As part of the recapitalization plan approved by the Union cabinet on Tuesday, IDBI Bank will get ₹4,557 crore from the government, and state-owned LIC will pump in an additional ₹4,743 crore to improve the bank’s capital buffers. The government, the erstwhile owner of the bank, held a 46.46% stake in the lender as of June.
IDBI Bank, saddled with the worst bad loan ratio among Indian lenders, needs immediate funds to bolster its capital buffers and exit Reserve Bank of India’s prompt corrective action programme that restricts it from lending. State-owned LIC bought a 51% stake in IDBI Bank from the government in August 2018 and infused ₹21,000 crore into it to revive the lender.
“Both LIC and the central government will contribute to (improving) capital adequacy so that the lender can work efficiently," Prakash Javadekar, minister of environment and information and broadcasting, told reporters after the cabinet meeting. The bank’s bad loans have come down and provision coverage ratio (PCR) has increased, he added.
“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," the government said in a statement.
IDBI Bank’s gross bad loan ratio stood at 29.12% in the first quarter of the current fiscal year, the highest among all Indian banks, according to Capitaline.
“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%. Remaining 49%, amounting to ₹4,557 crore, is proposed from government as its share on one-time basis," the government statement said.
LIC, which completed the acquisition of IDBI Bank in January, aims to leverage the bank’s retail network to sell its insurance policies.
IDBI Bank’s loss has since widened to ₹3,801 crore in the June quarter from ₹2,410 crore a year earlier. However, net non-performing assets reduced to 8% during the June quarter from 18.8% a year ago. Its PCR increased to 87.79% at the end of the quarter from 64.54% a year ago.
After the capital infusion, IDBI Bank will be able to raise more capital on its own and is expected to come out of the banking regulator’s PCA programme sometime next year, the government said.
Amid the worst economic growth in six years, the government has been taking several steps to boost demand and step up access to credit. In the Union budget announced in July, the government said it will infuse ₹70,000 crore into public sector banks to boost growth capital. The finance ministry also announced the consolidation of 10 public sector lenders into four bigger banks to strengthen their balance sheets.
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