It is clear that the government is determined to divest IDBI Bank early next year, but will it get a suitable price? As managing director of the International Monetary Fund, Kristalina Georgieva said recently, India remains ‘a bright spot’ in an otherwise dark horizon for countries around the world. So the adequately cleaned-up IDBI Bank, with its network of 1,884 domestic branches and over 3,400 ATMs, should attract investor interest, since bank licences will continue to be scarce. The Reserve Bank of India (RBI) has announced ‘on tap’ licensing for universal banks and small banks; but notice how it has found six of the 11 applications ‘not suitable’ and the remaining five are still ‘under examination’. So the big question about the IDBI Bank divestment is: At what price will it be offered and what other concessions and assurances will be demanded by potential investors, who are not industry houses?
(LIC, which obediently came to IDBI Bank’s rescue with repeated infusion of funds after RBI placed it under prompt corrective action in 2017, is a key player here, but won’t be the decision-maker. LIC invested Rs21,600 crore for its 51% holding at Rs61 per share by 2018. In 2019, it pumped in another Rs4,793 crore to help write off bad loans. This was in addition Rs21,157 crore injected since 2015, as mentioned by finance minister Nirmala Sitharaman to a news agency just after an additional Rs4,557 crore had been pumped into the Bank. After raising a further Rs1,435 crore through qualified institutional placement (QIP), IDBI Bank was finally pulled out of PCA, making it suitable for privatisation. The cost of doing this adds up to a stupendous Rs49,000 crore, without taking into account the sale of valuable legacy investments by the Bank. But more about that later.
Privatisation is essential for IDBI Bank so that it stops being a burden on LIC if its financial performance begins to slide again. Given the Bank’s history over nearly 2-decades, this is a likely scenario. Moreover, LIC, which went public in May 2020 by offering shares at Rs949, has already disappointed investors. The stock listed below the issue price and has continued to decline to Rs609 (19th October). LIC’s investment in IDBI Bank at Rs61 is also in the red and currently trading at around Rs43.45, despite the touted turnaround. A bank union has asserted that any sale below LIC’s investment price and potential dividend over the past two years (no dividend has been declared) would be unfair to policyholders who were actively wooed to subscribe to the issue. Privatisation of IDBI Bank will clearly get the albatross off LIC’s neck and boost investor sentiment for the insurance major. The question is: At what price?
Divestment Plans
LIC holds 49.24% and the government 45.48% (total 94%) and would jointly divest 60.72% stake. The public holds the balance 5.28%. Despite the predominantly public sector ownership, IDBI Bank was declared a private bank in 2019 when it became a subsidiary of LIC. In reality, the journey since its transformation from a powerful apex development finance institution (DFI) to a bank has been nothing short of disastrous.
It was in 2004 that the IDBI Act was repealed and a new company called IDBI Ltd incorporated. The original DFI was merged into it and immediately thereafter, IDBI Bank, a wholly-owned subsidiary, was merged with IDBI Ltd. The merged entity was renamed IDBI Bank in May 2008. This was the relatively easy part. Even before it could find its feet, IDBI Bank chose to acquire the loss-making United Western Bank (UWB) which had been placed under a moratorium by RBI. This added to the bad loans and led to serious integration issues, instead of providing benefits of organic growth.
Over the next decade, IDBI Bank racked up more bad loans and losses but was kept afloat through bailouts from the exchequer with no improvement in accountability. In February 2016, G Manthran, a banker wrote in Moneylife that “the rot has spread faster in IDBI Bank due to too much easy money from the government for too long without any heads rolling.”
After multiple bailouts, IDBI Bank posted a net profit of Rs1,359 crore in FY20-21 compared to a loss of Rs12,887 crore in the previous year. It has also provided for 96.9% of its bad loans, making it attractive for a new suitor. The business portfolio has also been re-jigged with a focus on growing retail loans and mortgage financing rather than corporate lending; but the real story behind the turnaround is only the massive capital infusion and the steady sale of valuable investments.
The Bank got a windfall return by selling its substantial holding in the National Stock Exchange (NSE). It also divested its investment in NSDL e-Governance Infrastructure, Ageas Federal Life Insurance Company Ltd, Asset Reconstruction Company (India) Ltd, Stock Holding Corporation of India Ltd (SHCIL), as well as real estate assets. The Bank hopes to hive off a further Rs12,000 crore of bad loans to the National Asset Reconstruction Company (NARCL) and reduce its gross bad loans to about 14%. Again, is this enough to get the right price and attract high-quality investors?
Right Decisions
The good news is that the government seems to be doing a few things right. The preliminary information memorandum has also (https://www.idbibank.in/pdf/IDBI-strategic-Sale-PIM-EOI-DIPAM-7.10.2022.pdf ) focused on the quality of investors and has sought legal declarations that they have not been convicted by a court or have adverse orders against them for serious offences. This automatically discourages those who are not ‘fit and proper’ to control public savings deposited in a bank.
In contrast to Yes Bank’s initial bailout, the finance ministry has held road-shows and engaged with large foreign investors, such as TPG Capital, Carlyle Group and Fairfax Financial Holding, controlled by the Canadian billionaire Prem Watsa. During the Yes Bank discussions, some foreign institutional investors had walked out because they weren’t getting answers to some legitimate queries and concerns – this remains an issue this time as well.
The difference is that RBI and the government appear to be more decisive and practical, having shed some pointless reservations. This is due to the successful turnaround of Yes Bank, led by Prashant Kumar from the State Bank of India, and sale of the bankrupt Lakshmi Vilas Bank to DBS India, a subsidiary of the Development Bank of Singapore (DBS).
While IDBI Bank’s chequered history and long culture of poor accountability will remain a concern, another big worry for potential investors is that the government and LIC will remain substantial shareholders, with a combined stake of 34%, and can block special resolutions. Potential bidders may demand additional support or assurances from RBI, LIC and the government to allay concerns about interference in management; but they need to be addressed effectively.
The bottom-line is that IDBI needs to be privatised. There is no option. The cost of interminable bailouts is just too high and the only beneficiaries are large corporate defaulters who are sponging away the money that is badly needed for public health and education.
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