The government, on Tuesday, announced that it will provide additional capital to IDBI Bank. This one-time capital infusion aims to complete the exercise of dealing with its legacy book.
As of now, LIC of India holds 51 per cent, while the remaining 49 per cent is with the government.
Accordingly, it was decided at the Cabinet meeting that the government will provide ₹4,557 crore, while LIC will infuse ₹4,743 crore.
After this infusion, IDBI Bank expects to be in a position to raise further capital on its own and come out of the RBI’s Prompt Corrective Action (PCA) framework sometime next year.
This cash-neutral infusion will be done through recap bonds — the government infusing capital into the bank and the bank buying the bonds from the government on the same day. The government money will be provided through a corpus of ₹70,000 crore as part of the Budget for the current fiscal.
Turnaround process
“It will help in completing the process of IDBI Bank’s turnaround and enable it to return to profitability and normal lending, giving government the option of recovering its investment at an opportune time,” a government statement said.
The news of capital infusion had a positive impact on the bank’s shares which closed at ₹28.80, up 7.66 per cent from its previous close.
LIC acquired 51 per cent of the government shareholding last year. The government claims that since then the performance of the bank has improved on various parameters.
As on date, credit growth has jumped to 11.58 per cent from 6.22 per cent, while net non-performing assets, as a ratio to total advances, came down to 8 per cent at the end of June 2019 from 18.8 per cent in June 2018.
LIC synergies
The bank expects its revenue to grow by ₹500 crore this fiscal and by ₹1,000 crore next fiscal.
Briefing reporters, Information and Broadcasting Minister Prakash Javadekar said that thanks to the acquisition by LIC, the bank has gained access to over 11 lakh insurance agents, over 3,100 crore officers and employees of the corporation and nearly 29-crore policy holders. All of these will help IDBI Bank expand to grow its business.
The bank collected premium amounting to ₹250 crore in the first four-and-half-months of this year and now expects to get more than over ₹2,000 crore next fiscal, which will bring in commissions and service charges amounting to ₹200 crore.
Additional business of ₹5,000 crore (housing loan, auto loan, and personal loans) is anticipated by leveraging LIC’s agents’ network.
This cash-neutral infusion will be done through recap bonds — the government infusing capital into the bank and the bank buying the bonds from the government on the same day.