IDBI Bank, which is currently fighting debt, has been categorized by the RBI (Reserve Bank of India) as a private sector banking entity. This is effective from the 21st of January, 2019 and has come as a major development in the Indian banking and financial services sector. This decision of the RBI comes in a scenario where a majority stake has been acquired sometime earlier in IDBI Bank by LIC (Life Insurance Corporation of India). Through a recently released notification, the RBI has clearly stated that the Private Sector Bank category has been given to IDBI Bank for regulatory reasons by it and also the date from which it will be effective that has been mentioned earlier. There is also the statement where it clearly says that this will happen only upon LIC acquiring 51% of IDBI Bank’s entire paid-up equity share capital.
The RBI has also stated that ICICI Bank, HDFC Bank and SBI (State Bank of India) will still be tagged as D-SIBs or Domestic Systemically Important Banks. This rating basically equates to the fact that these banks are too large to actually fail in the system. The systematic structural framework for addressing D-SIBs has also been notified by the RBI on the 22nd of July, 2014, as per reports. This necessitates the RBI to reveal the names of those banks which have been tagged as D-SIBs right from the year 2015 onwards and they will then be positioned in suitable segments depending upon their SISs or Systemic Importance Scores.
In the past, back in the year 2005 in April, IDBI Bank had the category of other public sector banks from the RBI in a new sub-segment created by the apex banking entity. This categorization was due to the assurance given by the Union Finance Minister to the Union Parliament on the 8th of December, 2004, that the government’s stake in IDBI Bank would always remain more than 51%. IDBI Bank has recently stated that there will be a meeting of its board on the 19th of March, 2019, for discussions and consideration of the proposal to grant approval for the rupee bond borrowing threshold of Rs. 4,000 crore for the financial year 2020.
The market has reacted positively to this new rating given to IDBI Bank by the RBI and the bank’s shares have witnessed 1% gains on the day of the announcement being made. The biggest life insurance entity in India, LIC (Life Insurance Corporation of India) is now considering a 3-5 year duration for lowering its stake in the newly acquired IDBI for adhering to the IRDAI regulations of a 15% share in any listed investee firm. The LIC will be reducing its stake based on the returns at suitable prices while market circumstances also have to be appropriate in this regard. Lowering a stake of 51% will take a long period of time and this cannot be executed in a few months as per reports and LIC may look to state this to the IRDAI (Insurance Regulatory and Development Authority of India) soon enough. The decision has not been finally taken as of now. IRDAI has already asked for this duration and timeline from the management at LIC with regard to lowering its stake in IDBI Bank. The view taken by the insurance regulator on this duration may have a direct impact on the share prices of IDBI Bank and this is why it desires LIC to come up with a proposed timeline on which a final decision can be taken.
Currently, any insurance company can hold shares of listed entities till a maximum of 15%. However, the LIC has got special permission from IRDAI and has more than this share percentage in a few public sector banks including Corporation Bank. The IRDAI will eventually finalize the timeline for LIC to lower its share in IDBI Bank and will be taking its call based on the proposal that is submitted to the regulator as per reports. The 51% stake acquired by LIC in IDBI Bank has been granted by the IRDAI on the condition that it will be lowered in the near future. LIC is now the majority and biggest shareholder of IDBI Bank as per reports.
The deal was worth close to a whopping Rs. 20,000 crore and IDBI Bank got Rs. 5,030 crore and Rs. 14,500 crore in the months of January and December respectively. The beleaguered bank which is already under the PCA (Prompt Corrective Action) system of the RBI was given some relief with these funds according to reports. The RBI also allows for a maximum of 15% as the promoter stake in any private sector bank. IDBI Bank has posted losses of Rs. 4,185.48 crore for the third quarter of the financial year that concluded in December last year. A loss was reported in the same period a year earlier to the tune of Rs. 1,524.31 crore. The total income of the bank for the third quarter came down to around Rs. 6,190.94 crore as per reports and income for the bank was Rs. 7,125.20 crore in the same period one year earlier. LIC paring its stake is now something that has to be executed seamlessly while IDBI Bank’s re-categorization heralds hope for a swift turnaround in the near future.