LIC will be required to eventually bring down its stake in IDBI Bank from 51 percent to 15 percent
IDBI Bank could be renamed either LIC IDBI Bank or LIC Bank after the Life Insurance Corporation of India (LIC) bought a majority stake in it. But what remains to be understood is whether the new name will hold even after LIC eventually brings down its stake to 15 percent as per regulatory norms.
Insurance Regulatory and Development Authority of India (IRDAI) had in June 2018 made an exception when it allowed LIC to hold 51 percent in IDBI Bank. Insurance regulations state an insurer can hold only 15 percent equity stake in an entity to ensure there is no concentration of risks.
LIC had in In January 2019 completed the deal with IDBI bank. However, IRDAI Chairman Subhash Chandra Khuntia told reporters on the sidelines of an event last week that the approval for the LIC-IDBI Bank deal had been on the condition that the stake will eventually be brought down to 15 percent.
IDBI Bank board had on February 4 approved a proposal to change its name subject to a ‘no objection’ from Reserve Bank of India, shareholders as well as name availability by Ministry of Corporate Affairs.
While IRDAI has not specified by when LIC will have to bring down its stake in IDBI Bank, it is understood it will take at least four to five years. Whether it will be brought down gradually or at once is to be seen.
With IDBI Bank, this is LIC’s foray into the banking sector. Their idea will be to expand operations and engage in a full-fledged banking business. The mandate of reducing stake to 15 percent in the future could be a dampener in their plans.
Also, if the name has been changed after the majority stake purchase by LIC, once they reduce the stake will the name be changed again?
IDBI Bank and turnaround
LIC’s first mission is to help IDBI Bank manage its losses and also offer support to the bank against non-performing assets. IDBI Bank's third quarter loss widened sharply to Rs 4,185 crore, nearly a three-fold increase compared to a loss of Rs 1,524 crore posted a year-ago due to higher provisions.
Net interest income, the difference between interest earned and interest expended, fell by 18.5 percent year-on-year (YoY) to Rs 1,357 crore in the quarter ended December 2018 with 17 percent degrowth in loans.
However, their gross non-performing assets (NPA) as a percentage of total assets declined to 29.67 percent in Q3 against 31.78 percent in Q2FY19 and net NPA also dropped to 14.01 percent against 17.30 percent sequentially.With LIC coming on board, the idea is to help IDBI Bank achieve a turnaround. At this stage, the 15 percent stake mandate will have to wait for at least 7-10 years. After that, it is not clear whether LIC would want to reduce its stake and exit banking operations or will it be granted an exception for a few more years.