IDBI Bank Capital Levels Fall Below Regulatory Requirement

IDBI Bank Ltd., which reported its eighth quarterly loss today, has seen its capital levels fall below the minimum regulatory requirement. The bank, however, plans to make good on coupon payments on its Basel-II bonds due next week, said two officials familiar with the matter.

As part of its quarterly earnings statement, the bank disclosed that its capital adequacy ratio under Basel-III has fallen to 6.22 percent compared to 8.18 percent in the last quarter. Its common equity tier-I (CET-1) ratio has fallen to 3.87 percent.

As per the Basel rules adopted by India, the minimum capital level is set at 9 percent and the minimum CET-1 level is set at 5.5 percent. If capital levels fall below the mandated thresholds then a bank is restricted from servicing Basel-compliant bonds, according to both RBI regulations and conditions inherent in such bond issues.

However, according to the two officials cited earlier, the bank has approval from the Reserve Bank of India to go ahead and make the coupon payment due on Nov. 19. The approval had been sought before the second quarter earnings, said one of the officials. The bank’s capital adequacy ratio was at 8.18 percent at the end of the first quarter.

An email seeking clarity on the approval was sent to the RBI on Wednesday evening. The story will be updated with its response.

Midst Of A Transition

IDBI Bank, an erstwhile development finance institution, is in the midst of an ownership transition.

Earlier this year, the government gave LIC approval to increase its stake in the bank from the existing 8 percent to a majority 51 percent shareholding. This will help the government prune its close to 86 percent stake in the bank to a non-promoter stake and spare it further capital contributions.

So far LIC has already raised its ownership in the bank to just under 15 percent, infusing Rs 2,098 crore via a preferential allotment of shares. This has been accounted for in the capital levels reported at the end of the September quarter.

The acquisition of the remaining stake is subject to the completion of pending litigation, said one of the officials quoted above. However, the official added that if needed the remaining funding due from LIC can be taken into account for the purpose of calculating capital adequacy ratios in the form of share application money.

At a press conference on Wednesday, the bank’s managing director and chief executive officer Rakesh Sharma said the deal with LIC is near conclusion. It has received approval from the Reserve Bank of India for the ownership change. Approval from the Competition Commission and final approval from the Securities and Exchange Board of India is awaited.

The increase in LIC’s ownership has triggered a mandatory open offer to IDBI Bank’s shareholders, that opens on Dec. 3. LIC has offered to acquire 204.15 crore equity shares, representing 26 percent stake in the bank as per SEBI takeover regulations. The offer to buy shares at Rs 61.73 apiece will close on Dec. 14.

Government To The Rescue

The government has not allowed any public sector banks to skip a coupon payment despite the regulatory and contractual limitations.

On Nov. 8, Allahabad Bank informed stock exchanges that the government will pump in an additional Rs 3,054 crore into the bank. This, too, was likely done to shore up the bank’s capital levels, which fell below the regulatory minimum. At the end of the September 2018 quarter, Allahabad Bank reported a capital adequacy ratio of 7.07 percent and a CET-1 ratio of 4.98 percent. “Upon consideration of Government of India capital infusion of Rs 3,054 crore received by the Bank on 12.11.18. the total capital adequacy would improve to 10.89 percent with CET-1 of 7.59 percent,” a statement by the bank said.

In the past, both the government and the RBI have also allowed banks to recall additional tier-1 bonds so they don’t have to skip coupon payments on these bonds. Even though skipping of coupon payments is a permitted feature in the loss absorbing nature of these instruments, authorities fear a missed payment could be seen as a default by a government-led bank.