And Finally...LIC Gets A Bank

LIC completes acquisition of a 51 percent stake in IDBI Bank.

People Standing Outside IDBI Bank Branch In Mumbai (Photograph: Dhiraj Singh/Bloomberg)
People Standing Outside IDBI Bank Branch In Mumbai (Photograph: Dhiraj Singh/Bloomberg)

Life Insurance Corporation of India Ltd. finally owns a bank. Despite much debate over the government’s decision to cede control of IDBI Bank Ltd. to the national insurer, the transaction is now close to completion.

IDBI Bank, in a statement issued on Monday, said LIC completed the acquisition of a 51 percent controlling stake in the lender. As such, the bank’s board approved the reclassification of LIC as promoters of IDBI Bank.

The transaction creates a ‘unique financial conglomerate in India’.
IDBI Bank Statement

Also, the bank’s board approved an extension of the tenure of Rakesh Sharma as chief executive officer, it said in a separate notification. KP Nair and GM Yadwadkar will also continue at the bank for now.

Capital: The Immediate Challenge

The immediate challenge for LIC—the new promoter of IDBI Bank—will be to ensure that the bank has adequate capital.

After reporting its eighth quarterly loss in the July-September period, the bank had seen its capital levels fall below the minimum regulatory requirement. It’s capital adequacy ratio under Basel-III has fallen to 6.22 percent compared to 8.18 percent in the last quarter. Its common equity tier-I ratio has fallen to 3.87 percent.

As per the Basel rules adopted by India, the minimum capital level is set at 9 percent and the minimum CET-1 level is set at 5.5 percent.

The bank is yet to report its earnings for the three months ended December.

The urgent need for capital comes against the backdrop of a pile-up of bad loans. The gross non-performing assets ratio rose to 31.78 percent in the three months to September compared to 30.78 percent in the first quarter of the year. Post provisioning, the net NPA ratio was at 17.30 percent at the end of the second quarter compared to 18.76 percent in the June quarter.

With bad loan ratios elevated, the bank remains under the Reserve Bank of India’s prompt corrective action framework, which places operational restrictions on weak lenders. It hopes to exit this framework in a time-bound manner, the lender said in a press release.

Significant revenue synergies are estimated from the partnership. IDBI Bank and LIC have started working to ensure full realisation of their synergies over the next 12 months. An improved financial health will pave the way for the bank to exit from the prompt corrective action framework in a time-bound manner and be a future-ready, top-ranked bank.   
IDBI Bank Statement
Only 22% Shareholders Exit IDBI Bank In LIC Open Offer

The Merger Benefits

While not offering any clarity on LIC’s capital infusion plan, the bank said the two entities would look to leverage each other’s reach.

LIC will use IDBI Bank as a significant bancassurance channel. “Over 800 branches of IDBI Bank can be used as touch points for selling LIC policies,” said the lender. The bank will extend its cash management facility to LIC, which will help to boost its current account balances and reduce its cost of funds, the lender said.

IDBI Bank, an erstwhile development finance institution, will also continue to de-emphasise corporate lending and focus on the retail market.

“The retail loan portfolio for IDBI Bank increased from 32 percent of overall lending in FY15 to 46 percent in FY18, and is expected to reach 50 percent by FY20,” said the bank.