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

Moody’s To Review IDBI Bank Rating For Possible Upgrade

Rating agency Moody’s Investors Service will review IDBI Bank’s long term ratings for a possible upgrade, following Life Insurance Corporation of India’s plan to increase its stake in the lender to over 51 percent.

In an update on Wednesday, Moody’s said the primary driver of the review is the LIC’s intention to acquire controlling stake in the bank through the preferential allotment of shares. “In order to build a 51 percent stake LIC will subscribe to new shares, which will be positive for the bank's capitalisation,” said Moody’s.

A final upgrade will depend on a few factors including:

  • The exact amount of fresh equity that LIC will inject into the bank.
  • The presence of any regulatory limitations on LIC's ability to provide further support, and on it ability to raise its stake above 51 percent.
  • LIC's relatively strong credit profile and its controlling ownership.

The rating review will also take into account the fact that the government will no longer be the controlling shareholder for IDBI Bank. As such, the assumption of government support that is built into all public sector bank ratings would not be assumed for IDBI Bank.

Another factor in the final rating call will be an assessment of the nature of LIC’s investment in IDBI Bank. Since the investment would be made through policyholder funds, it would be constrained by investment guidelines for insurance companies.

Even for this transaction, LIC had to obtain special exemption from India’s insurance regulator as insurance companies are prohibited from taking more than a 15 percent stake in any company when investing policyholder funds.
Moody’s Investors Service

Earlier this month, the IDBI Bank board said that it has received an expression of interest from LIC to pick up a controlling stake in the lender. The bank has referred the proposal to the government for approval.

Should the government approve it, the bank would also need clearance from the Reserve Bank of India to allow LIC to take on the role of a promoter of IDBI Bank.