IBEF: September 04, 2019
The Union Cabinet chaired by the Prime Minister Shri Narendra Modi has approved the infusion of Rs 4,557 crore (US$ 652 million) by Government in IDBI Bank.
It will help in completing the process of IDBI Bank's turnaround and enable it to return to profitability and normal lending and giving Government the option of recovering its investment at an opportune time.
IDBI Bank needs a onetime infusion of capital to complete the exercise of dealing with its legacy book. It has already substantially cleaned up, reducing net NPA from peak of 18.8 per cent in June 2018 to 8 per cent in June 2019. The capital for this must come from its shareholders. LIC is at 51 per cent and is not allowed to go higher by the insurance regulator. Of the Rs. 9,300 crore (US$ 1.33 billion) needed, LIC would meet 51 per cent (Rs. 4,743 crore). Remaining 49 per cent, amounting to Rs. 4,557 crore (US$ 652 million), is proposed from Government as its share on one time basis.
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 Prompt Corrective Action (PCA) framework sometime next year. This cash neutral infusion will be through recap bonds i.e. Government infusing capital into the bank and the bank buying the recap bond from the Government the same day, with no impact on liquidity or current year's Budget.
Following Cabinet's approval in August 2018, LIC acquired 51 per cent stake in IDBI Bank. Government continues to be a promoter and holds 46.46 per cent stake.
The financial parameters of IDBI Bank have improved considerably during the last one year:
• CRAR has improved from 6.22 per cent as on 30.9.18 to 11.58 per cent as on 31.3.19.
• Net NPA ratio reduced from 17.3 per cent as on 30.9.18 to 10.11 per cent as on 31.3.19 and further to 8.02 per cent as on 30th June 2019
• Provision Coverage Ratio (PCR) improved from 69 per cent (30.9.18) to 83 per cent (31.3.19) and further to 88 per cent on 30th June 2019
• Synergy with LIC has enabled access to 29 crore (US$ 4.14 million) policyholders base spread over 3184 branches and also to 11 lakh agents and 2 lakh employees of LIC.
• Rs.500 crore (US$ 71.54 million) revenue for FY 2020 and Rs.1,000 crore (US$ 143.08 million) from FY21 onwards projected from LIC Synergy.
• Sale of insurance kick-started in March 2019 with Rs.160 crore (US$ 22.89 million) premium. This momentum has continued with over Rs. 250 Cr (US$ 35.77 million) premium collection in first four and a half months of this year. FY 2019-20 target is Rs.2000 crore (US$ 286.16 million) of premium and Rs. 200 crore (US$ 28.61 million) revenue.
• Additional business anticipated is Rs.5,000 crore (US$ 715.4 million) (Housing loan, Auto loan, personal loan) by leveraging LIC agents' network.
Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.