Six Years On, IDBI Bank Remains The Government's Problem Child

Having detailed plans to divest stake in IDBI Bank Ltd., the government has met with advisers and potential investors over the past few months.

But the feedback on the prospects of a successful divestment of IDBI Bank is not encouraging, said two people who were part of a stock-taking meeting held over the weekend. They spoke on the condition of anonymity.

Road shows conducted last month, ahead of a plan to invite bids in May, did not throw up many potential bidders, the first of the two people quoted above said.

Bidders who logged in to a call hosted by the government were largely uninterested in pursuing an opportunity, this person said. A few equity funds based in the United States had approached the government with early interest, but this fizzled out too, the second person quoted above said.

A similar approach may have to be followed for planned privatisation of two other government-owned lenders as interest there may be limited too, the people quoted above said.

Emails sent to the Ministry of Finance, the RBI and the IBA on Tuesday were not answered.

With an outright sale unlikely, the debate over other possibilities to deal with IDBI Bank restarted.

One such option is to de-bulk the bank's balance sheet by transferring all the bad loans to the National Asset Reconstruction Company Ltd., said the second person quoted above.

NARCL is India's version of a bad bank, which intends to resolve bad loans it buys within a period of five years. The government has also provided guarantees worth Rs 30,600 crore to this entity.

Once IDBI Bank's bad loans are sold to NARCL, the government may consider splitting the lender's good balance sheet and selling it to multiple investors. IDBI Bank could then be potentially wound down, the second person quoted above said.

This is easier said than done and winding down IDBI's liabilities would be complicated in such a scenario.

This alternative plan is only a thought, the second person clarified.

Of course, LIC and the government could continue owning IDBI Bank, but the insurance regulator has given the insurer permission to hold its majority stake for 12 years from the point of its acquisition in January 2019, according to the first person quoted above. Insurance firms are only allowed to hold up to 15% stake in a listed entity.

To be sure, IDBI Bank has seen considerable improvement since LIC was brought in to rescue the lender.

As of March 31, IDBI Bank had a gross non-performing asset book worth Rs 34,115 crore, which constituted 19.14% of the total loan book. Most of these loans are fully provided for as the bank's net NPA book stands at Rs 1,856 crore or 1.27%. The bank's capital adequacy ratio stood at 19.06% at the end of FY22.

Despite this improvement in the financials, IDBI Bank's stock has fallen. It currently trades at Rs 35.65 apiece, compared to LIC's average purchase price of Rs 61.

The dilemma over what to do with IDBI Bank is now an old one for the government.

It has been six years since the government first expressed its intent to conduct a strategic stake sale in IDBI Bank.

"The process of transformation of IDBI Bank has already started. Government will take it forward and also consider the option of reducing its stake to below 50%," former Union Finance Minister Arun Jaitley had said during the budget speech delivered in February 2016.

The decision was taken as IDBI Bank, which was one of the weakest banks under the government's control at the time, constantly needed capital to stay afloat at a time when the government's own finances were stretched.

In the years that followed, the government did manage to bring down its stake to below 50%, but only by selling to LIC, which now holds 49.24% in IDBI Bank. While technically IDBI Bank has now been reclassified as a private bank, the LIC stake is considered as a quasi-government holding.

In 2017, the RBI placed IDBI Bank under the prompt corrective action framework to help it conserve capital better and allow it time to fix the balance sheet.

While these measures may have been undertaken with good intent, analysts believe that it did not change IDBI Bank’s public sector character.

The franchise remains of value but there are also qualitative parameters that investors look at, such as culture. Cultural differences at public sector banks can also be a potential dissuading factor that contributes to the lack of investor interest, says Saswata Guha of Fitch Ratings India.

"Public sector banks have seen their books relatively improve over the last few years, no doubt. But you need to look at how banks have been achieving that," Guha said. "While there has been slowdown in fresh bad loans, a large portion of the improvement in the bad loan numbers is also stemming from write-offs, and not recoveries–at least not material."

This does not necessarily indicate better underwriting standards and seems more like a strategy to make room for future stress, once the loans put under forbearance during Covid-19 start to unwind, he said.