People stand outside a branch of IDBI Bank Ltd. in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

LIC Deal Will Not Impact IDBI Bank’s Credit Rating, Says ICRA

The credit rating of IDBI Bank is unlikely to get impacted even if the Life Insurance Corporation of India were to pick up a majority stake in the lender, said rating agency ICRA in a note on Tuesday.

On June 29, the Insurance Regulatory Development Authority allowed LIC to raise its stake in IDBI Bank to 51 percent, relaxing its guidelines which restrict the insurer from holding more than 15 percent of an individual company’s equity. The IDBI Bank board is yet to take up a formal proposal for such an investment by LIC.

However, the rating profile of IDBI Bank will not change even if the transaction were to conclude, said ICRA. The prospect of a change in the rating profile arises since credit ratings of public sector banks build in considerable capital support from the sovereign. The implicit capital support would no longer aid the bank's ratings should the government seize to be its promoter.

Also Read: LIC-IDBI Bank: A Stop-Gap Solution

ICRA, however, notes that LIC is equally capable of providing capital support. “...acquisition of stake by Life Insurance Corporation of India, with equally strong ability to infuse capital, is unlikely to drive the credit profile in near term till there is an improvement in the standalone profile of the bank,” said Anil Gupta, head of financial sector ratings at ICRA in a release.

ICRA also expects LIC’s investment in IDBI Bank to be transitory and sees the insurer reduce its stake back to below 15 percent. This because the investment would be made out of the policyholder’s account.

The acquisition of the stake in IDBI is likely to be done under the policyholder’s accounts of LIC and hence even a 51 percent stake in the bank will not make IDBI Bank a subsidiary of LIC. Further, being an investment in the policyholder’s account, the stake will be transient in nature and LIC will have to reduce its stake in the bank going forward and bring it down to the regulatory requirement of 15 percent.
Anil Gupta, Head - Financial Sector Ratings, ICRA

Also Read: The Fractured Legacy Of IDBI Bank

BloombergQuint
Stay Updated With Business News News On BloombergQuint