IDBI Bank: Government Works On Plan A And Plan B Ahead Of Divestment — BQ Exclusive

While the preferred option would be to sell stake to a single investor, ideally a bank, the government may be open to allowing a consortium of investors and even merging IDBI's good loan book with a larger lender while carving out its bad loans.

The government has initiated discussions with a few domestic and international investors, according to two people in the know who spoke on the condition of anonymity. These conversations involve the possibility of an outright purchase of the government's 45.48% stake in the bank and a part of LIC's 49.24% stake.

Last month, BloombergQuint reported that investors, including Blackrock, KKR-InCred, Avenue Capital Group and Prem Watsa's Fairfax Financial Holdings Ltd., had expressed early interest in buying the controlling stake in IDBI Bank.

According to the two people, the government has set an internal deadline of around mid-November for these discussions, following which a formal process will be initiated. A formal sale process will be announced by December, where investors will be asked to submit expressions of interest, the people said.

IDBI Bank has been asked to set up a data room for any information that potential investors may seek, the first of the two people said.

Queries emailed to the Finance Ministry, IDBI Bank and the RBI on Tuesday didn't elicit a response.

The stake sale in IDBI Bank is crucial for the government ahead of LIC's initial public offering. Without converting LIC into a investor in the bank, rather than a promoter, the IPO is unlikely to generate much institutional investor interest, the second person cited earlier said.

With time being of the essence, other options are also being discussed, the two people cited earlier said. These include:

• Invite bids from a consortium of investors.

• Merge the liabilities, network and sustainable portion of IDBI Bank's loan book with a large lender in India and sell unsustainable loans to National Asset Reconstruction Co.

To be sure, no decision has been taken on these options.

The reason multiple options are being put on the table is because each path of divestment may throw up its own challenges.

With a balance sheet of Rs 2.9 lakh crore and a market capitalisation of over Rs 59,000 crore, a strategic investor in IDBI Bank has to come with considerable financial heft.

In discussions with the Department of Investment and Public Asset Management, the RBI has expressed some reservation on a single foreign investor taking a large chunk of stake in the bank, according to the second person cited earlier. The RBI may prefer a domestic investor or a consortium of investors, this person said.

To be sure, the foreign direct investment limit for private banks is 74%. But the RBI approves all investors having more than 5% stake in a lender. It also conducts a fit-and-proper assessment of all large investors.

In the case of stressed lenders, the RBI makes exceptions. For instance, Fairfax took majority control in Catholic Syrian Bank, now known as CSB Bank, in 2018. The RBI also allowed the local subsidiary of Singapore's DBS Bank Ltd. to take over Lakshmi Vilas Bank Ltd. last year.

In the second scenario, where a consortium is allowed to bid, the question will be whether corporate investors will be permitted, the second person added. At present, the RBI does not allow corporates to own banks. However, an internal working group in November 2020 had argued for allowing such applications. The banking regulator is yet to accept this recommendation.

The option to merge IDBI's good book with another bank while selling its bad loans to the NARCL has its own set of problems.

According to the first person cited earlier, the NARCL was created with a five-year horizon and a Rs 2 lakh-crore bad loan portfolio under its control. Also, the government has already announced its intention to issue government guarantees worth Rs 30,600 crore toward the NARCL and it may not be willing to increase that guarantee amount for a specific bank's book.

As of June 30, IDBI Bank had a gross bad loan pool of Rs 35,594 crore and net bad loans worth Rs 2,053 crore. It had deposits of Rs 2.2 lakh crore and advances of Rs 1.2 lakh crore.