Cabinet Committee Approves Strategic Divestment Of IDBI Bank
The Cabinet Committee on Economic Affairs has approved the strategic divestment of IDBI Bank Ltd., along with a transfer of management control. The intention to divest stake in IDBI Bank had been announced in the Union Budget in February.
“The extent of respective shareholding to be divested by Government of India and Life Insurance Corporation shall be decided at the time of structuring of transaction in consultation with RBI,” the government said in a release.
The government owns 45.48% in IDBI Bank, while LIC holds 49.24%. LIC is currently the promoter of IDBI Bank while the government is co-promoter.
“LIC’s Board has passed a resolution to the effect that LIC may reduce its shareholding in IDBI Bank Ltd. through divesting its stake along with strategic stake sale envisaged by the Government with an intent to relinquish management control and by taking into consideration price, market outlook, statutory stipulation and interest of policy holders,” the release said. It added that this is in line with insurance regulations.
IDBI Bank is set up under a separate act of parliament, which allows for easier divestment. This is in contrast to other public sector banks, where the Bank Nationalisation Act would need to be amended before the government can reduce its shareholding to below 51%.
IDBI Bank has had a checkered past.
In August 2018, the government allowed LIC to buy 51% in IDBI Bank at a time when the lender was in dire need of capital. Its bad loans had surged to 28% and the government was reluctant to put in more capital. However LIC’s promoter-ship of the lender came with its own problems. Since LIC had to dip into policyholder funds to finance the stake purchase, the insurance regulator had raised concerns about long-term ownership of the lender.
Over the last few years, the bank has been cleaning up its books while being under the Reserve Bank of India’s prompt corrective action framework for weak banks. On March 10, the RBI removed restrictions placed on the lender.
The lender reported an annual profit for the first time in five years in 2020-21. Net profit for the year stood at Rs 1,359 crore compared to a loss of Rs 12,887 crore a year ago. While the bank’s gross bad loans are still high at 22%, high provisions have helped bring down the net non performing assets ratio to 1.97%.
The bank’s capital adequacy ratio was at 15.59% as of the end of March.
“It is expected that strategic buyer will infuse funds, new technology and best management practices for optimal development of business potential and growth of IDBI Bank Ltd.,” the government release said.