IDBI Bank is set to get a one-time capital infusion of Rs 9,300 crore from its promoters — the central government and Life Insurance Corporation (LIC) — to deal with its “legacy book”.
Union minister Prakash Javadekar announced the decision taken by the Cabinet on Tuesday. Of the Rs 9,300 crore, LIC will contribute 51 per cent i.e. Rs 4,743 crore, and the remaining 49 per cent funds, amounting to Rs 4,557 crore, will come from the government as its share on a one-time basis, Javedekar said. The government's capital infusion will come in the form of recapitalisation bonds.
This is the first time the government has decided to pump money in IDBI Bank after LIC acquired a majority stake of 51 per cent in the bank — a process completed in January.
The government, which continues to be a promoter, holds around a 46.5 per cent stake in IDBI Bank, classified as a private bank following LIC’s acquisition.
The government decided to jointly infuse capital into IDBI Bank since LIC alone couldn’t have done it due to regulatory issues, an official said. The Insurance Regulatory and Development Authority of India (Irdai) had given an exemption to LIC for hiking its stake from 8 per cent to 51 per cent in the ailing bank last year.
The insurance regulator permits insurers to hold only up to 15 per cent in any listed entity.
“It (capital infusion) will help in completing the process of IDBI Bank’s turnaround and enable it to return to profitability and normal lending, and giving the government the option of recovering its investment at an opportune time,” a press statement issued by the finance ministry said. It added that the capital infusion would help the bank in “dealing with its legacy book”.
A financial ministry official said IDBI bank’s turnaround plan had envisaged the bank to clock net profit in the third quarter (October-December) of this financial year and reduce its non-performing assets (NPAs) below 6 per cent by the end of second quarter (July-September) this financial year.
IDBI Bank is under the Reserve Bank of India's (RBI’s) prompt corrective action (PCA) framework, which puts certain restrictions on the expansion of lenders due to its ailing health. “After this infusion, IDBI Bank expects to be able to subsequently raise further capital on its own and expects to come out of RBI’s PCA framework sometime next year,” the statement said.
The bank's finances have continued to show signs of deterioration even after LIC's acquisition. The bank posted its 11th consecutive quarterly loss, of Rs 3,800 crore, in the first quarter of this financial year, compared to Rs 2,409 crore in the year-ago period, mainly on account of higher provisioning towards bad loans. Once IDBI Bank comes out of the PCA framework, LIC may sell its stake to the private sector, according to sources. LIC will have to pare its stake in the lender as Irdai had put a sunset clause to the insurance company’s stake hike.
The press statement issued by the finance ministry said IDBI Bank is expected to gain Rs 500 crore in 2019-20 and Rs 1,000 crore in 2020-21 due to business synergies with LIC. The bank has collected Rs 250 crore as premium from sale of insurance in the first four-and-a-half months of this financial year. “Additional business anticipated is Rs 5,000 crore from housing, auto and personal loan by leveraging LIC agents’ network,” the statement said.