RBI gives 12 years to LIC for reducing stake in IDBI Bank

The Reserve Bank of India (RBI) has given 12 years to Life Insurance Corp to reduce its stake in IDBI Bank, accepting the life insurer’s argument that it is a long-term investor in the struggling bank which had nearly 30 per cent of its advances as bad loans in the December quarter. Two people aware of the development said that RBI, which classified IDBI as a private sector bank last month, has given LIC 12 years to cut its stake in the bank by 10 per cent.

“RBI has stipulated that after 12 years LIC has to reduce stake in IDBI Bank by 10 per cent to 40 per cent,” said a source in the direct knowledge. “LIC will take a view on how they are able to divest it.”

The development means that LIC would be under no obligation to sell its stake in next few years or so and would probably invest more money to retain its stake in any future fund raising by the bank.

The insurance regulator’s rules stipulate that LIC can hold only up to 15 per cent in a bank which can go up to 30 per cent in case of board approval. But the Insurance Regulatory Authority of India (Irdai) allowed LIC to invest up to 51 per cent in IDBI Bank last year. The regulator also did not insist publicly on a deadline for LIC to cut its stake in Corporation Bank when it invested more than 10 years ago. The insurer held nearly 26 per cent at one time which has now come down to 3 per cent.

“LIC has come as a strategic investor, but the bank is going to be a board run,” said another source. LIC invested ?21,624 crore additional capital to take the stake up to 51 per cent from 14.5 per cent. Now, depending on the plan approved by the board, LIC will invest additional capital.

IDBI Bank proposes to have a 15-member board with two representatives from LIC and the LIC chairman is the non-executive chairman of the bank. As part of the turnaround plan, IDBI Bank has put on block its insurance and mutual fund businesses to increase the capital base.

The government is the other major investor in IDBI Bank owning 46.46 per cent while the rest is with the public.

IDBI Bank is under the prompt corrective action framework of the RBI. For a bank to come out of PCA, it has to report profit and its net NPA should be below 6 per cent. One it comes out of PCA, the bank will require growth capital. The provision coverage ratio of the lender has improved to 75 per cent but it may have to provide more because of aging provision. The bank board has approved raising ?4,000 crore through Tier II capital.