IDBI Bank disinvestment: Govt approves 100% stake sale by Centre, LIC

The government has approved the sale of its entire stake, and that of the Life Insurance Corporation of India (LIC), in IDBI bank.

On July 9, the Department of Investment and Public Asset Management (DIPAM) said the Cabinet Committee of Economic Affairs (CCEA) has given its go-ahead to the government and the LIC to offload 100 percent of their entire stakes in IDBI Bank, along with a transfer of management.

At present, IDBI Bank is classified as a private sector bank by the RBI with the government's shareholding at 45.5 percent, LIC's shareholding at 49.24 percent and the non-promoter shareholding at 5.29 percent.

However, DIPAM has said that the exact quantum of stake to be sold will be decided based on a number of factors. "It will be determined, as we go through the transaction, and ascertain investor's interest," it said.

The Department has also clarified that since LIC's stake will be sold alongside the government's shareholding in this transaction, there will be only one transaction advisor.

the Centre's plans to offload atleast 26 percent of its stake. It had also reported that the entire stake may be sold.

DIPAM, in the RFPs issued, had said that the bids by interested investment banks, financial institutions, consulting firms and law firms should be submitted by July 13.

Responding to the queries raised by bidders on the RFP, Dipam has said the broad quantum of primary infusion expected in the bank, and the timeframe for such infusion has not yet been decided. It has also clarified that consortium bids are not allowed.

LIC completed the acquisition of controlling stake in IDBI Bank in January 2019 making it the majority shareholder of the bank. Subsequent to the enhancement of equity stake by LIC, the RBI clarified that IDBI Bank stands re-categorised as a private sector bank.

The Cabinet Committee on Economic Affairs had cleared the 'strategic divestment' of IDBI in early May. LIC will reduce its shareholding in IDBI Bank in parallel with the central government, and with an intent to relinquish management control.

For 2021-22, the Centre has set itself a divestment target of Rs 1.75 lakh crore, on the back of the planned privatisation of Air India, Bharat Petroleum, Shipping Corp, Concor, two state-owned banks (yet to be decided) and the initial public offering of LIC Ltd.

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Government mulls bank merger before privatisation

 

The government will look into the balance sheet of banks in the first quarter of next financial year and may consider merger of two public sector banks, before going ahead with privatisation. According to sources in the Finance Ministry, the government has not yet shortlisted any bank so far and it would be done only after examining the balance sheet.

“Lots of names are floating but we have not shortlisted anything yet. It will be decided after taking into account performance of the Q4 (Jan- March 2021) and Q1 of FY22 ( April to June 2021) after consultation with the RBI. If required, the PSBs can be merged before privatisation,” a senior official with the finance ministry told TNIE. 

The finance minister, in her budget speech, had announced that two state-run banks will be privatised in the next fiscal. “Other than IDBI Bank, we propose to take up the privatisation of two public-sector banks and one General Insurance company in the year 2021-22,” Nirmala Sitharaman had said.  Other banks including Bank of India as well as Punjab and Sind Bank were also doing the rounds in various media reports.  However, the official added that it may not be the “weakest” bank which will go for privatisation.

“The decision will be taken on the basis of unlocking the valuation and not on which is the weakest Bank. It is a more complex process. A lot of factors may go into the decision making and also on the appetite of the investor,” the official argued. On the timeline, the official ruled out the process would be initiated in the first half of the next financial year.

“There are many legal processes which need to be followed to facilitate privatisation and it requires certain amendments. All these will take some time,” the official said. The government is likely to bring amendments to two legislations later this year. Finance ministry sources said that amendments would be 

required in the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 to facilitate the privatisation.

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Government is considering mid-sized to small banks for its first round of privatisation.

Government has shortlisted four mid-sized state-run banks for privatization, under a new push to sell state assets and shore up government revenues, three government sources said.

Privatisation of the banking sector, which is dominated by state-run behemoths with hundreds of thousands of employees, is politically risky because it could put jobs at risk but Prime Minister Narendra Modi's administration aims to make a start with second-tier banks.

The four banks on the shortlist are Bank of Maharashtra, Bank of India, Indian Overseas Bank and the Central Bank of India, two officials told Reuters on condition of anonymity as the matter is not yet public.

Two of those banks will be selected for sale in the 2021/2022 financial year which begins in April, the officials said. The shortlist has not previously been reported.

The government is considering mid-sized to small banks for its first round of privatisation to test the waters. In the coming years it could also look at some of the country's bigger banks, the officials said.

The government, however, will continue to hold a majority stake in India's largest lender State Bank of India, which is seen as a 'strategic bank' for implementing initiatives such as expanding rural credit.

A finance ministry spokesman declined to comment on the matter.

India's deepest economic contraction on record caused by the pandemic is driving the push for bolder reforms, economists say.

Government also wants to overhaul a banking sector reeling under a heavy load of non-performing assets, which are likely to rise further once banks are allowed to categorise loans that soured during the pandemic as bad.

PM Modi's office initially wanted four banks to be put up for sale in the coming fiscal year, but officials have advised caution fearing resistance from unions representing the employees.

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DFS has approved the 11th Bipartite Wage Settlement, Arrears will be paid this month only

Ministry of Finance, Department of Financial Services had approved the 11th Bipartite Wage Settlement and give the Non Objection on behalf of the Government to Public Sector Banks to make arrears and revised salary payment to existing employees. 

They have also provided the NOC for paying enhanced pension or family pension as per the 11th BPS settlement terms.

The Arrears and revised salary will be paid from the month of December 2020.

A mixed response from the bankers as they waited for long 3 years for this. The hike given to them was not appreciating i.e. 15%, if compare with the risk and work pressure.

The signed NOC by DFS to IBA :

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Cabinet approves RBI's proposal to merge Lakshmi Vilas Bank with DBS Bank, all branches to function as DBS Bank, says RBI

Union Cabinet on Wednesday approved the merger of capital-starved Lakshmi Vilas Bank (LVB) with DBS Bank India. The Reserve Bank of India on 17 November proposed the merger of the 94-year-old lender with the Indian arm of Singapore’s DBS Bank. As part of the amalgamation, DBIL will infuse fresh capital of Rs.2,500 crore into LVB.

The central bank on 17 November placed Lakshmi Vilas Bank under one-month moratorium, superseded its board and capped withdrawals at Rs.25,000 per depositor. "With the merger, there will no further restrictions on the depositors regarding the withdrawal of their deposit," Union minister Prakash Javadekar said.

Analysts and global credit rating agencies have applauded RBI's move and said that it will benefit both parties. "The quick action taken by the RBI in the Laxmi Vilas Bank matter affirms the faith of the depositors in the banking system," Ajay Shaw, Partner, DSK Legal.

"LVB merger with another bank is a very prudent step in order to save the depositors and to mitigate the systematic disruption associated with it. The image of government and regulator gets enhanced by such timely action and response," said S Ravi, former chairman of Bombay Stock Exchange (BSE) and Managing Partner of Ravi Rajan & Co.

DBS was the first foreign bank to receive a banking licence after the central bank allowed foreign banks to set up a wholly owned subsidiary in 2014. "With DBS likely to use digital capabilities to enhance its physical footprint in India, the proposed deal could lead to a 30-40% increase in Indian assets of DBS," said JPMorgan analysts Harsh Wardhan Modi and Saurabh Kumar.

The regulator had put LVB under Prompt Corrective Action in September 2019. The lender earlier reported widening of its net loss at Rs.397 crore in the second quarter ended September 2020 due to rise in bad loans and provisions. On 25 September, the shareholders of the bank had voted out seven members from the board, including the then MD and CEO S Sundar. The RBI on 27 September appointed the CoD composed of three independent directors Meeta Makhan, Shakti Sinha, and Satish Kumar Kalra, being headed by Meeta Makhan.

Moody’s said the merger will strengthen DBS’s business position in India by adding new retail and small and medium-sized customers.

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Govt may sell stake in IDBI Bank in FY21 but no decision yet on other banks

The government intends to go ahead with its proposed stake sale in IDBI Bank in the current fiscal and there is no decision as yet on privatising more banks, a finance ministry source said on Saturday.

The statement comes amid growing speculations about the government privatising more banks, including Uco Bank, Punjab & Sind Bank and Bank of Maharashtra, following reported recommendations by Niti Aayog.

The central bank also reportedly made a pitch for the government to pare down its stake in certain state-run banks to 26%.

The government held a 47.11% stake in IDBI Bank as of June 2020, while LIC is the promoter of the bad loan-laden lender with a 51% stake. The Centre has set a disinvestment target of Rs 2.1 lakh crore for the current fiscal. Of this, Rs 1.2 lakh crore will come from divestment of public sector undertakings.

The rest Rs 90,000 crore is expected to come from stake sale in financial institutions like LIC and IDBI Bank.

The centre will also come out with a list of strategic sectors soon. If banks feature in that, there could be scope for further amalgation or privatisation of state-run banks. “However, it will all depend on which sectors are finally part of the strategic sector list. The Cabinet will soon take a call on this issue,” said the source. Similarly, no final decision has been made yet on the quantum of the government’s stake dilution in insurance behemoth LIC, added the source.

Once a sector is declared strategic, a maximum of four state-run companies will be allowed in it, the government recently announced. Already, thanks to a series of amalgamations in recent years to create a few lenders with much stronger balance sheets, the number of state-run banks has been reduced from 27 in 2017 to just 12 now.

Despite the enormous challenges posed by the Covid-19 outbreak, the government is working on completing the stake sale process of about 23 public sector companies, divestment in which has already been cleared by the Cabinet, finance minister Nirmala Sitharaman said earlier this week.

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Moratorium extension of 3 months by RBI has two sides; the second one is ugly for banks

Governor Das had announced a three-month moratorium for all term loan repayments between March 1 and May 31 at his last address in April.

The loan moratorium will be extended till August 31, says RBI governor Shaktikanta Das. This makes it a six-month moratorium. He added that the lending institutions are being permitted to restore the margins for working capital to the origin level by March 31, 2021.

"The surprise move by the RBI to reduce repo rate to 4 percent from 4.4 percent followed by an extension of the loan moratorium by another three months is a welcome step and can provide solace to the ailing economy whereby EMI burden for the borrowers would be somewhat lowered and would also allow them to defer EMI payments by another three months. For corporate borrowers too, the increase in group exposure limit of banks to 30 percent from 25 percent will bring some relief," said Rajesh Agarwal, Head of Research at Aum Capital.

"The fall in bold yield after the announcement is positive news, the committee's decision to continue with its accommodative stance is further good news but the point remains that even after so much of liquidity, the banks are reluctant to take additional risk and that has resulted in a muted credit growth," he added.

"RBI, which has been proactive in recent times, has risen to the occasion by advancing the policy meet to cut policy rates by 40bp. Also, the unequivocal statement that monetary policy will continue to be accommodative till growth revives sends positive signals. The fact that the central bank has refrained from giving a GDP growth figure is a reflection of the complexity in giving projections with the present growth models," said VK Vijayakumar- Chief Investment Strategist at Geojit Financial Services.

"Extension of the moratorium announced earlier by another 3 months is a relief. A takeaway from the policy announcement is that the stress in the banking sector will continue," he added.

For banks, the extension of moratorium by another three months has two sides. A clear picture on the asset quality of the lenders will now emerge only by March 2021, instead of September 2020. There is a risk of the moral hazard issue creeping in, as borrowers who have the ability to pay, may even opt for moratorium. And for MFIs and NBFCs catering to the bottom-of-the-pyramid customers, the risk of repayment behaviour getting disturbed is higher.

On the positive side, the moratorium extension gives more time to customers (professionals, small businesses, MSMEs and corporates) for recovery in earnings/repayment capacity in an easing lockdown scenario. Thus, the probability of them slipping buckets after the end of moratorium on August 31 diminishes, and therefore the NPL spike for lenders could be lower than what is anticipated now.

The moratorium extension also gives time to lenders to strengthen their collection infrastructure for retail products as restrictions on physical collection/follow-up eases out and collection agencies would have had their migrant workforce back.

For working capital facilities, interest payment has been deferred by another three months, in line with extension of moratorium on terms loans. The accumulated interest for the deferment period can be covered into a funded interest term loan payable be end of the current fiscal. Thus borrowers need not pay accumulated interest in one shot immediately after the deferment period, which is a big relief for them.

While the RBI governor Shaktikanta Das announced that the three-month term loan moratorium has been extended till August 31, it is to be noted that individual banks have the right to take a decision on whether this will be allowed for all borrowers. It is only an enabling provision and not a mandate.

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Bad bank may start with Rs 60K-crore NPAs; govt may put in Rs 10K crore

Banks are likely to move big-ticket bad loans amounting to over Rs 60,000 crore to an asset reconstruction company (ARC), which will focus on turning around non-performing assets (NPAs) and enhancing value. Banks are likely to transfer more stressed assets going forward.

The government could invest up to 50 per cent of the capital in the “bad bank” with a contribution of about Rs 9,000-10,000 crore, said sources.The ARC is expected to take up both old and new cases, bankers said.

Banking lobby group Indian Banks’ Association (IBA) is expected to take the proposal, which is on the lines of the Sashakt panel recommendations, to the finance ministry this week.

The panel had recommended that large bad loans could be resolved under an ARC. The IBA plan envisages setting up of three entities — an ARC, an asset management company (AMC), and an alternative investment fund (AIF) to acquire bad loans from banks with an aim to turn around those assets.

The ARC will acquire and aggregate the asset, the AMC will manage the assets — including takeover of management or restructuring of assets, and the AIF will raise funds and invest into securities floated by the ARC.

The proposed ARC will have to be backed by the government. A similar arrangement was done in the case of IDBI Bank where a stressed assets management fund was created, bankers added. The coronavirus pandemic is expected to result in a rise in NPAs of banks despite steps like allowing a 90-day moratorium on retail loans and relaxing working capital financing norms.

In July 2018 a committee headed by Sunil Mehta, now chairman of YES Bank, had come out with a report on resolution of stressed assets (dubbed as Sashakt panel). It recommended the formation of an independent ARC to acquire bad loans predominantly from public sector banks. The large assets with exposure above Rs 500 crore with potential for turnaround were to be managed by an AMC, while the AIF would raise funds and invest in the securities of the ARC.

The groundwork for forming such a vehicle has been done, keeping in mind the regulatory environment and conditions in financial sector. This would help to reduce response time.

According to a CARE Ratings analysis, gross non-performing assets of commercial banks declined to Rs 9 trillion in December 2019 from Rs 9.7 trillion in December 2018. Public sector banks continued to have the lion’s share (Rs 7.2 trillion in December 2019) of the total NPA pool.

State Bank of India Chairman Rajnish Kumar had said last week this is the right time for a structure along the lines of a bad bank as most banks are holding very high levels of provisioning of NPAs.

Banks have been making hefty provisions for bad loans after asset quality review kicked in 2015-16. As a consequence, the provision coverage ratio of banks has also seen an improvement from 65 per cent in December 2018 to 71.6 per cent in December 2019, reflecting an improvement in the financial health of scheduled commercial banks.

Source- Business Standard

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