60-year-old state-owned insurer Life Insurance Corporation (LIC) completed its takeover of IDBI Bank on Monday by acquiring controlling stake in the state-run lender, thereby making it a private sector bank.
IDBI Bank, with its eighth consecutive quarterly loss, has suffered its longest streak of quarterly losses since 2005, according to reports. With the government’s divestment of its majority stake in of LIC, the number of public sector lenders now comes down to 20.
The insurance major held a total of 44.3% stake in IDBI Bank by the end of the December quarter. With this acquisition of 51% stake, LIC becomes its majority shareholder, the debt-ridden bank formally announced in a regulatory filing on Monday.
What led up to this
Conceptualised in June 2018, the deal was cleared by the government in August, and approved by the bank’s shareholders in October. The Cabinet approved the acquisition of controlling stake by LIC as a promoter in the bank through a combination of preferential allotment and open offer of equity.
With the completion of the takeover, this makes it the latest in a long list of bank mergers over the last year.
“A unique financial conglomerate”: IDBI Bank
The deal is “envisaged as a win-win situation for both IDBI Bank and LIC with an opportunity to create enormous value for shareholders, customers & employees of both entities through mutual synergies,” IDBI Bank said in its statement.
“Strong together, they (IDBI Bank and LIC) bring the convenience of banking and insurance services under one window for all their customers,” the bank added in its BSE filing.
The acquisition will not only enable the bank to exit RBI’s corrective action framework in a time-bound but also enable the insurance behemoth to make its foray into the banking sector.
How will it benefit IDBI Bank?
IDBI is one of the eleven public-sector banks currently languishing under bad debts, threatened with prompt corrective action that prohibits it from further lending. Its capital adequacy ratio under Basel-III (fixed at 9%) has fallen to 6.22% compared to 8.18% in the last quarter.
The bank reported a net loss of Rs 3,602.49 crore, while non-performing assets hit 31.78% of the gross advances, during the September quarter of 2018-19, compared to 24.98% in the previous year. So the immediate challenge for the new promoter of IDBI Bank will to ensure that the bank has adequate capital.
In a statement, the bank said it expects its financial health to improve with the deal. It projects the retail loan portfolio to reach 50% of overall lending by year 2019-20, suggesting de-emphasis on corporate lending and focus on the retail market in the near future.
The portfolio had risen from 32% from FY14-15 to 46% in FY17-18.
The LIC-IDBI deal would also bring about an increase in investments pertaining to building data analytics capabilities that can customer of both the entities. The bank can thereby expand its product offerings, reduce distribution cost, de-risk portfolio and support retail business build, it said in the statement.
What is LIC’s endgame?
Despite the lender’s stressed balance sheet, the deal will similarly enable LIC to use IDBI as significant bancassurance channel, thereby increasing its productivity and reducing distribution costs. There is no clarity on its capital infusion plan yet, but both entities have agreed to leverage each other’s reach.
IDBI Bank currently has 1.5 crore retail customers, about 18,000 employees and over 1,800 branches, all of which will be used as touch points for selling LIC policies hereon, the filing noted. The public-sector lender will also extend its cash management facility to LIC to boost its current account balances and reduce its cost of funds.
Conversely, the bank will be given access to LIC’s network of more than 1 lakh employees and 11 lakh agents.
The deal also proposes to enable 900 of IDBI Bank branches for settlement payments via NEFT or National Electronic Funds Transfer (an instant money transfer system maintained by RBI).
Leadership to remain the same for now
Meanwhile, the board also decided to continue with the existing top management, including Rakesh Sharma as the managing director of the bank.
The board of “IDBI Bank has in its meeting held on January 21 approved continuation of office of Rakesh Sharma, K P Nair and G M Yadwadkar as directors and as MD & CEO and DMDs (deputy managing director), respectively, of the bank till such time as the board approves appointment of” new management following the due process”, it said.
Prarthana Mitra is a staff writer at Qrius