Government steps up bid to sell IDBI Bank stake, talks to potential suitors including Fairfax’s Prem Watsa

Prem Watsa

The government has stepped up its bid to push the sale of IDBI Bank, in which Life Insurance Corporation of India (LIC) owns a stake, to private investors, people familiar with the development said.

The government is in talks with a clutch of potential investors including Canadian billionaire Prem Watsa’s Fairfax Financial Holdings on the sale, the people said.

Besides Fairfax, a few institutional investors too are in the radar, they said.

Watsa, whose company controls CSB Bank, is keen to see if there is synergy between the Kerala-based lender and IDBI Bank, and whether these two can be combined later, said one of the persons cited above.

“There are discussions happening between Watsa and government officials on IDBI Bank. There are others as well who have evinced interest,” said the person, who declined to be named because the talks are confidential.

The government is consulting various stakeholders including IDBI Bank’s management and the banking regulator, Reserve Bank of India, on the proposed sale.

Fairfax Financial couldn’t be contacted for a comment immediately. A top IDBI Bank official didn’t respond to a message asking if the discussions were indeed taking place.

Ownership details 

State-owned LIC (49.2 percent) and the government (45.5 percent) are the largest shareholders in IDBI Bank. Privatising IDBI Bank is key to the government’s disinvestment agenda.

After a mega merger in 2020, India currently has a dozen state-run banks. So far, the government has not made any significant progress in the privatisation agenda despite repeated promises over years.

In Union Budget 2020, Finance Minister Nirmla Sitharaman announced plans to privatise at least two state-run banks. On July 18, the government reaffirmed its privatsation plan.

The Finance Minister said, “The Government had introduced New Public Sector Enterprise (PSE) Policy for Atmanirbhar Bharat which has been notified on 4th February, 2021 and is applicable to Central Public Sector Enterprises (CPSEs), Public Sector Banks (PSBs) and Public Sector Insurance Companies (PSICs). As per this policy, existing Public Sector Enterprises (PSEs) have been broadly classified under Strategic and Non-strategic Sectors.”

Proposed bill 

The proposed Bill will allow the government to bring down its stake in banks to 26 percent from the 51 percent it is required to hold currently. That rule will be an attraction for new bidders.

PSBs look a much better bet right now compared with the past after the bad loan clean-up initiated in 2015 with the asset quality review and later the constitution of the so-called bad bank, an entity which will house all toxic assets in banks, enabling them to make a fresh start.

As at the end of FY22, the gross non-performing asset (NPA) ratio of state-run banks stood at 7.6 percent, compared with 9.5 percent at the end of FY21, according to RBI data.

In a severe stress scenario, the banking regulator sees the gross NPA ratios of state-run banks increasing to 10.5 percent by the end of FY23.

Legacy issues 

Yet, there are hurdles on the path; PSBs are dominated by heavily politicised employee trade unions that are opposed to privatisation.

Besides, there needs to be a credible buyer who would be willing to experiment with eradicating deep-rooted legacy issues from these banks.

All that has happened so far is the mega merger of 10 state-run banks into four in 2020 and the forced purchase of IDBI Bank using LIC, India's largest insurer, in 2019.

While PSBs are struggling with legacy issues, private banks are gaining market share. According to  Sumeet Kariwala, India banks analyst at Morgan Stanley, there has been significant acceleration of market share gains in recent years.

“We note, that private banks have increased loan market share by 10 percentage points to 35% over past five years ending F22. This compares to an increase of 7 percentage points during the preceding five years,” Kariwala said in an interview with Moneycontrol on June 7.

“We expect the pace of private sector market share gains will continue to remain high -- this will be helped by a number of new differentiated bank licenses as well as the technology-led innovations in the private sector,” Kariwala said.