A day after the board of Life Insurance Corporation cleared a proposal to acquire 51 per cent stake in IDBI Bank, the board of the debt-ridden, loss-making bank on Tuesday decided to seek the government’s approval to bring in LIC as a “promoter” of the bank.
“The bank has received a letter from Life Insurance Corporation of India expressing their interest in acquiring 51 per cent controlling stake in IDBI Bank, as a promoter through preferential allotment of shares/open offer,” IDBI Bank said in a regulatory filing. “The bank’s board in its meeting held on July 17 has considered the letter and decided to seek Government of India’s decision in this regard.”
However, officials said the Reserve Bank of India (RBI) will have to clear the proposal as it is for the banking regulator to decide on the promoter and how much stake this “promoter” can hold in the equity capital of a bank. The RBI had earlier not responded to the LIC’s plans to foray into banking. While IDBI Bank is not considered as a nationalised bank, it is treated as a public sector bank at par with any other nationalised bank in the country. However, it has a different internal employee structure and pay scales.
In private banks, for all existing banks, the permitted promoter/promoter group shareholding is 15 per cent. In the case of financial institutions that are owned to the extent of 50 per cent or more or controlled by individuals, the shareholding would be deemed to be by a natural person and the shareholding will be capped at 10 per cent. If someone wants to increase shareholding/voting rights to 5 per cent or more, RBI permission is required. Similarly, the ‘fit and proper’ criterion for acquisition of shareholding in a private bank beyond 5 will apply.
The LIC proposal will also need approval from market regulator Sebi and the Corporation will have to make an open offer if its coming in as a promoter. However, the open offer is unlikely to cost a big amount as the public holding in the bank is less than five per cent.
Despite opposition from several quarters including the unions, insurance regulator Irdai has already given its approval to the insurer for the stake purchase using policyholders funds. Under the current IRDAI laws, insurance companies cannot invest more than 15 per cent in the equity of a company. The government will have to vet the proposal to avoid legal hassles, especially to ensure that the LIC move is executed without violating existing laws or guidelines.
LIC which held 10.82 per cent stake in IDBI Bank had sold part of the stake in the last three months. Insurers stake in the bank is 8.29 per cent.
The public sector insurer has been looking to enter the banking space for quite some time. It had acquired 26 per cent stake in Corporation Bank several years ago but it was treated only as a strategic investment and the corporation was unable to acquire the bank. LIC then sold part of the stake in Corporation Bank. It also tried to get a banking licence through its housing finance subsidiary — LIC Housing Finance — but the RBI did not approve the proposal.
For the year ended March 31 2018, IDBI Bank’s gross NPA rose to 27.95 per cent, up from 21.25 per cent as on March 31, 2017. This means out of every Rs 100 lent by the bank, Rs 27.95 is stuck as defaulted amount. In absolute terms, gross NPAs jumped to Rs 55,588.26 crore against Rs 44,752.59 crore on year-on-year basis. The bank reported net loss of Rs 8,238 crore in 2017-18, up from Rs 5,158 crore in 2016-17. Most of its bad loans are in steel, textiles and construction sectors.
In addition to the asset quality pain, the bank reported a large divergence in the assessment of NPAs — or understatement of bad loans — in FY17.
The divergence in gross NPAs stood at Rs 10,281.9 crore or 23 per cent of the gross NPAs reported by the bank at the end of March 2017. It also reported a divergence in provisions of Rs 4,464 crore for FY17. Several of its former executives have been charge-sheeted by probe agencies recently for lapses in credit sanctioning.