Union Cabinet, chaired by Prime Minister Narendra Modi, has cleared the Life Insurance Corporation’s acquisition of 51 per cent stake in the debt-ridden IDBI Bank. The approval of the deal means LIC will raise its stake in the bank from the current 8 per cent to 51 per cent, which makes makes it a majority holder. As per the proposal, IDBI Bank will issue preferential shares to LIC to raise money.
The LIC stake buy will help the bank get capital support of Rs 10,000-13,000 crore. With the acquisition of a majority stake, LIC is expected to appoint at least four members on the bank’s board.
LIC-IDBI deal: Cabinet approves LIC’s acquisition of 51% stake in IDBI Bank
Interim Finance Minister Piyush Goyal said the deal would be a win-win for all — the government, LIC and the IDBI Bank. “The government has taken many steps to make Indian banks stronger since August 2015. The asset quality review of evergreen loans and restructuring, which led to a jump in the NPA figure, revealed that most of them were issued before 2014. Because of this, the government has infused capital in these banks. Of these NPA-hit banks, IDBI has been infused with around Rs 16,000 crore as it held 25 per cent gross NPAs when its asset quality review was done. Now the bank is standing firm. To make it stronger, it has been connected with LIC, which can spread its reach to all corners of the country,” said Piyush Goyal.
He added the deal was important as it would make IDBI Bank stronger, its capital adequacy would improve, and it could soon get out of prompt corrective action. “With the help of around 11 lakh agents across the country, LIC could get low-cost funds. In addition to this, LIC would provide a big market for IDBI for spread its business,” said Goyal.
According to the takeover plan approved by the Insurance Regulatory and Development Authority (IRDA), the state-owned insurance company would not have any management control over the state-owned bank. Also, LIC would present a comprehensive plan to reduce its stake to 15 per cent over a period of the seven years.
The government, with 86 per cent stake in IDBI, wanted to privatise IDBI by ceding control for long. However, its plan did not succeed due to the bank’s deteriorating financial condition.
The IDBI Bank has the highest gross non-performing assets (27.95 per cent) as a percentage of total loans among all public sector banks. It has accumulated losses of over Rs 17,000 crore. Out of its total outstanding loans of Rs 1.99-lakh crore, it already has recognised gross NPAs worth Rs 55,588 crore while it has already provisioned for NPAs worth Rs 26,902 crore. The public lender has reported losses of Rs 8,237.92 crore in FY 18, Rs 5,158.14 crore in FY 17, and Rs 3,664.80 crore FY16.
Besides, IDBI Bank is already under banking regulator RBI’s prompt corrective action (PCA), which restricts the bank’s ability to expand loan business; requires it to shed non-core business and focus on returning to profitability by cutting expenses.