Mergers and acquisitions have long served as instruments of growth or survival in the banking sector. Post liberalisation, 22 out of 24 acquisitions in the Indian banking sector were for survival of the weak or the distressed banks. These included the acquisition of IDBI Bank by the financially distressed Industrial Development Bank of India (IDBI-FI) for its survival in 2005.
IDBI’s decline started in the mid-1990s after the departure of the last stalwart, SS Nadkarni, who was succeeded largely by men of straw. Mr Nadkarni’s legacy ensured that IDBI would remain a top performer among the three all-India financial institutions up to FY96-97. Thereafter, its decline began and, in just seven years, up to FY03-04, the grand FI (financial institution) had bitten the dust, characterised by gross non-performing assets (NPAs) of ₹12,945 crore (net NPA – ₹9,000 crore), constituting a huge 14.2% gross NPA (apart from hidden NPAs) as on 31 March 2004.
As 72.7% shareholder, the government bailed out IDBI Bank by structuring the net NPAs of ₹9,000 crore as zero-coupon bond investments. In addition, IDBI-FI merged with itself, its small but valuable subsidiary, viz., IDBI Bank based on the assumption that the merger would automatically eradicate the causes for IDBI-FI’s financial distress. At that time IDBI Bank’s assets were just about 15% of the assets of the merged entity – IDBI Bank (Table-1)
The root cause, i.e., the deficient governance caused by unbridled management and misaligned incentives, i.e., adverse selection, leading to the 2005 bailout, remained unaddressed. As a result, the decade (2005-2015) was characterised by the continuance of past practices leading to huge NPAs and large-scale write-offs/ provisioning and recapitalisation by the government and LIC (Table-2)
Write-off–Recapitalisation Cycle
Between FY15-16 and FY19-20, the Bank recognised cumulative losses of ₹44,921 crore due to NPA recognition and write-offs. These losses were effectively absorbed through recapitalisation of ₹51,582 crore between 2010 and 2019, funded by taxpayers’ money. While the ₹9,000 crore bailout in 2004 made waves in the media, the much larger provisioning, losses and recapitalisation during 2011-2021 did not raise even a ripple, despite grave fiscal implications.
Following RBI intervention under the prompt corrective action (PCA) framework in 2017 and the appointment of a seasoned and successful banker as MD & CEO in October 2018, the Bank showed signs of operational improvement. The PCA restrictions were lifted in March 2021, and the bank returned to profitability. (Table-3)
The improved financial performance post-FY20-21 follows extensive write-offs and balance sheet cleansing funded by taxpayers’ money. Therefore, these reported profits reflect, to a significant extent, post-write-off normalisation under the current incumbent, rather than purely organic efficiency gains.
Divestment Attempts and Valuation Disconnect
Efforts to privatise IDBI Bank have faltered repeatedly. An early attempt in October 2015 failed due to poor asset quality. A renewed divestment process initiated in 2022 also failed recently, reportedly because bids for control stake acquisition fell short of the reserve price.
The reserve price, which was fixed for the stake sale, is not public but is stated to have been over ₹100/share. Thus, the government’s share valuation expectations implied a price-to-book ratio of over 1.78 and an aggressive price-to-earnings multiple (PEM) of 14.31 based on FY24-25 figures. The implied PEM exceeded the public sector bank (PSB) median PEM of 7.75 to 8.00, significantly and was not realistic. Based on trailing EPS (earnings per share) of FY24-25 and median PSBs’ PEM of 8.00, the fair value of IDBI Bank shares works out to about ₹55.92/share. With an aggressive 40% control premium, the fair value works out to ₹.78.3/share. This is, however, subject to the satisfactory outcome of the bidders’ due diligence. It is surprising how the transaction advisors failed to induce a realistic reserve price.
Even after operational improvements, IDBI Bank remains relatively small, overcapitalised and less efficient in asset deployment compared to larger peers (Table-4).
Legacy issues, including actuarial liabilities, further weigh on valuation. The gap between expected and realisable valuation underscores a key point: markets discount not just past losses, but the risk of their recurrence. No wonder the auction failed.
The Way Forward
The Bank’s navigation to profitable operation from FY20-21 is positive, but does not imply a long-term change of course. The central issue remains the unresolved shareholder–manager agency problem, which continues to induce adverse selection, i.e., distorted lending incentives and risk assessment. Without correcting this fundamental misalignment, any future capital infusion—whether from the government or private investors—risks being absorbed in the same cycle.
If the government intends to exit, it must recognise that valuation will ultimately reflect structural realities, not recent improvements in financial metrics. Strategic options such as consolidation with stronger institutions may offer better outcomes than repeated, unsuccessful divestment attempts.
IDBI Bank’s trajectory is not an isolated case but a broader reflection of challenges within public sector banking. It highlights a critical policy lesson: recapitalisation without governance reform is fiscally costly and economically ineffective.
Unless the root cause, which induces suboptimal credit analysis, allocation and monitoring, and weak accountability, is addressed, the cycle of write-offs and public funding will persist—each iteration larger than the last.
(Dr Rajendra M Ganatra, ex-MD&CEO of an ARC & an insolvency professional, has over four decades of experience in industry & financial services.)
Dr Ganatra is known for cleansing system. He dedicated his career in doing so. Here his experience show cased