united western Bank.

IDBI would continue to provide the extant products and services as part of its development finance role even after its conversion into a banking company. In addition, the new entity would also provide an array of wholesale and retail banking products, designed to suit the specific needs cash flow requirements of corporate and individuals. In particular, IDBI would leverage the strong corporate relationships built up over the years to offer customized and total financial solutions for all corporate business needs, single-window appraisal for term loans and working capital finance, strategic advisory and "hand-holding" support at the implementation phase of projects, among others.

IDBI's transformation into a commercial bank would provide a gateway to low-cost deposits like Current and Savings Bank Deposits. This would have a positive impact on the Bank's overall cost of funds and facilitate lending at more competitive rates to its clients. The new entity would offer various retail products, leveraging upon its existing relationship with retail investors under its existing Suvidha Flexi-bond schemes. In the emerging scenario, the new IDBI hopes to realize its mission of positioning itself as a one stop super-shop and most preferred brand for providing total financial and banking solutions to corporate and individuals, capitalizing on its intimate knowledge of the Indian industry and client requirements and large retail base on the liability side.

TRANSFORMATION OF IDBI INTO UNIVERSAL BANK

Recent developments

To meet emerging challenges and to keep up with reforms in financial sector, IDBI has taken steps to reshape its role from a development finance institution to a commercial institution. With the Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003, IDBI attained the status of a limited company viz. "Industrial Development Bank of India Limited" (IDBIL). Subsequently, the Central Government notified October 1, 2004 as the 'Appointed Date' and RBI issued the requisite notification on September 30, 2004 incorporating IDBI Ltd. as a 'scheduled bank' under the RBI Act, 1934. Consequently, IDBI, the erstwhile Development Financial Institution of the country, formally entered the portals of banking business as IDBIL from October 1, 2004, over and above the business currently being transacted.

The Private banking arm, IDBI bank was merged into IDBI. The IDBI BANK was one of the fastest growing companies in India. The Banking arm was technologically driven, customer focused entity. IDBI got the platform of its private banking arm to reform itself into a competitive entity.

In March 2008, IDBI Bank entered into a joint venture with Federal Bank and Fortis Insurance International to form IDBI Fortis Life Insurance, of which IDBI Bank owns 48 percent. The company ended the year with over 300 Cr in premiums as on 31st March 2009.

Acquisition of United Western Bank

In 2006, IDBI Bank acquired United Western Bank in a rescue. AnnasahebChirmule, who worked for the cause of Swadeshi movement, founded SataraSwadeshi Commercial Bank in 1907, and some three decades later founded United Western Bank. The bank was incorporated in 1936, and commenced operations the next year, with its head office in Satara, in Maharashtra State. It became a Scheduled Bank in 1951. In 1956 it merged with Union Bank of Kolhapur, and in 1961 with SataraSwadeshi Commercial Bank. At the time of the merger with IDBI, United Western had some 230 branches spread over 47 districts in 9 states, controlled by five Zonal Offices at Mumbai, Pune, Kolhapur, Jalgaon and Nagpur.

Highlights 2008-09

  • Business crossed Rs.1.55 lakh Crore
  • Balance sheet also crosses Rs.1.30 lakh Cr
  • Deposits at Rs.72,998 Cr; growth 68%
  • CASA at 16.56% of total deposits
  • Advances at Rs.82213 Cr; growth 31%
  • Business per Employee Rs.18.09 Cr
  • Profit per Employee Rs.8.86 lakh

Highlights

  • NII - Q4 FY08 at Rs.236 Cr (PY Rs.213 Cr)
  • NII - FY 08 at Rs.656 C
  • Q4 FY 08 PAT Rs.245 Cr (Q4 FY07 Rs.213 Cr)
  • PAT - FY 08 at Rs. 729 Cr (PY Rs.630 Cr
  • PAT for FY 08 by 15.7%

Balance sheet highlights for 2008-09

  • Balance sheet growth at 25.86%
  • Total business Dep. + Adv.] grew by46.67% to Rs.1,55,211Cr
  • Total business [including deposits in the nature of bonds] grew by 32.88% to Rs 1,82,165Cr
  • CRAR - 11.95% (PY 13.73%)
  • Tier I : 7.42% <> Tier II : 4.53%
  • Branches increased from 432 to 499
  • ATMs increased from 520 to 779

Key Stock IndicatorsAs on March 31, 2008-09

  • Market price per share (Rs) 89.1
  • Market Capitalization(Rs.crore) 6,458
  • Earnings per share (Rs 10.06 Book value per share(Rs)93.37
  • Price to Book Ratio 0.95
  • P : E Ratio 8.86

NPAs

As at 31-Mar-2008 (Rs.Crore)

  • Gross Advances 83608
  • Gross NPAs 1565
  • Gross NPAs as % of Gross Advances1.87%
  • Total Provisions held 482
  • Net Advances 83126
  • Net NPAs 1083
  • Net NPAs as % of Net Advances 1.30%
  • Provision Coverage (%) 30.79%

Key Trends and Forces

A key lever for IDBI's growth [life cycle]

IDBI Bank is a the preferred partner for a large number of Indian companies that need to raise debt from foreign credit markets in the form of external commercial borrowing (ECB). The aggregate external commercial borrowing by Indian companies increased by a CAGR of 59.1% between 2004-07. IDBI Bank is the preferred lead arranger for a large number of these transactions and this revenue stream should continue to boost IDBI's fee income.

IDBI Bank is currently the best-placed Indian bank to cater to Indian companies' increasing appetite for international mergers and acquisitions. During fiscal 2008, IDBI was involved in 75% of outbound mergers and acquisitions deals from India. It is now a preferred partner for Indian companies for syndication of external commercial borrowings and other fund raising in international markets and has been ranked number one in offshore loan syndications of Indian corporates in calendar year 2007.

New branches leads to increase in low-cost deposits

The RBI approved 587 new deposit-taking branches for IDBI Bank in 2008. In 2007, it had approved 450 branches for IDBI. Bank branch expansion in India is regulated by RBI and banks cannot expand their branch network without RBI's approval. As low-cost deposits are directly tied to the size of the branch network, the number of branches a bank has, is a key success factor for any bank in India. While public sector banks (state owned banks) enjoy a pre-eminent position in terms of low-cost deposit base (also called CASA deposits in India - stands for Current Accounts and Savings Account), private-sector banks have been increasing their CASA base steadily over the years. IDBI Bank has expanded its CASA market share by 218% over the period of 2003-2007. The bank's CASA deposits have grown at a CAGR of 61% over the same period, compared with a growth of 17.1% for public-sector banks, 32.5% for private sector banks and 29% for foreign banks in India

Economic analysis

Detailed analysis of IDBI Bank (IBN) by Ketul S. Recommended Buy Price - $29.35, Target Price - $51. "In the long run, IBN has a proven business model, a good franchise with a strong management team and high growth prospects."

Sector Analysis:

IDBI Bank (IBN) is India's largest private sector bank - it belongs to the International Banking group. Oflately, fortunes of international banks have been tied to the US financial sector; IBN's correlation to Financials SPDR - XLF in the past six months is 0.86. In simple terms, IBN traded in-line with the US financial sector for the past six months and dropped by 50%; underperforming India's BSE Sensex which fell by 15% during the same period.

There are many reasons for IBN's decline but a major influence has been the issues facing the US banking sector. So, the obvious question that investor's have regarding banking stocks is: "what if the story of US banks' asset write downs and earnings losses is repeated in emerging markets such as India?" However, there are a few subtle differences between Indian banks and their US counterparts that make Indian banks less likely to follow the same path.

First, Indian banks have very low exposure to structured finance investments in the US market. IBN's Q2 2008 report didn't have any materially significant losses from structured investments in US and the management doesn't expect that to change anytime in the future. Secondly, home loans that banks originate in the Indian market are of better quality than US mortgages. At this point, it is important to understand the difference between a US home loan versus a Indian home loan.

A US home loan is typically pooled as an MBS and sold to investors leaving the risk of default with the MBS investors, (a group of financial institutions) while the originating bank only services it. The loan doesn't appear on the lender banks' balance sheet nor is it liable in case of default; hence it has little to no incentive in checking the ability of the borrower to repay the loan. To make matters worse, the originator bank is paid for originating the loan which means that the banks are incentivized to originate as many loans as possible without checking the credit quality of the borrower.

This is not true in case of Indian home loans; they are originated, serviced and carried on the lender's balance sheet as well as accounted for in NPA estimation. It is this subtle variation that makes all the difference in the quality of home loans issued by Indian banks. Here, the originator (Indian bank) is liable for default and thus has an incentive to check the ability of the borrower to repay the loan.

Commercial & Retail Banking (IDBI) Bank:

IDBI forms the largest chunk of revenues and is the most important part of the business. It recorded a 35% growth in savings deposits in the June quarter on a y-o-y basis. India has a savings-to-GDP ratio of about 35% while China is at 50%. However, 69% of India's savings are from the household segment while the bulk of Chinese and Korean (about 80%) savings are from the corporate and government segment. Obviously, a higher savings ratio in the household segment bodes well for IDBI Bank. India maintains a high savings rate inspite of high inflation since social security is almost non-existent which means the high savings rate should persist in the near future. IBN has a network of 1,388 branches while India's largest nationalized bank, State Bank of India, has a network of 13,000+ branches. Private sector banks such as IDBI have grown rapidly at the expense of nationalized banks since the latter were not quick enough to adapt to changing customer needs; we don't see a reversal in this trend in the anytime soon.

IDBI Securities:

IDBI is the largest retail stock brokerage franchise in India and it also offers online trading. Stock market turnover has grown at a CAGR of 60% per annum in the last five years and stock trading at IDBI securities (in terms of daily turnover) has grown at a CAGR of 114% in the last four years.

India has one the lowest penetrations of Insurance amongst the Bric nations with premiums at 0.6% of the GDP; Brazil (1.6%), Russia (2.3%), China (1%) have higher insurance premium-to-GDP ratios and so the growth potential in the Indian market certainly exists.

Overall, IDBI is well positioned to grow in an underserved market and has an excellent track record of above average performance in every business segment.

Valuation:

A DCF valuation of IBN yields a price of $51/ADR; at a current stock price of 29.35 it has an upside potential of 73%. DCF valuation is extremely sensitive to sustainable beta values and the reason I have used a sustainable beta of 1.65 is because it's a large private sector bank and its volatility will fall in-line with the market as it continues to grow. Moreover, using a beta of 1.65 we get a sustainable cost of equity of 14% which is an appropriate discount rate for a large cap bank in a country with high inflation rates. The model uses a long term revenue growth rate of 4% and a conservative sustainable net profit margin of 19%; IBN's TTM net profit margin is at 24%.

A scenario analysis with short term revenue growth and variable sustainable net margin shows that IBN's current stock price reflects low short term revenue growth at 10% or a low sustainable net profit margin of 11%. A low sustainable net profit margin was a possibility if IBN had recorded massive structured finance losses; however, given the low probability of such losses, IBN is undervalued by 73%.

Crisis in the US Banking sector is certainly the largest influence on IBN's stock decline but there are a couple of other issues that have contributed to IBN's recent fall:

Inflation Control:

The Indian government faces a general election in the first half of 2009 and historically inflation is a major issue during the elections; the government will use all the levers available to control inflation before the opposition can topple the government on this issue in 2009. In an attempt to control inflation, the reserve bank is reducing liquidity in the system and has increased CRR 7 times in the last 14 months. CRR (cash reserve ratio) is the percentage of bank deposits that a bank must have on hand as cash. Overall, a reduction in liquidity will negatively affect GDP growth. However, the government might soon run out of options on the liquidity front and we might be at the tail end of CRR increases.

Subsidiaries:

IBN's fast growing insurance subsidiaries continue to burn cash and negatively affect its bottom line. These losses are due to the special treatment of policy writing and one-time acquisition costs by Indian GAAP. In the life insurance business, most companies amortize one-time customer acquisition commission and policy writing costs over the term of the policy, however, Indian GAAP doesn't allow amortization of these costs and so, as the insurance business grows it negatively affects IBN's bottom line. In the long run, these policies do generate significant earnings and this is just a short term issue.

IBN's stock has taken a beating due to the US banking crisis and some short term issues we discussed above; in the long run, IBN has a proven business model, a good franchise with a strong management team and high growth prospects.

Interest rate fluctuations increase IDBI Bank debt payments

Taking advantage of the easy liquidity conditions in the international markets and depreciating foreign currencies, IDBI Bank dramatically increased its external commercial borrowing between FY04 and FY07 (as the green line in the Borrowing Mix of IDBI graph shows). While this strategy has served it well in the past, the recent turmoil in the international credit markets have caused its borrowing costs (over LIBOR) to widen. The global currencies- American dollar and euro have also appreciated with respect to the Indian Rupee, increasing their borrowing costs.An inability to improve the funding mix in favour of low cost deposits hampers the bank's ability to improve its net interest margins in line with the competition. Prolonged dependence on wholesale deposits will cause the net interest margins for the bank to be volatile and could result in some loss of market share, especially in the retail lending portfolio.

In the domestic market, RBI had tightened domestic liquidity conditions in 2007 and first half of 2008 through cash reserve ratio increases, repo rate hikes and other mechanisms. Interest rates have been eased in the last quarter of 2008 and this should further boost the bank's net interest margins

COMPANY ANALYSIS;

The following table sets forth, for the periods indicated, the key ratios

FISCAL2007 2008

RETURN ON EQUITY (%) 13.4 11.1

Return on average assets (%) 1.1 1.1

Earning per share (Rs) 34.8 39.4

BOOK VALUE (RS) 269.8 417.5

FEE TO INCOME (%) 40.5 41.6

COST TO INCOME (%) 40.2 40.4

BETA 4.5 4.7

ANALYSIS AND INTERPRETATION

After calculating roe of two years it is found that in 2008 comprasion to 2007 it shows decrease which is not good for company. return on equity should be high because that is favourable .the return on assets shows that growth rate is constant any variability may have bad effect ,but the good thing is that eps shows increase which is very good for company because it effects companys growth and earnings .the book value is increasing with great range compared to previous year which is also favorable and shows paid up capital and reserves or real worth of their assets , low book value may also be unfavourable.the beta is showing increase which is not very high because it shows variability and volatility of return.after seeing these ratios it is found that company is having good image and in coming years may achieve good hights and can increase the value of profitability ratios so that companys real worth and revenue can show increase upto great extent. IDBI is a banking marketing company, with share of the Indian banking sector market. IDBI has recently diversified its company; it also has controlling interest in another diversified company, Investment thesis I rate Sell/Medium Risk (3M) with a target price of Rs385. I expect the stock's valuations to move in line with the sentiment toward the sector, key to which are share expectations progress on deregulation, and government decisions on banking rates pricing reforms. However, following the run up in the stock, valuations now fully reflect the benefit and are also building in a sustained recovery going forward, in our view. Although we expect strong margins to continue in the medium term, given the robust outlook for banking and insurance around the region, the key issues on pricing freedom remain unresolved. icici remains a hostage to government policies on marketing margins and subsidies,Continued government interference in the sector is likely to keep investor sentiment and sector valuations in check.

Financial Condition

The following table sets forth, for the periods indicated, the summarised balance sheet.

Rs. in billion, except percentage

ASSETS 2007 2008 %CHG

Cash balance and SlR investments 1,044.89 1,130.72 8.2

Cash and balance with RBI & banks 371.21 380.41 2.5

SLR investments 673.68 750.31 11.4

Advances 1958.66 2256.16 15.2

Debentures,bonds& other investments 238.90 364.23 52.5

Fixed assets 39.23 41.09 4.7

Other assets 164.90 205.75 24.8

TOTAL ASSETS 3446.58 3997.55 16.0

LIABILITIES 2007 2008 %CHG

Equity capital & reserves 243.13 464.71 91.1

Equity capital 8.99 11.13 23.8

Reserves 234.14 453.58 93.7

Preferences capital 3.50 3.50 -

Deposits 2305.10 2444.31 6.0

Saving deposits 288.38 390.89 35.5

Current deposits 213.76 246.91 15.5

Term deposits 1802.96 1806.5 0.2

Borrowings 706.61 863.99 22.3

Subordinated debt 194.05 207.50 6.9

Other liabilities 188.24 221.44 17.6

TOTAL LIABILITIES 3446.58 3997.55 16.0

ANALYSIS AND INTERPRETATION

  1. Government securities qualifying for Statutory Liquidity Ratio (SLR). Banks in India are required to maintain a specified percentage, currently 25.0%, of their net demand and time liabilities by way of liquid assets like cash, gold or approved unencumbered securities.
  2. Included in 'other liabilities' in schedule 5 of the balance sheet.
  3. All amounts have been rounded off to the nearest Rs. 10.0 million.

Our total assets increased by 16.0% to Rs. 3,997.95 billion at year-end fiscal 2008 from Rs. 3,446.58 billion at year-end fiscal 2007. Total assets of overseas branches (including overseas banking unit in Mumbai) increased by 50.8% to Rs. 614.74 billion at year-end fiscal 2008 from Rs. 407.50 billion at year-end fiscal 2007. Net advances increased by 15.2% to Rs. 2,256.16 billion at year-end fiscal 2008 from Rs. 1,958.66 billion at year-end fiscal2007 primarily due to increase in advances of overseas branches. Net advances of overseas branches increased by 95.6% to Rs. 477.46 billion at year-end fiscal 2008 from Rs. 244.10 billion at year-end fiscal 2007. Aggregate advances of the Bank and its overseas banking subsidiaries and IDBI Home Finance Company increased by 19% to Rs. 2,513.77 billion at year-end fiscal 2008 from Rs. 2,113.91 billion at year-end fiscal 2007. Total investments at year-end fiscal 2008 increased by 22.1% to Rs. 1,114.54 billion compared to Rs. 912.58 billion at year-end fiscal 2007 primarily due to the 11.4% increase in investment in SLR investments to Rs. 750.31 billion at year-end fiscal 2008 from Rs. 673.68 billion at year-end fiscal 2007 in line with the increase in our net demand and time liabilities.

Other investments (including debentures and bonds) increased by 52.5% to Rs. 364.23 billion at year-end fiscal 2008 compared to Rs. 238.90 billion at year-end fiscal 2007, reflecting an increase in our investments in insurance and international subsidiaries and investment of surplus liquidity in mutual funds.

Our equity share capital and reserves at year-end fiscal 2008 increased to Rs. 464.71 billion as compared to Rs. 243.13 billion at year-end fiscal 2007 primarily due to the follow-on public offering and ADS offering aggregating Rs 199.67 billion during the year. Total deposits increased by 6.0% to Rs. 2,444.31 billion at year-end fiscal 2008 from Rs. 2,305.10 billion at year-end fiscal 2007. Our savings account deposits increased to Rs. 390.89 billion at year-end fiscal 2008 from Rs. 288.38 billion at year-end fiscal 2007, while current account deposits increased to Rs. 246.91 billion at year-end fiscal 2008 from Rs. 213.76 billion at year-end fiscal 2007. Term deposits increased to Rs. 1,806.51 billion at year-end fiscal 2008 from Rs. 1,802.96 billion at year-end fiscal 2007. Total deposits at yearend fiscal 2008 constituted 73.9% of our funding (i.e. deposit, borrowings and subordinated debts). Borrowings (including subordinated debt) increased to Rs. 863.99 billion at year-end fiscal 2008 from Rs. 706.61 billion at year-end fiscal 2007 primarily due to increase in borrowings of overseas branches.

Risk Analysis

I assign a Medium Risk rating to the stock because the volatility in global prices will likely continue to affect earnings given the linkage to marketing margins. Sentiment towards the sector and IDBI is closely linked to price fluctuations, sector deregulation, subsidy losses, and auto share price hikes. Removal of the subsidy-sharing mechanism with upstream companies and/or reduction in the bank rates from the government could significantly impact IDBI's earnings. Upside risks to our target price include: a further decline in SLR and CRR prices and stronger-than-expected recovery in the company's marketing profitability leading to higher-than-estimated returns; if the government took concrete pricing action on retail products to bring them in line with international prices, it would put our earnings forecasts at risk; and on the macro front, if the government were to adopt the Downstream Regulatory Bill, appoint an independent regulator, and give pricing freedom to the oil- marketing companies, it would likely give a fillip to the stock price.

CONCLUSION

  • The Bank's life insurance joint venture with Fortis and Federal Bank commenced operations in March 2008
  • IDBI bagged two special IT awards for "Best payment initiative" and "Outstanding achiever of the year" from Indian Bank'sAssociation (IBA) for the year 2007, in recognition of its customer-centric IT initiatives
  • The Bank plans to make its maiden foray overseas during 2008 by opening branches in Singapore, Dubai and Shanghai in a phased manner
  • In March 2008, IDBI opened its first City SME Center (CSC) inMumbai to give a fillip to Small and Medium Enterprises (SMEs lending. CSC has been established to streamline credit appraisalprocess to ensure faster turnaround time. More such CSCs would be set up in due course.
  • The Bank has set up an Entrepreneurial Development Fund (EDF)with a corpus of Rs.10 crore for financing the entrepreneurs inthe Small and Medium sector

BIBLIOGRAPHY:

  1. www.bpcl.com/financials
  2. Indian financial system by mittal
  3. www.moneycontrol.com
  4. www.myiris.com
  5. Investment and portfolio analysis; 3rd edition, Prasana Chandra
  6. Bloomberg, Religare Institutional Equity Research
  7. IDBI and its role by swarti and ranjan

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