Today, Cabinet Committee on Economic Affairs, chaired by Prime Minister Narendra Modi, has given its in-principle approval for strategic disinvestment along with the transfer of management control in IDBI Bank.
The government is looking at a strategic buyer for the bank. This buyer will infuse funds, new technology and best management practices for optimal development of business potential and growth of IDBI Bank, stated the government.
The government expects the bank to generate more business without any dependence on LIC and government assistance/funds, after this sale.
Even though RBI categorised IDBI bank as private sector bank, it continued to depend on government for capital. Now the government is trying to cut that supply by the change in management.
Before this, it is important to know the journey of this institution.
IDBI was not always a bank...
- Industrial Development Bank of India (IDBI) was constituted under Industrial Development Bank of India Act, 1964. More like LIC which was formed under an Act too.
- This institution was a wholly-owned subsidiary of the Reserve Bank of India (RBI) at one point. It was later that RBI transferred it to the Government of India.
- It was a Development Financial Institution (DFI) and came into being as on July 1, 1964.
- Following the recommendations of the Narasimham Committee II and publication of the RBI Discussion Paper on “Harmonising the Role and Operations of Development Financial Institutions and Banks” released in January 1999, RBI announced its regulatory approach for the DFIs in April 2000. It was decided to allow an option to any DFI which wished to convert into a commercial bank but only after fulfilling regulatory obligations.
- After serving as a DFI for 40 years till the year 2004, it was transformed into a Bank. To do so, the Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003 (Repeal Act) was passed repealing the Industrial Development Bank of India Act, 1964.
Mergers and acquisitions
- IDBI Bank took over United Western Bank Ltd. (UWB), a Satara-based private sector bank in 2006. This decision was to protect the interest of the customers of UWB. Post this merger, IDBI Bank doubled the number of its branches from 195 to 425 in 2006.
- In 2011, two wholly-owned subsidiaries of IDBI Bank Ltd namely IDBI Home Finance and IDBI Gilts were amalgamated with IDBI Bank. This decision was made mainly because the subsidiaries were loss-making entities.
Thin line between private sector bank and public sector bank categorisation
- RBI had placed IDBI Bank under the Prompt Corrective Action (PCA) framework in May 2017, after it had breached the thresholds for capital adequacy, asset quality (net NPAs was over 13 per cent in March 2017).
- In 2019, state-run insurer LIC of India acquired 51 per cent controlling stake in IDBI Bank, making it the majority shareholder of the bank. Today, the government of India (holds 45.48 per cent) and LIC (holds 49.24 per cent) together own more than 94 per cent of the equity of IDBI Bank. LIC is currently the promoter of IDBI Bank with management control and the Indian government is the co-promoter. Thus, making IDBI not a state-run bank.
- Banking regulator RBI re-categorised IDBI Bank as a private sector bank, with retrospective effect from January 21, 2019. But with government and LIC looking at reducing stake in IDBI bank, it can truly be a private sector bank.