State-owned Life Insurance Corp. of India has received approval from the Union cabinet to buy a majority stake in state-run IDBI Bank Ltd.
Wednesday’s nod clears the way for LIC to seek the go-ahead from the Reserve Bank of India and the Insurance Regulatory and Development Authority of India for the transaction.
IDBI Bank, the worst performing state-run bank, will receive fresh equity after the transaction is completed.
The insurance behemoth is likely to buy a 51% stake in IDBI Bank for an estimated ₹10,000-13,000 crore. It will also receive promoter status and management control.
The cabinet has approved “acquisition of controlling stake by LIC as promoter in the bank through preferential allotment/open offer of equity, and relinquishment of management control by the government in the bank,” the government said in a statement.
The government has been trying to privatize IDBI Bank for the past couple of years amid mounting losses and rising bad loans.
The bank’s losses widened to ₹8,237.92 crore in the financial year ended 31 March, from ₹5,158 crore in the previous year.
Gross bad loans almost doubled to ₹55,588.26 crore during 2017-18, which is 32.36% of the bank’s gross advances during the year.
However, valuing the large real estate and land holdings of IDBI Bank was proving to be a stumbling block for the government.
Last month, directors of LIC approved the deal while IDBI Bank sought the government’s permission for the same.
As of the end of June, LIC had a 7.98% stake in IDBI Bank, with the government holding 85.96%.
Mint was the first to report on 11 June about the government’s plan to let financial institutions such as LIC pick up a stake in IDBI Bank.
“IDBI Bank will become stronger and will have better capital adequacy. It will also help it quickly to come out of the prompt corrective action framework of the RBI,” said finance minister Piyush Goyal.
LIC, in turn, will be able to leverage IDBI Bank’s branches to sell its insurance policies, Goyal said, adding it’s a win-win for both.
The cabinet approval comes even as employee unions at both LIC and IDBI Bank have opposed the proposed deal. Some policy-holders of LIC have also opposed using policy-holder funds to acquire a loss-making entity that is saddled with high levels of bad debts.
The government’s intention to privatise IDBI Bank was first stated by union minister Arun Jaitley in his budget speech in 2016.