L&T Finance-IDBI deal prospects slim

L&T Finance is reportedly looking to buy a stake in state-owned IDBI Bank, with IFC, UK-based CDC group and Singapore's GIC also showing interest.

The government, which has a 80.16 per cent stake (which will be reduced to 74 per cent after a qualified institutional placement) in IDBI Bank, has indicated it would like to reduce its stake and get into the back seat as far as operational matters were concerned. Does this mean L&T Finance's long-pending wish of becoming a bank could come true soon? Unlikely, said most analysts.

Siddharth Purohit, banking analyst at Angel Broking, said: "I am not sure about the regulatory aspect. Regulators may not allow the merger of an NBFC (non-banking finance company) with a bank."

Further, an analyst at a domestic brokerage said the Reserve Bank of India (RBI) might not approve such a deal as the L&T group did not get a licence for either a universal bank or a small finance bank. He added that these might be rumours, as L&T Finance's name has been appearing in all recent banking deals following its inability to bag a universal banking licence.

Even if L&T Finance gets a stake, it will be a big negative for the company. This is because IDBI Bank has been struggling with a whole host of issues such as poor asset quality and profitability, weak capitalisation, lack of corporate governance in select cases such as Kingfisher Airlines and union opposition to privatisation, among others. Any potential buyer will find it tough to deal with these issues after a merger.

Assuming that L&T Finance was the future buyer, it might not be able to derive much synergies from the IDBI Bank merger. Purohit said though IDBI Bank was focused on lending to corporates and L&T Finance targets the retail-lending space, weak financial positioning and lack of banking expertise in case of the latter would be key hurdles. Given IDBI Bank's corporate focus, its branch network too was not as large as some of the other public sector banks, he added.

The bank's lower capital adequacy will only add to the woes of a potential buyer.

Rating agency ICRA had estimated that IDBI Bank would need to raise common equity capital of Rs 8,000-11,000 crore and additional tier-I capital of Rs 3,000-4,000 crore during FY17-FY19 to meet the increase in regulatory minimum capital requirements and for meeting growth targets. This might be difficult, given that its huge stressed assets would keep provisions at elevated levels and continue to put pressure on the bank's profitability.

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