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

Government Looks To Sell Stake In IDBI Bank To LIC. But Who Will It Help?

The government is hoping to sell stake in IDBI Bank Ltd. to Life Insurance Corporation of India, at a time when the bank has seen a third of its loans go bad.

The finance ministry has approached the IRDAI, asking the regulator to allow LIC to increase its stake in IDBI Bank, two people familiar with the matter told BloombergQuint on the condition of anonymity. The Insurance Regulatory and Development Authority of India’s permission would be required as existing regulations do not allow LIC to hold more than 15 percent in public sector banks. The government is seeking an exemption to this rule, said the two people quoted above. They did not specify how much stake the government is looking to sell to LIC.

The matter will be taken up at the IRDAI board meeting on June 29, said one of the two people quoted above. The IRDAI has always looked at LIC’s shareholding in individual companies on a case-to-case basis and will do the same for IDBI Bank, the official added.

The government has been keen to sell stake in IDBI Bank for some time now. At the time of the Union Budget 2016-17, the government had said it would consider the option of bringing its stake down to below 50 percent in IDBI Bank. However, the plan has failed to take off because of the poor quality of the bank’s loan book.

The government currently owns 81 percent in the lender, according to shareholding data on the BSE website. LIC already owns 10 percent in the bank, the shareholding data shows. As such, a purchase of anything more than an additional 5 percent by LIC in IDBI Bank will need IRDAI’s permission.

Timing Of The Stake Sale

Traditionally, a project financier, IDBI Bank has a large corporate loan book of Rs 1.1 lakh crore. This is about 55 percent of its total loan book.

Following an asset quality review conducted by the Reserve Bank of India in 2015, IDBI Bank saw its gross non-performing assets rise from 6.9 percent at the end of the September 2015 quarter to 27.95 percent now. On June 5, India Ratings downgraded IDBI Bank citing its deteriorating operating metrics.

The bank’s total stressed loan portfolio, including non-fund based exposures and accounts overdue by more than 60 days, is 35.9 percent of its total loans, said India Ratings in its note.

The bank has reported a net loss for six consecutive quarters. In the March ended quarter, the bank’s net loss stood at Rs 5,663 crore.

As of March 2018, the bank’s core equity capital (CET-1) stood at 7.42 percent, which is above the regulatory minimum. This was because of the Rs 10,610 crore in capital infusion it got from the government in FY18. The bank is due to get a second tranche of capital via recapitalisation bonds in FY19.

However, even that may not be enough, according to India Ratings.

Considering the bank’s capitalisation level and structural weakness, it could remain under pressure on the capital front even after another equity infusion by the Government of India in line with past allocation. India Ratings believes IDBI will need to raise fresh equity from divesting its non-core assets in addition to a large infusion by the Government of India to meet its FY19 regulatory capital requirements.
India Ratings Report (June 5)

Also read: IDBI Bank Looks To Separate Its Retail, Corporate Lending Verticals

Government’s Gain Or IDBI’s Gain?

A sale of the government’s existing stake in IDBI Bank to LIC will not infuse any capital into the bank. The bank will only get capital if fresh equity were to be issued, which is then purchased by LIC.

A sale of minority government stake in IDBI Bank will not help the bank, said Dhananjay Sinha, head of research at Emkay Global. If you are looking at a scenario where LIC has majority holding then there may be some benefit but that’s a matter of speculation, Sinha said.

In the past, when LIC has come to the rescue of public sector banks, it has been through a purchase of preferential shares issued by public sector banks. A number of banks issued preferential shares to LIC in 2015 and 2016, when the government’s allocated capital was considered to be insufficient and the banks were not in a position to raise equity capital from the markets. According to a Kotak Institutional Equities report dated April 2016, LIC had invested Rs 1,850 crore in public sector banks in 2014-15 and Rs 2,539 crore in 2015-16. As a result of this, LIC’s shareholding in a number of public sector banks has increased over the past few years.

Should LIC purchase equity in IDBI Bank directly from the government, the benefit flows more to the latter. But even those gains are minimal. At the current market price of Rs 59 per share, a sale of 10 percent by the government will fetch it just about Rs 2,400 crore. The government has set a fiscal deficit target of 3.3 percent of GDP for the current year. The divestment target has been pegged at Rs 80,000 crore. Both targets are considered challenging by analysts.