The Reserve Bank of India (RBI) on March 14, 2019 categorised the IDBI Bank Limited as a ‘Private Sector Bank’ for regulatory purposes with effect from January 21, 2019.

The move came following the acquisition of the 51 percent of the total paid-up equity share capital of the IDBI bank by Life Insurance Corporation of India (LIC).

IDBI removed from ‘Other public sector banks’ category

The IDBI Bank was categorised in the sub-group ‘other public sector banks’ by the RBI in April 2005.

The ‘other public sector banks’ categorisation was rendered on the basis of the assurance given to the Parliament on December 8, 2004 by the then Finance Minister during the discussion on the Repeal Bill, 2003, that “the government holding in IDBI Ltd would always be above 51 percent”.

IDBI Bank’s 51% acquisition by LIC: A brief

In January 2019, the Life Insurance Corporation of India (LIC) completed the process of picking up a controlling stake of 51 percent in the IDBI Bank. The deal concluded after the approval of the Union Cabinet on August 1, 2018.

The Cabinet also approved reduction in Government shareholding in IDBI Bank Limited to below 50 percent by dilution. 

The acquisition was done through preferential allotment or open offer of equity and through relinquishment of management control by the Union Government.

How IDBI Bank and LIC would be benefitted by the deal?

• The IDBI Bank is currently under the Prompt Corrective Action (PCA) framework of RBI that bans it from corporate lending, branch expansions, salary hikes and other regular activities. The entry of LIC is likely to solve the capital issue through the infusion of funds.

• The acquisition would help financially strengthen the LIC and the bank as well as their subsidiaries which offer financial products such as housing finance and mutual funds.

• The IDBI bank will get an opportunity to tap over 11 lakh LIC agents for doorstep banking services, positioning it to improve customer services and deepen financial inclusion.

• The bank would also be benefitted in terms of lower cost of funds through acquisition of low-cost deposits and fee income from payment services.

• LIC would get bancassurance (selling of insurance products by bank) through the bank’s network of 1916 branches, besides access to bank’s cash management services.

• LIC would gain in terms of furthering the realisation of its vision of becoming a financial conglomerate.

• The acquisition has wide-ranging synergy benefits for customers of the LIC and the bank. Customers will get access to wider offerings of financial services under one roof, and LIC being better positioned to expand life insurance coverage.

SBI, ICICI and HDFC remain Domestic Systemically Important Banks (D-SIBs)

The Reserve Bank of India (RBI) on March 14, 2019 itself named the State Bank of India (SBI), the ICICI Bank and the HDFC Bank as Domestic Systemically Important Banks (D-SIBs).

What does ‘Domestic Systemically Important Banks (D-SIBs)’ category imply for banks?

The RBI has been coming out with the list of Domestic Systemically Important Banks every year since 2015.

The D-SIBs category generally implies for banks that are too big to fail. The failure of any of these banks would have a tumbling effect on Indian financial system.

As per the norms, these banks have to set aside more capital for their continued operation.

Inclusion of banks in the list gives additional assurance to investors that these banks would never fail.

In July 2014, the RBI issued the Framework to deal with D-SIBs. The D-SIB framework mandates the RBI to disclose the names of D-SIBs banks and place these banks in appropriate categories depending upon their Systemic Importance Scores (SISs)

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