Tumultuous journey of a growth financial institution


It surprised many when RBI categorized IDBI Bank as a private bank on March 14, 2019, retrospectively to January 21, 2019, and LIC together own more than 94 percent of the bank’s equity. LIC currently holds 49.24 percent of the shares in the bank and also has full management control. The state owns 45.48 percent, with the remaining 5.29 percent held by non-promoter shareholders.

There is no logic in giving IDBI Bank a private sector tag; It’s like saying that LIC is not a government company. Until now, LIC has been a wholly owned public sector company (PSU) awaiting its first initial public offering of shares early in the next calendar year.

The center needs enormous resources to meet its commitments, especially due to the Covid pandemic. The easiest path she has chosen is to divest state-owned companies. Both IDBI Bank and its majority shareholder LIC are on the list; LIC plans to sell around 10 percent of its shares initially. But for IDBI Bank, the proposed sale will be complete. The cabinet had given its approval in principle in May, along with the transfer of management control over LIC.

Some estimates suggest that the government will raise 60,000 billion yen from the total sales. Up to seven well-known companies, including JM Financial, EY and Deloitte, are in the running for the appointment of lead manager by the Department of Investment and Public Asset Management (DIPAM).

Development bank

In retrospect, the Industrial Development Bank of India (IDBI) was founded in 1964 as a development finance institution, a category popularly known as a development bank. In contrast to the more inclusive functions of commercial banks, IDBI and ICICI deal specifically with industrial finance.

Until the 1980s, neither did not see any competition from commercial banks, as these were not allowed to issue fixed-term loans. In 2005, IDBI was reversed with its commercial banking branch, IDBI Bank, after which it was categorized by RBI into a new sub-group “Other Public Sector Banks”. It became India’s second universal bank after a very similar chronology of events that founded ICICI Bank in 2002.

Operational synergies were expected from such mergers. However, this did not happen for the IDBI Bank, as it stuck to the industrial financing in the sense of the former IDBI. By 2010, only 13 percent of the bank’s total advances were in the retail segment. Most of the debtors fall into the industrial borrower category. For example, the bank’s gross non-performing assets (NPAs) rose to 55,588 billion yen in March 2018 – nearly 28 percent of its total loan book. This was the highest of all banks.

The bank’s core capital ratio was 7.42 percent as of March 2018, just above the minimum requirement of 7.37 percent. This led to a rescue of IDBI Bank by LIC under direct government intervention. The government and the LIC have consequently poured a total of 9,300 billion yen into the bank.

In the profit zone

After five long years, IDBI Bank finally reported a profit of 1,359 billion yen in the last fiscal year; it had reported a net loss of 12,887 billion yen in 2019-20. The bank has claimed it could meet all of the Immediate Corrective Action (PCA) parameters except return on investment. PCA is a framework under which banks with weak financial metrics are monitored by the RBI.

Since the insurance regulator IRDAI also believes that LIC should not hold more than 15 percent of the shares in the bank or any other company as a general principle for controlling operational risk, the latest divestment decision was only expected.

Before LIC increased its stake in three tranches via preferential allotments – in October 2018, December 2018 and January 2019 – it only held 7.98 percent in the bank. But if LIC and the government sell their shares all at once, the bank will become a real private bank overnight.

The older private banks like HDFC Bank, Axis Bank and ICICI Bank are popular with customers, as are some of the newly established banks like Kotak Mahindra Bank and Bandhan Bank, which offer higher interest rates on their savings accounts.

Therefore, IDBI Bank is unlikely to see a significant decline in its customer base due to the proposed privatization. But the bank’s staff might be concerned as they joined the bank knowing it was a PSB. If the bank is now privatized, they may lose the benefits of having a PSB, with job security being the most obvious.

The author is Professor of Commerce at Vidyasagar University, Midnapore