The Union Cabinet chaired by the Prime Minister Shri Narendra Modi has approved the Infusion of ₹ 4,557 crore by Government in IDBI Bank.

It will help in completing the process of IDBI Bank’s turnaround and enable it to return to profitability and normal lending, and giving Government the option of recovering its investment at an opportune time.

IDBI Bank needs a one time infusion of capital to complete the exercise of dealing with its legacy book. It has already substantially cleaned up, reducing net NPA from peak of 18.8% in June 2018 to 8% in June 2019. The capital for this has to come from its shareholders. LIC is at 51% and is not allowed to go higher by the insurance regulator. Of the ₹ 9,300 crore needed, LIC would meet 51% (₹ 4,743 crore). Remaining 49%, amounting to ₹ 4,557 crore, is proposed from Government as its share on one time basis.

After this infusion, IDBI Bank expects to be able to subsequently raise further capital on its own and expects to come out of RBI’s Prompt Corrective Action (PCA) framework sometime next year. This cash neutral infusion will be through recap bonds i.e. Government infusing capital into the bank and the bank buying the recap bond from the Government the same day, with no impact on liquidity or current year’s Budget.

Background:

Following Cabinet’s approval in August 2018, LIC acquired 51% stake in IDBI Bank. Government continues to be a promoter and holds 46.46% stake.

The financial parameters of IDBI Bank have improved considerably during the last one year:

• CRAR has improved from 6.22% as on 30.9.18 to 11.58% as on 31.3.19.
• Net NPA ratio reduced from 17.3% as on 30.9.18 to 10.11% as on 31.3.19 and further to 8.02% as on 30th June 2019
• Provision Coverage Ratio (PCR) improved from 69% (30.9.18) to 83% (31.3.19) and further to 88% on 30th June 2019
• Synergy with LIC has enabled access to 29 crore policyholders base spread over 3184 branches and also to 11 lakh agents and 2 lakh employees of LIC.
• ₹ 500 crore revenue for FY 2020 and ₹ 1,000 crore from FY 2021 onwards projected from LIC Synergy.
• Sale of insurance kick-started in March 2019 with ₹ 160 crore premium. This momentum has continued with over ₹ 250 Cr premium collection in first four and a half months of this year. FY 2019-20 target is ₹ 2000 crore of premium and ₹ 200 crore revenue.
• Additional business anticipated is ₹ 5,000 crore (Housing loan, Auto loan, personal loan) by leveraging LIC agents’ network.

Government capital infusion enables IDBI Bank turnaround via recap bonds, supporting cleanup and exit from supervisory restrictions. Cabinet approved a one time government capital infusion into IDBI Bank via a cash neutral recap bond arrangement-Government infuses capital and the bank buys the recap bond the same day-to complete legacy asset remediation, strengthen capital, enable resumption of normal lending and profitability, and facilitate eventual recovery of the investment while helping the bank exit the Prompt Corrective Action framework and raise further capital.