Successful end to sovereign-led IDBI bailout?
The government will sell its entire 45.48% stake in IDBI Bank to a strategic investor next fiscal. If it happens, it’ll be the most successful closure to a sovereign-led disaster-management bailout ever. Three years, Rs 30,000 crore and the might of insurance behemoth LIC is all that it took for IDBI to turnaround. With better asset quality, credit mix and capital adequacy, it’s payback time for the bank, which exited the RBI’s Prompt Corrective Action framework earlier this week. Word has it that the government is open to roping in foreign players (FDI in private banks is permitted up to 74%) and will soon amend clauses in the Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003 to proceed with protocol.
But incoming investors may want management control, which now rests with LIC thanks to its 51% stakeholding. It means for the government to exit IDBI, it’ll be lucrative only if LIC joins forces. It’s important to note that special relaxations were extended to LIC including IRDAI regulations that restrict more than 15% stakeholding in individual entities besides norms barring insurers from owning non-insurance companies. Likewise, RBI too relaxed rules preventing non-banking firms holding over 10% stake in a bank. While joint stake sale could possibly fetch a better sum, it’s paramount that LIC ensures a decent return on investment in the interest of policyholders. IDBI’s current market price is way lower than the price LIC paid, investing Rs 21,624 crore for 51% stake bought between October 2018 and January 2019 at an average Rs 60 per share. In contrast, shares now hover around Rs 40.
That said, IDBI is in better shape and the current capital base of 14.77% is adequate to support growth next fiscal. The net NPA ratio is within an acceptable range at 1.9% in Q3 as against 5.25% last year and even though the provisioning coverage ratio is among the highest in the industry at 97%, improving loan growth (including corporate credit) without compromising asset quality remains a challenge.