OPINION Why govt must press ahead with the IDBI divestment

IDBI BANK

• IDBI divestment bids fall below government reserve price.
• Government urged to continue IDBI stake sale despite hurdles.
• Deal fatigue and regional instability may deter future bidders.

Did our AI summary help?

The fate of IDBI’s divestment is uncertain as of the time of this writing. Sources tell CNBCTV18 that the offers received by the two known bidders – Emirates NBD and Fairfax – for a 60% stake sale by government and LIC, are lower than the reserve price set by the government. By implication, this round may be cancelled. The intention of this piece is to enlist many good reasons why government must persist with the divestment.

Firstly, the NDA government has been working on the IDBI disinvestment for the past 10 years and chickening out now raises questions over the government’s intent and competence. FM Arun Jaitley had first declared the government’s intent to divest from IDBI in his February 2016 budget speech and ten years and six weeks later, the process doesn't seem to be anywhere close to fruition. This is in sharp contrast to two relatively smaller and even weaker banks - RBL and Yes Bank - successfully roping in two sturdy foreign institutional investors just six months ago.

The comparison is stark. RBL Bank's ROA as of Sept 30, 2025 the last results before the stake sale was 0.53% and its RoE was 4.93%. Yet the bank managed to attract Emirates NBD bank to take a 60% stake in Oct 2025 investing Rs 26,850 cr. Likewise Yes bank with an ROA of 0.8% as of June 30,2025, and an ROE of 5.4%, attracted Japanese bank SMBC to spend Rs 15, 880 cr to take 20% stake.

As on Dec 31 2025, IDBI had a better ROE of 14.5% and a ROA of 1.83%. Since RBL stake was sold at a valuation of 1.1 time book value and Yes Bank’s was sold at 1.4 times its book value, the government perhaps had a reserve price for IDBI that demanded a valuation of closer to 2 times book. The government’s expectations may have also gone up because of the dramatic turnaround in the profits of IDBI and of public sector banks in general this year.

However, it is important to note that IDBI as a public sector bank belabours under some disadvantages, which RBL and Yes did not.

Firstly, IDBI Bank’s buyer despite paying for a 60% stake will only get 26% voting rights, like NDB does in RBL Bank. But NDB gets control over RBL because the remaining 40% is held by public shareholder. However, in IDBI, if the 60% divestment happens, the new buyer won't get control because of the balance 40% shareholding, government-plus-LIC will hold 35%. This means the new buyer can get out-voted on key resolutions. As former Bank of Baroda Chairman S S Mundra pointed out on CNBCTV18, the government may vote on some issues for fiscal reasons, while LIC will want higher returns for its investors. The new shareholder will factor these huge uncertainties and lower the bid price.

Secondly, even if RBL and definitely Yes Bank have lower ratios than IDBI, they don’t have labour union issues, which IDBI Bank has. In fact the protesting voices of these unions was one reason why the government took its time to go ahead with the divestment. The new owner may have to occasionally lower his margins and profits to accommodate the unions.

Thirdly, IDBI is not a bank with many distinguishing strengths. As Mr Mundra put it, “IDBi bank is neither here nor there. It is smaller than many private banks. It does not have a great retail franchise.” The veteran banker has a point: in its early days as a development finance institution IDBI had a band of excellent project finance bankers. But then as India’s DFI flagged in the nineties due to the economic downturn, the bank built an excellent retail subsidiary. However, the retail bank was made to reverse merge with its ailing parent and since then IDBI has had a wobbly run, unable to excel in corporate financing or build out a large retail franchise. Pricing expectations of the government must hence be modest, implied Mr Mundra.

Fourthly, IDBI Bank, in its past has had a history of slipping into bad loans when the cycle turns. It suffered from a bad loan load in 2003, when steel and other infrastructure companies defaulted. Once again from 2013 to 2017, IDBI was laden with high NPAs when the banking sector and the economy went through a tough patch. To be sure, IDBI Bank, like other PSU Banks, now boasts of pristine asset quality, net NPA of 0.18% and over 99% provision cover. But the Indian banking sector’s asset cycle, after a good innings from 2019 to 2026, may turn. The war in West Asia, the surging price of crude and non-availability of gas can lead to a rise in bad loans. If this divestment cycle is cancelled, chances are the pricing in the next round may be lower because the banking sector itself may be in higher bad loan patch.

Fifthly, IDBI’s share price is not a very good guide. The share ruled between 60 and 70 rupees (i.e. a valuation of 1.2x) for a better part of 2024. But it moved towards Rs100 (or closer to 1.7x book) by end-2025, as news of the imminent bidding started trickling in. These price moves can’t be taken as market-discovered valuation since IDBI has a floating stock of under 5% of its total equity.

Sixthly, if this round is scratched in anticipation of higher prices and more bidders in a subsequent round, such a hope may be misplaced. Given the trouble in West Asia, neither Emirates NBD nor any other entity in the region may bid next time, because of home trouble.

Also, there is something called “deal fatigue” said banking expert Abizer Diwanji. The investment banking world has heard the buzz of IDBI divestment for years now and a second round of bidding after ten years of discussions, is likely to draw a yawn.

The RBL and Yes Bank deals went through because the banks’ executives are not government officials, a veteran central banker told me. Indian bureaucrats are painfully aware that if they go through with what can be criticised as a sell-out, they can be dragged to the Vigilance Commission, five or ten years after their retirement, on charges of causing loss to the exchequer. Which is why they will prefer to hide behind a tall reserve price and pass the buck. In this instance the PM and the FM must show resolve and take the onus on themselves and go ahead with the divestment.

The nationalization of dozens of banks in 1969 was always one of the more faulty chapters of independent India’s economic history. Since 1991, correctly, no government resorted to nationalising any bank. But governments have not shown the resolve to walk back on the nationalization and privatize any of the public sector banks. IDBI bank is lowest hanging fruit, since it is not governed by the Banking Companies Act (i.e. the Nationalization Act) under which government has to own 51% of the banks and appoint the CEO. IDBI bank is the only PSU bank to be governed by the Companies Act, which allows the promoter (i.e. government) stake to fall and where appointments are made by the board. IDBI divestment is the best chance for the government to prove that it still has the resolve to reform the economy out of its inept socialist ways. That is why the government must bite the bullet and press ahead with the current divestment round.