Early Diwali dhamaka: With the IDBI strategic sale to Fairfax, GoI has taken a giant step in the disinvestment pathway

The sale of IDBI Bank comes at a time when the economy is facing challenges on account of a persistent crude oil shock impacting forex balances that are being addressed by RBI. This has also strained government balances with various conjectures being made on the fiscal slippages due to higher subsidy outflows. Needless to say, a flow of ₹26,000 cr comes as a bonanza for the government.

What makes this sale special is that while discussions started from 2022 onwards, the deal has been completed in 2026 during which time the bank has become even stronger than before, thus making it a good pick for Fairfax in terms of valuation.

Several things stand out from this sale:

• GoI would be getting around ₹26,000 cr, which is significant at a time when fiscal balances can be strained due to the higher subsidy bill outflow. In fact, the budget has been delivering well on the non-debt receipts side, which includes both disinvestment and asset monetisation where a lot of urgency has been shown. The target will now be exceeded with the IDBI Bank sale providing the icing. Further, with GoI still retaining 15% stake, there is room for further sale in the market at an opportune time.
• As the investment comes from Fairfax, a Canada-based company, funds will go as FDI - something that India has been looking to shore up the capital account. While the amount of around $5.5 bn would be a one-time flow, it opens the door for greater participation of FDI in future asset sales in the banking sector. Fairfax has equity stake in CSB and would have to merge the same over a time period. We have already seen such investment by foreign entities in banks like Yes Bank and RBL Bank, which will make other foreign investors interested.

Also Read: Centre set to cross Rs 80000 cr disinvestment target for first time since FY19 after IDBI Bank stake sale

• IDBI Bank has demonstrated over time that with adept management and support from government and LIC, there can be a major turnaround. Gross NPA ratio has fallen to 2.3% in FY26, which is almost 30% over 2018 when it was placed under the umbrella of prompt corrective action.
• Further, the capital adequacy ratio of the bank is more than comfortable at 25.5%. And this has been accomplished with no major management change, and with the existing so-called public sector bankers bringing about this transformation.
• The curious thing about this sale is that while GoI gets money that's accounted for as disinvestment, the transaction is not really privatisation. This is so because the bank is treated as a private bank since LIC was the leading stakeholder with around 49%, while GoI held around 45%. This means that this deal cannot be interpreted as being the beginning of a programme of privatisation in the banking sector, and should be viewed on a standalone basis.
• While the deal isn't privatisation, this issue will come back to the discussion table for sure. In 2021, GoI had spoken about privatising a couple of PSBs. It was largely believed that IDBI Bank would be a test case as it would provide some clues to how such deals transpire - even though it's not a case of government giving up ownership.

Also Read: IDBI Bank strategic restructuring to attract FDI, boost banking sector, says FM Sitharaman

The decision on such future deals is evidently the prerogative of the owner, which is the government. But there will be a couple of issues that will have to be kept in mind:

1. PSBs have played a very important role in carrying out government social programmes like Jan Dhan and MUDRA. A lot of resilience shown by the economy during Covid has been due to cash transfers being enabled by these accounts. This lever will get diluted once there is any change in ideology on this subject.
2. All PSBs are profitable and comparable to private sector banks on almost all performance parameters. In fact, there is a change in investor presentations where private banks juxtapose their performance with some of the large PSBs for comparison. In the past, it was the other way round.
3. PSBs have built a strong retail lending franchise in the last 5 yrs based on leading-edge technology that has added to stock valuation.
4. Banks as a group have turned profitable, and been paying progressively high dividends to GoI, which comes as non-tax revenue in the budget. The dividend paid has been rising and has been upwards of ₹25,000 cr in the recent past. Any divestment will mean an immediate gain in terms of revenue, but depletion of future flow of income.

Will anything change for IDBI Bank? It would mean business as usual for deposit holders and borrowers, and the regulatory framework for the bank remains the same. The interesting thing would be the future of HR management. Normally, all such deals could involve some disruption at the top in terms of roles and designations. There could be upward calibration in compensation. This is something that needs to be seen.

Views are personal