Life Insurance Corporation of India (LIC) has received a nodfrom the Insurance Regulatory and Development Authority of India (IRDAI) to hold up to 51 percent stake in state-run IDBI Bank. With this, they will be the largest shareholder in the bank.
But, will this help in the turnaround of IDBI Bank with a bleeding balance sheet?.
IDBI Bank’s net loss for the March quarter widened to Rs 5,662.76 crore year-on-year (YoY) on weakening asset quality and rise in provisions. During the quarter under review, IDBI Bank's provisions for non-performing assets rose by 77.9 percent to Rs 10,773.30 crore as against Rs 6,054.39 crore in the year-ago period.
While the timeline of the deal has not been announced, sources close to the development told Moneycontrol the process will be completed in six to eight months. After IRDAI approval, the deal also needs a nod from Reserve Bank of India (RBI) and IDBI Bank also an exemption from Securities and Exchanges Board of India (Sebi) for the open offer.
A senior IDBI Bank official said, "We have not received any communication so far. The process should be expedited because we need the funding for growth purpose."
He added that some amendments to the articles of association will be required. Also, according to him the government may also need to make a statement in the Parliament on their divestment and stake purchase by LIC.
Rising bad loans
During the fourth quarter of FY18, IDBI Bank's provisions for non-performing assets rose by 77.9 percent to Rs 10,773.30 crore from Rs 6,054.39 crore in the year-ago period. This led to the bank shooting up its provision coverage ratio (PCR) to 63.40 percent for FY18 from 54.96 percent in FY17.
Karthik Srinivasan, Senior Vice President at ICRA said, “IDBI has a lot of legacy issues on the infra funding that they have done. It needs to be seen how much more capital would it need, what is the turnaround strategy. Of course, it requires capital but profitability is weak, asset quality is weak which is eroding its capital and that has to be corrected before a turnaround takes place.”
Sources said LIC will have to inject at least Rs 8,000 to 10,000 crore capital into the bank with the additional stake acquisition that it is doing. While the life insurer may still not control the management, it will use a large chunk of its policyholder account capital to fund the deal. LIC holds 10.83 percent in the bank currently.
The RBI’s February 12 circular on non-performing assets also led to a rise in slippages for the bank in Q4FY18. Their total slippages into bad loans jumped by Rs 12,823 crore, of which about Rs 9,000 crore was due to RBI circular.
Similarly, the percentage of gross non-performing assets (NPA) jumped to 27.95 percent in Q4FY18 compared to 21.25 percent a year ago. Net NPA also jumped to 16.69 percent in the March quarter over 13.21 percent a year ago.
Subsidiary route?
While the detailed structure of the deal has not been presented, it is likely that the life insurance giant will take the subsidiary route for IDBI Bank.
Market expert NS Venkatesh said, “It is a strategic investment and IDBI’s growth activity can start with the capital. LIC was anyways looking for a banking licence, so this is a good option. Later on, they can take the subsidiary route or any other way to merge it.”
Venkatesh also added this has come at a cheaper price for LIC and also serves reduction of government ownership converting into a corporate structure. So, to that extent, he said it will pave the way for operational freedom and better organization structure which will ensure IDBI Bank can work at a faster pace. The capital will definitely help in growth funding.
We will see things improving from here as most bad loans are recognised, provisions have been made and whatever accretion happens further will be due to the aging provisions, which will be minimal.
Long road ahead for LIC to recover costs?
LIC’s initial efforts will be to clear the bad debts of the bank and help aid the recovery process. Though IRDAI officials said this is an investment and not an acquisition, the life insurance company will stay invested for at least 8-10 years before bringing down its shareholding to 15 percent which is the maximum permissible shareholding limit in a single company by an insurer.
A senior analyst of a large rating agency said a turnaround will take 3-4 years. “Private players did not want to enter the black hole and LIC has come to rescue it,” he added.
Though there is still no clarity on how IDBI Bank will function with LIC as its largest shareholder, sources said the LIC network could also be used for selling the products and services of the bank.
“IDBI can use LIC’s distribution to garner more deposits and LIC can use IDBI branches to cross-sell its own products. It is one of the workable solutions and if it becomes a subsidiary eventually, the policyholders will benefit as they always look for long-term returns. IDBI can give superior returns given the levels at which LIC is investing,” said Venkatesh.
Sale of IDBI’s non-core businesses to be a key focus?
IDBI Bank has been trying to sell its stake in its non-core assets like life insurance and asset management, IDBI Federal Life Insurance.
A report said the bank has kicked off the process to appoint a transaction advisor to offload 25 percent stake held by IDBI Capital Market in mutual fund subsidiary IDBI Asset Management Company (AMC).
Similarly, it was looking to sell its stake in IDBI Federal Life Insurance. Max Life Insurance and Aditya Birla Sun Life were shortlisted as the final bidders. However, they have been unable to close the deal due to a mismatch between the structure of the offer and demand from the buyers.
On June 8, Max Life Insurance announced it was dropping out of the race to acquire IDBI Federal Life Insurance. This was merely two months after the insurer received an approval to raise funds for an acquisition opportunity.
With the other lone bidder Aditya Birla Sun Life Insurance also looking to exit, sources said the stake sale could take another six to eight months to be completed once the bids are called for once again. LIC acquiring a majority stake in IDBI Bank may not necessarily have any impact on this process, though bancassurance could continue to be the bone of contention in the sale process.
While there are murmurs that LIC holding a majority stake in IDBI Federal Life’s parent entity, IRDAI sources said this will be considered as a separate entity and the LIC-IDBI Bank will have no impact on its functioning.