Government set to bail out IDBI as part of Rs 9,000 crore plan

Beleaguered IDBI Bank is set to get a fresh lifeline of Rs 9,000 crore, with the government planning to pay its share of the bailout money that Life Insurance Corporation has been seeking for the past several months.
While LIC, which is the majority owner of IDBI Bank, will have to cough up close to Rs 4,500 crore as its share, the government is expected to chip in with a matching contribution, sources told TOI.

The money will be released as part of the Rs 70,000 crore bank recapitalisation plan, of which over Rs 55,000 crore has already been earmarked for the state-run lenders led by the entity to be created by the merger of Punjab National Bank, Oriental Bank of Commerce and United Bank of India, which will receive Rs 16,000 crore, according to initial estimates released on Friday.

Sources said the fresh support to IDBI will help it tide over the latest financial crisis, given that it has a massive pile of nonperforming assets (NPAs), which on a gross basis was estimated at over 29% of advances on June 30. The bank has been in the red for the last 11 quarters, despite the management and the government repeatedly suggesting that the worst is over. Its capital base has been eroded and the capital adequacy ratio was estimated at 8.1%.

The poor show has meant that the bank faces restrictions on expansion and lending under the Reserve Bank of India’s Prompt Corrective Action framework with even LIC, which acquired a majority stake from the government, is unhappy with the state of affairs. After all, the insurer has already pumped in close to Rs 20,000 crore to acquire a majority stake.

LIC has seen a significant value erosion, with IDBI Bank share price plummeting from Rs 56.5 when the stake acquisition was completed in late January to Rs 26.7 on Friday. LIC had made an open offer at Rs 61.7 to acquire a 26% stake in the erstwhile development financial institution, which has seen many twists and turns since the government decided to convert it into a universal bank at the start of the millennium.

Over the years, it has lost its expertise in offering long-term project finance and has not been able to expand its retail footprint at a brisk pace. LIC is, however, happy with IDBI Bank’s ability to hawk its insurance products, which has also prompted the lender to scout for suitors to acquire its stake in IDBI Federal, a joint venture insurance company.