Life Insurance Corporation of India Ltd. Finally owns a bank. Despite the many debates on the government’s decision of the national insurance company under the control of IDBI Bank, the deal is now close to completion.
In a statement issued on Monday, IDBI Bank said that LIC has completed 51% of the loan amount. In this way, the rehabilitation of the bank’s board was approved.
The transaction creates a ‘unique financial conglomerate in India’. – IDBI Bank Statement
Also, in a separate notification, the bank’s board extended under Rakesh Sharma’s tenure was approved as the Chief Executive Officer. Presently KP Nayar and GM Yadavak will continue to be in the bank.
Capital: An immediate challenge
The bank has enough capital to ensure that IDBI Bank’s new promoter-LIC is the immediate challenge.
After the eighth quarterly loss in July to September, the bank had seen its capital level at least as below regulatory requirements. Capital adequacy in Basel III dropped to 6.22 percent from 8.18 percent. Its common equity tier-I ratio has fallen to 3.87 percent.
According to the Basel norms accepted by India, the minimum level of capital has been fixed at 9% and at least CET-1 level is fixed at 5.5%.
The bank has not yet earned revenue after three months ended in December.
The immediate need for capital comes on the back of bad loans. In the three months of September, the gross non-performing assets ratio increased by 31.78% to 30.78% in the first quarter of the year. Post-provisional, net NPAs of the second quarter were 17.30 percent compared to 18.76 percent in the June quarter.
Due to bad credit amounts, the bank stays under the amended corrective action plan of the Reserve Bank of India, which bans the action on a weak loan. The framework is expected to come out in a timely manner, the lender said in a press release.
Significant revenue synergies are estimated from the partnership. IDBI Bank and LIC have started working to ensure the full realization of their synergies over the next 12 months. Improved financial health will pave the way for the bank to exit from the prompt corrective action framework in a time-bound manner and be a future-ready, top-ranked bank. – IDBI Bank Statement
Benefits of merges
While not giving any clarity on LIC’s Capital Invocation Plan, the bank said that both the companies will take advantage of each other’s reach.
The LIC IDBI Bank will use it as an important Bancassurance Channel. “Over 800 branches of IDBI Bank can be used as touch points for selling LIC policies,” said the lender. The bank will provide cash management facility to LIC, which will increase the balance of the current account and reduce its cost. the lender said.
IDBI Bank, earlier development finance institution, will continue to provide corporate debt and focus on the retail market.
“The retail loan portfolio for IDBI Bank increased from 32 percent of overall lending in FY15 to 46 percent in FY18, and is expected to reach 50 percent by FY20,” said the bank.