From PCA to Prem Watsa: IDBI Bank's long road to privatisation

What do IDBI Bank Ltd and Air India have in common? For both, privatisation turned into a five-year plan. Of course, the erstwhile Planning Commission is not involved in their cases!

 

Following Cabinet approval in June 2017, the government invited expressions of interest (EoIs) for Air India in March 2018, offering a 76 per cent stake, but it drew no bids. A revised plan offering 100 per cent was launched in January 2020; the Tata Group won the bid in October 2021 and took over the airline in January 2022.

 

For IDBI Bank, the February 2021 Budget announced the government's plan for strategic disinvestment; an in-principle Cabinet approval followed in May 2021. EoIs were invited in October 2022.

 

In March 2023, the then Department of Investment and Public Asset Management Secretary Tuhin Kanta Pandey (now chairman of the capital market regulator) tweeted: "Reports appearing in a section of the media indicating the possibility of deferment of IDBI Bank disinvestment are misleading… The transaction continues to be on track as per the defined process in the post-EoI stage following receipts of multiple EoIs."

 

In March 2026, the government called off the first round after financial bids from Fairfax Financial Holdings Ltd and Emirates NBD fell short of the reserve price. Revised bids came in by July 2026.

 

On October 14, the Cabinet Committee on Economic Affairs approved Canada's Fairfax as the strategic buyer. Fairfax will buy the 60.72 per cent stake (30.48 per cent from the government and 30.24 per cent from Life Insurance Corporation of India, or LIC) for ₹52,878 crore. This will be the largest foreign direct investment in the history of India's financial sector. The deal is expected to close by March 2027, once all approvals are in place.

 

Fairfax plans to bring IDBI Bank, Go Digit Insurance, and IIFL Capital Services Ltd under one umbrella, creating a large integrated financial group on Indian turf. Fairfax is the controlling promoter of Go Digit General Insurance Ltd. Its stake in IIFL Capital is 30.2 per cent, and it is in the process of raising it to 51 per cent.

 

It also holds 40 per cent in CSB Bank Ltd. We don't know where CSB Bank fits into Fairfax's scheme of things. It may merge it with IDBI Bank or sell its stake to another investor. It has a two-year window to resolve the overlap.

 

Indeed, the IDBI Bank privatisation took a long time, but it is yet another signal of how the approach of the government and the banking regulator to the financial sector is changing.

 

Once upon a time, the Reserve Bank of India (RBI) was looking for a suitor for United Western Bank Ltd. Standard Chartered Bank was among 17 contenders, but an acquisition by a foreign bank was a big no-no in the RBI's playbook in those days. In 2006, the Satara-based old private bank was merged with IDBI Bank.

 

Before that, HSBC had acquired a 20 per cent stake in UTI Bank Ltd (now Axis Bank Ltd) in December 2003. Under the RBI's ownership norms, it had to pare its stake to below 5 per cent in 2006, and it eventually exited in 2012, nearly a decade after the acquisition.

 

Things started changing in the middle of the last decade. In December 2016, the RBI allowed Fairfax to take a majority stake in Catholic Syrian Bank Ltd, the first time a foreign investor had been permitted to control an Indian bank. Fairfax recapitalised it, renamed it CSB Bank, and listed it on the bourses in 2019.

 

Japan's Sumitomo Mitsui Banking Corporation (SMBC) holds 24.99 per cent in Yes Bank Ltd. Dubai-based Emirates NBD completed the acquisition of a 60 per cent controlling stake in RBL Bank Ltd in June 2026.

 

Among other large single investors, Warburg Pincus has close to 10 per cent of IDFC First Bank Ltd, and Blackstone will have 9.99 per cent of Federal Bank Ltd once its warrants are converted.

 

The RBI has progressively raised the voting-rights ceiling for a single shareholder in a private bank from 10 per cent to 26 per cent, and case-by-case exemptions on ownership are made, depending on the circumstances. CSB Bank was the first experiment with such an exemption, and a successful one.

 

The reasons behind the exemptions differ: Stress at a bank, a strategic goal of building a larger entity, or the government wanting to encash value. In the case of IDBI Bank, the government will get about ₹26,543 crore for its 30.48 per cent. It can make more later, as it will still hold 15 per cent in the bank.

 

Banks in a growing economy need patient, long-term foreign capital with good governance to meet credit demand. The direction is right.

 

Overall foreign direct investment (FDI) in private banks is permitted up to 74 per cent – 49 per cent through the automatic route, and investment between 49 and 74 per cent needing government approval. For public sector banks, the FDI ceiling is 20 per cent and government ownership cannot fall below 51 per cent.

 

It has been a different Diwali for both IDBI Bank and its MD and CEO Rakesh Sharma. He took charge in October 2018, a few weeks before that year's Diwali; eight years on, the strategic sale has come just ahead of another Diwali. Sharma, whose current tenure runs till March 2028, will remain at the helm.

 

It has not been an easy task.

 

The RBI placed IDBI Bank under the Prompt Corrective Action (PCA) framework in May 2017 because of its high net non-performing assets (NPAs) and negative return on assets. PCA restricted the bank's lending, branch expansion, and hiring.

 

Nearly one-third of the bank's loan portfolio had turned bad. By September 2018, its gross NPAs were 31.78 per cent, the highest bad-loan ratio ever recorded by an Indian commercial bank. In that quarter, net NPAs were 17.3 per cent, a tad lower than 18.76 per cent in June.

 

IDBI Bank also holds the record for losses – for 13 successive quarters, between December 2016 and December 2019. During this period, it accumulated net losses of about ₹41,800 crore, driven by massive provisioning for its ballooning NPAs.

 

Following capital infusions from the government and ₹21,624 crore from LIC, which took a 51 per cent controlling stake in January 2019, the RBI reclassified it as a private sector bank. The bank broke its losing streak in the March 2020 quarter with a net profit of ₹135 crore, and a year later, in March 2021, the PCA restrictions were lifted. After a gap of eight years, it paid a dividend (10 per cent) for FY2023.

 

Since returning to profit in March 2020, IDBI Bank has not looked back. In the September 2026 quarter, its gross NPAs were 2.12 per cent and net NPAs 0.17 per cent. It made a net profit of ₹2,205 crore in the quarter and ₹4,320 crore in the first half of the current fiscal. Its net interest margin was 4.11 per cent in September, 0.50 percentage point higher than in June.

 

One contributing factor has been cutting down high-cost bulk deposits. 

 

Meanwhile, the once-corporate lender is now a retail bank, with retail loans accounting for nearly 70 per cent of its ₹2.72 trillion loan book. Finally, its capital adequacy ratio is 27.1 per cent, which means it can grow substantially without raising fresh capital. What else does a bank need?   

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The writer is an author and senior advisor to Jana Small Finance Bank Ltd. His latest book: Roller Coaster: An Affair with Banking. To read his previous columns, log on to www.bankerstrust.in. X: @TamalBandyo