RBI wants IDBI Bank to come out of PCA framework before stake sale

The government and Life Insurance Corporation (LIC) of India should allow IDBI Bank to come out of the prompt corrective action (PCA) framework before they go ahead with the stake sale in the lender, the Reserve Bank of India (RBI) has suggested.

The banking regulator’s view is that the government’s plan to exit IDBI Bank would send a wrong signal, portraying the lender as “weak” and the one which is in “more trouble”, said a key source aware of the development. “This is contrary to the current position,” he said. An evaluation of the PCA framework is due by the RBI, and the bank is expected to come out of it, he added. 

A query sent to RBI over this remained unanswered.

The government’s shareholding in the lender is 47.11 per cent, while LIC holds 51 per cent in it.

IDBI Bank has been under the PCA framework since 2017 because of the deterioration in its health. However, the bank met all the parameters for coming out of PCA in April-June 2020, according to the bank’s latest analyst presentation on its website. 

In July, the bank had said its endeavour would be to come out of the restrictive PCA framework as early as possible in the current fiscal. 

The July-September results of the bank showed that net NPA, one of the PCA parameters, had further reduced to 2.67 per cent from 3.55 per cent in the quarter ended June.

Finance Minister Nirmala Sitharaman, in the last Union Budget, had announced that the government would sell its balance shareholding in IDBI Bank to private, retail and institutional investors through the stock exchange.  The Department of Investment and Public Asset Management, along with the Department of Financial Services, is still debating how to carry forward the stake sale. Several options are being considered which include LIC and the government both exiting the bank completely, as a new buyer would want a majority shareholding in the lender along with management control. Another option is the government and LIC partly reducing stake, and handing over the control of the bank to a new buyer who would hold a substantial stake, if not majority stake, the official said. The third option is to reduce the government's stake through offer for sale, but that’s unlikely to get good response as the government would have make multiple offers. 

Also, the acquisition of 5 per cent shares by one entity or entities acting in concert requires approval of the RBI, he said.   In an interview to Business Standard last month, Financial Services Secretary Debasish Panda had said selling the government’s stake to small retail investors might not help in getting better value. To enable the transaction, legal changes will also have to be done which are being handled by the DFS. 

The department is consulting the RBI on the issue, as making enabling changes or repealing the legislation under which IDBI Bank was incorporated could mean the lender losing its banking licence. This will not be an issue even if the Act is repealed as the existing entity can get a licence from the RBI if need arises, the official said.