IDBI, poster boy for more privatisation

The strategic sale of IDBI Bank is India's most ambitious disinvestment undertaking to date. GoI has tapped into rising overseas interest in India's financial sector to pare its holdings and those of LIC into minority stakes, even as RBI reassuringly continues 'full regulatory and prudential supervision' of the bank. Indian-Canadian V Prem Watsa-owned holding company Fairfax raised its bid for IDBI Bank - average of two independent valuations reportedly serving as benchmark price for evaluation of qualified bids - and the deal went through. This brings a welcome end to a decade-long chapter of rescuing the bank from bad loans that involved, apart from recapitalisation, bringing government-owned LIC on board as largest shareholder. IDBI Bank, now profitable, is the candidate for GoI's attempt to privatise banks, which was placed on the back burner due to political opposition.

Indian banks have seen a flurry of investments by Japanese and West Asian banks of late. Fairfax has a controlling stake in CSB Bank that will have to be merged or sold within two years of the IDBI Bank deal. But the real challenge for Fairfax lies in driving the bank into the hyper-competitive private banking space. The competitive intensity can only intensify in one of the world's fastest-growing markets for credit that is drawing interest from foreign lenders. IDBI Bank may have to rationalise its branch network under its new management to maintain its regional presence in western India. The bank's legacy infrastructure must be integrated with Faifax's technology stack.

Critically, IDBI Bank will make a huge leap from its development finance origins to foreign ownership with the government riding side saddle. It has been done before, of course. Other overseas investors are looking at the private and shadow banking space for acquisitions. Fairfax will have to make the cultural transformation at IDBI Bank, which requires larger management bandwidth. Success should pump energy into India's stalled privatisation of banks. GoI's greatest divestment coup could set the template for a stronger banking industry.