Union Cabinet approves infusion of capital by Government in IDBI Bank

Union Cabinet approves infusion of capital by Government in IDBI Bank

The Union Cabinet has approved infusion of capital worth Rs 4,557 crore by the central government in IDBI Bank. The Union Cabinet was chaired by Prime Minister Narendra Modi.

The decision to infuse capital in IDBI Bank is expected to help in completing the process of IDBI Bank’s turnaround and enable its return to profitability. The government hopes that with the provided capital, the bank would be able to return to normal lending, giving the government the option of recovering its investment when required.

The IDBI needed a one-time infusion of capital to complete its exercise of returning to make profit. The bank has substantially reduced its net NPA (non-performing assets) from 18.8 percent in June 2018 to just 8 percent in June 2019.

The capital required by the bank has to come from its shareholders. LIC holds 51 percent stake in the bank and it cannot provide capital higher than 51 percent, as per regulations by the insurance regulator. Hence, of the Rs 9,300 crore needed by IDBI, LIC would meet only 51 percent of the amount, which is Rs. 4,743 crore. The remaining 49 percent of the amount, Rs 4,557 crore, was proposed from the Government as its share on a one-time basis.

Impact

Following the infusion of the capital by the government, IDBI Bank is expected to be able to subsequently raise further capital on its own and come out of RBI’s Prompt Corrective Action (PCA) framework by 2020.

The infusion of capital by the government will have no impact on liquidity or this year’s budget.

Background

LIC had acquired 51 percent of the total paid-up equity share capital of IDBI Bank after Union Cabinet’s approval in August 2018. The Government continues to hold 46.46 percent stake.

The IDBI bank had reported a loss of Rs 3200 crore in the last quarter of the fiscal year 2016-17. The bank again reported a net loss of Rs 853 crore in the first quarter of the fiscal year 2017-18. Though the reported loss was lower than the previous quarter, bad loans increased.

However, in the third quarter of 2017, the bank improved its situation slightly with a net loss of Rs.198 crore. In 2018, the financial parameters of the bank improved considerably.

The Capital to Risk (Weighted) Assets Ratio (CRAR) of the IDBI bank improved from 6.22 percent on September 30, 2018 to 11.58 percent on March 31, 2019.

The bank’s net NPA ratio also reduced from 17.3 percent as on September 30, 2018 to 10.11 percent as on March 31, 2019 and further to 8.02 percent as on June 30, 2019.

The Provision Coverage Ratio (PCR) improved from 69 percent to 83 percent during the same period and further to 88 percent on June 30, 2019.

The IDBI bank was categorized by the RBI as a ‘private sector bank’ for regulatory purposes with effect from January 21, 2019.

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