LIC plans Rs 130-bn capital injection in IDBI Bank; Irdai may ease 15% rule

Mumbai: The Insurance Regulatory and Development Authority of India (Irdai) is likely to approve Life Insurance Corporation’s (LIC’s) proposal to pick up a substantial stake in IDBI Bank, paving way for capital infusion of about ~130 billion. The board of Irdai, which is meeting on Friday, may grant exemption to LIC from the rule that bars an insurer from holding more than 15 per cent equity stake in any company, according to a government official. The insurance regulator might put some caveats and could ask India’s largest insurer to bring down its stake in IDBI Bank over a period of five-seven years.

Sources said this would not be a challenge because Irdai had allowed such exemptions in the past. LIC has over 10 per cent stake in six public sector banks, including IDBI Bank.

LIC has readied the investment strategy for the state-run bank.  According to the plan, LIC would invest ~130 billion in IDBI Bank through a preferential allotment of fresh equity. With this, the government’s stake in IDBI Bank would fall below 51 per cent, from 80.96 per cent in March 2018.

LIC held 10.82 per cent in the beleaguered bank in March 2018. With its fresh infusion, its stake in IDBI Bank would go up to 45 per cent based on Thursday’s price of ~49.9 a share on the BSE.

“LIC would remain a strategic investor in the bank. The insurer would appoint one or two directors on the bank board. However, it will not control the bank’s management,” said an executive.The government has been attempting to bring a strategic investor in the ailing public sector lender for over three years, but has not met with any success. International Finance Corporation had done due diligence of the bank’s books, but matters did not move ahead.

Currently, IDBI Bank is under the Reserve Bank of India’s (RBI’s) prompt corrective action framework due to very high level of bad loans.

Faced with the huge provisions bill for bad loans, for the full year ended March 2018, it booked a net loss of ~82.37 billion for financial year ended March 2018, against a net loss of ~51.58 billion in 2016-17. Its gross non-performing assets (NPAs) stood at 27.95 per cent and net NPA of 16.69 per cent at the end of 2017-18. As part of a balance sheet clean-up, the bank plans to put NPAs of ~210 billion on the block. Some of these NPA accounts are from the RBI’s first list of firms taken to the National Company Law Tribunal. The bank would only part with these stressed loans if it gets expected value. The bank has been engaged in sale of non-core assets, including realty and stakes in entities such as the National Stock Exchange and Sidbi in 2017-18 to shore up capital base. The profit from the sale of non-core assets stood at ~38.7 billion in 2017-18.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.