Early Interest Emerges For IDBI Bank As Government, LIC Look To Divest—BQ Exclusive
At least four entities have expressed early interest in purchasing controlling stake in IDBI Bank Ltd. These include Prem Watsa's Fairfax Financial Holdings, The Blackstone Group, Avenue Capital Group and InCred-KKR, two people with direct knowledge of the matter said.
In recent conversations, these bidders have expressed interest in buying the government's 45.48% stake, the first of the two people said. Apart from the government's stake, a successful bidder will also take over a portion of Life Insurance Corp. of India's 49.24% stake to become the largest shareholder in the bank.
LIC will continue to hold some stake in IDBI Bank for the time being, the two people quoted above said. The government is seeking to structure the transacton in a way that LIC becomes an investor in IDBI Bank, rather than a promoter, the two people cited earlier said.
The Department of Investment and Public Asset Management or DIPAM is currently in conversation with process advisors on structuring this transaction, as it aims to complete it by March 2022, before the initial public offering of LIC, the people said.
The conversations are in early stages and may not result in a transaction, the people indicated.
Mails sent on Monday to IDBI Bank, Fairfax, Blackstone, InCred and DIPAM remained unanswered. Avenue Capital and KKR declined to comment.
Canada-based Fairfax Financial Holdings currently holds controlling stake in CSB Bank, after a rescue process in 2018. According to the second person cited earlier, if the investor is successful in bidding for IDBI Bank, it may look at merging the two entities and creating a larger banking franchise.
Fairfax has held informal conversations with the IDBI Bank board to consider an investment. These talks are still in early stages and have not proceeded to any firm offer, the second person clarified.
InCred, founded by former investment banker Bhupinder Singh, took over KKR's India lending business in August. Currently, KKR and a clutch of investors hold 35% stake in the combined entity.
InCred is a retail and small business lender, which will see its portfolio widened to include corporate loans after the deal with KKR. While InCred doesn't have a banking licence, the Reserve Bank of India has selectively permitted mergers of banks and non-banks. If InCred is able to acquire IDBI Bank's franchise, it could transition into a pan-India lender with access to low cost financing.
IDBI Bank, which was among India's weakest banks at one time, has managed to effect a turnaround after spending nearly four years under the Reserve Bank of India's Prompt Corrective Action framework.
As of June 30, IDBI Bank reported a net profit of Rs 603 crore, up over four times year-on-year. Gross advances fell marginally over the preceding year to Rs 1.23 lakh crore, while total deposits remained flat at Rs 2.22 lakh crore.
The bank's gross non-performing asset ratio is still high at 22.71% as of the end of the first quarter, but its net NPA ratio is at a comfortable 1.67%, indicating high provisions against bad loans. Moreover, with the National Asset Reconstruction Co. becoming a reality, IDBI Bank would be able to offload its gross bad loans, making the book more valuable, the first person cited earlier said.
In her union budget speech in February, Finance Minister Nirmala Sitharaman had announced the government's strategic sale of IDBI Bank stake this year. Apart from this, the government will also look at privatising two other state-run banks. IDBI Bank, by virtue of its past as a development finance institution, comes under a separate act of parliament. As such, no amendment to the Bank Nationalisation Acts is needed for a divestment in IDBI Bank, which is already listed as a private lender.
A divestment in IDBI Bank is key ahead of LIC's IPO. Currently, the insurer's valuation suffers from being IDBI Bank's promoter, the people cited earlier said.
According to Amit Tandon, founder and managing director, Institutional Investor Advisory Services, LIC needs to clarify whether it intends to remain a promoter of IDBI Bank or not.
"LIC will need to face questions not just with respect to IDBI Bank, but also a host of other companies they have equity stake in," Tandon said. "They will need to explain to shareholders in which investments they play a developmental role and are likely to hold on, where is it a strategic investment and where are they portfolio investors."