The government has decided to sell its balance stake in IDBI Bank, to make room for a wider base of investors, Finance Minister Nirmala Sitharaman said while presenting the Union Budget 2020-21 on February 1.
"In the last few years, the government has taken concrete steps for the banking system to be robust. However, there is a need for private capital. Accordingly, it is proposed to sell the balance holding of government's IDBI Bank to private, retail and institutional investors through the stock exchange," Sitharaman said.
The move comes after the government infused Rs 4,557 crore by way of recapitalization bonds a few months back.
After the bank was bailed out by Life Insurance Corporation of India (LIC) last year, government holding came down to 47.11 percent.
While the announcement sent the share price soaring to a high of Rs 39.85 apiece during the day, the move could have a negative bearing on the bank's credit rating.
A reduction in capital support by the government or LIC could be seen as a negative factor, according to CARE Ratings in a recent report.
The agency noted that the government had clarified in December 2019 that its direct and indirect stake in IDBI Bank was 97.46 percent and that all central and state government departments or agencies could consider the bank for grant of government business. This would boost the bank's Current Account Savings Account (CASA) and overall business.
With the government now moving to offload its stake in the bank completely, along with the public listing of LIC that has also been permitted this year, the bank may stand to lose this status going ahead.
In all, LIC has infused Rs 21,624 crore equity in a phased manner since September 2018. It holds a 51 percent stake in the bank currently.
While the timely capitalization by LIC and government helped the bank to improve its capital adequacy levels, the lender is yet to come out of the Prompt Corrective Action (PCA) framework imposed by the Reserve Bank of India (RBI) in May 2017.
CARE Ratings said it may take some time for the bank to exit PCA as its Return on Assets (RoA) continues to remain negative since the past 14 quarters.
"To privatize a small bank like IDBI is a step in the right direction where the government is clearly signalling its intention to move out of areas which can be run well by the private sector," said Krishna Kumar Karwa, Managing Director - Emkay Global Financial Services.
In 2015, former Finance Minister Arun Jaitley had first indicated the government's intention to emulate an Axis Bank-like structure for IDBI Bank, which involved giving up control in the bank to improve its performance.
In January 2019, IDBI Bank was re-categorized as a private bank by the RBI after LIC acquired a majority stake in the troubled lender.
While there was no specific amount allotted for public sector banks (PSBs) in the Union Budget 2020-21, the government said it will undertake recapitalization as and when needed. PSBs will also be encouraged to approach capital markets to raise additional funds.
Last year, the government had earmarked Rs 70,000 crore for PSB recapitalization, mainly aimed at supporting banks that were in the process of consolidation.
"We had earlier approved the consolidation of 10 banks into four. In the last few years the government has infused Rs 3.5 lakh crore by way of capital into public sector banks for both regulatory and growth purposes," Sitharaman said.
She added that governance reforms will be carried out in these banks so that they become more competitive. "Few among them will be encouraged to approach capital markets to raise additional capital," Sitharaman said.
She added that there is a need to take further steps to bring in transparency and greater professionalism in public sector banks. "The government will take appropriate measures to this end," she said.