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Cabinet takes two key decisions - Capital infusion in IDBI Bank, ethanol price hike

By Vishal S
|

New Delhi, Sep 03: The Union Cabinet on Tuesday took some key decisions that would have an impact on the economy which showing signs of slowing down.

Cabinet has cleared recapitalization of IDBI Bank with one-time infusion of funds by both government & LIC (Life Insurance Corporation). In the other decision, Cabinet Committee on Economic Affairs (CCEA) approved mechanism revision of ethanol price for supply to Public Sector Oil Marketing Companies for procurement of ethanol.

A file photo

The government has approved Rs 9,300 crore fund infusion in IDBI Bank to help improve the bank's capital base and turn it profitable.

Briefing media about Cabinet decisions, Information and Broadcasting Minister Prakash Javadekar said it will help in completing the process of IDBI Bank's turnaround and enable it to return to profitability and normal lending, and giving government the option of recovering its investment at an opportune time. Of the Rs 9,300 crore needed, LIC would meet 51 per cent (Rs 4,743 crore), he said.

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The remaining 49 per cent, amounting to Rs 4,557 crore, is proposed from the government as its share on one-time basis, he added. The shareholding of the government was reduced to 46.46 per cent from 86 per cent while LIC stake in the bank increased to 51 per cent in January this year.

LIC acquired controlling 51 per cent stake in the bank, making it the lender's majority shareholder in January this year. After this infusion, IDBI Bank expects to be able to subsequently raise further capital on its own and expects to come out of RBI's Prompt Corrective Action (PCA) framework sometime next year, he said.

"This cash neutral infusion will be through recap bonds i.e. Government infusing capital into the bank and the bank buying the recap bond from Government the same day, with no impact on liquidity or current year's Budget," he said.

IDBI Bank needs a one time infusion of capital to complete the exercise of dealing with its legacy book, he said, adding it has already substantially cleaned up, reducing net NPA from peak of 18.8 per cent in June 2018 to 8 per cent in June 2019. The capital for this has to come from its shareholders.

LIC is at 51 per cent and is not allowed to go higher by the insurance regulator. In August last year, the Cabinet approved the acquisition of controlling stake by Life Insurance Corporation (LIC) as a promoter in the bank through a combination of preferential allotment and open offer of equity.

IDBI Bank with over 800 branches has about 1.5 crore retail customers and about 18,000 employees. For the first quarter ended June 2019, IDBI Bank reported a net loss of Rs 3,801 crore as compared to Rs 2,410 crore in the same quarter of the last year. Gross non-performing assets (NPAs), as a percentage of total advances, were at 29.12 per cent in the quarter compared to 30.78 per cent in the year-ago June quarter. Post provisioning, the net NPA too came down to 8.02 per cent as against 18.76 per cent in the year-ago quarter.

Provision Coverage Ratio (PCR) improved from 69 per cent from September 2018 to 83 per cent in March 2019 and further to 88 per cent as on June 30, 2019. Synergy with LIC has enabled access to 29 crore policyholders base spread over 3,184 branches and also to 11 lakh agents and 2 lakh employees of LIC, an official statement.

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From LIC synergy, the bank is expected to earn Rs 500 crore revenue in 2019-20 and Rs 1,000 crore from 2020-21 onwards, an official statement said.

"Sale of insurance kick-started in March 2019 with Rs 160 crore premium. This momentum has continued with over Rs 250 crore premium collection in first four and a half months of this year. FY 2019-20 target is Rs 2,000 crore of premium and Rs 200 crore revenue," it said.

Additional business anticipated is Rs 5,000 crore (housing loan, auto loan, personal loan) by leveraging LIC agents' network, it said.

Govt hikes ethanol price to cut oil import bill:

The government on Tuesday raised the price of sugarcane-extracted ethanol used for blending in petrol by up to Rs 1.84 per litre as it looked to cut oil import bill by USD 1 billion annually through its greater use in auto fuels. State-owned oil marketing companies will buy ethanol from sugar mills, for mixing in petrol, at enhanced rates for ethanol year beginning December 1, Petroleum Minister Dharmendra Pradhan said here. He was briefing reporters on the decisions taken by the Cabinet Committee on Economic Affairs, chaired by Prime Minister Narendra Modi.

The price of ethanol from 'C-heavy molasses' has been raised by 29 paise per litre to Rs 43.75 while the same from 'B-heavy molasses', also called as intermediary molasses, by Rs 1.84 to Rs 54.27 a litre. Ethanol is a by-product of molasses generated on crushing of sugarcane and the higher price is to encourage sugar mills to divert from sugar production.

Cane-based ethanol can be produced three different ways - directly from cane juice, from B-grade and C-grade molasses. Pradhan said the higher price is expected to increase the procurement of ethanol to 260 crore litres between December 2019 and November 2020, up from 200 crore litres bought in the previous ethanol year.

"Increased ethanol blending in petrol is expected to replace 2 million tonnes of oil annually, helping save USD 1 billion in import bill," he said. The percentage of ethanol being doped in petrol will rise from about 6 per cent now to 7 per cent next year and to 10 per cent by 2021-22, he said. Price of ethanol was last revised in September last year when the CCEA had approved a 25 per cent hike in the price of ethanol produced directly from sugarcane juice to Rs 59.13.

Now it has been hiked to Rs 59.48. At that time, the price of ethanol produced from B-heavy molasses was hiked from Rs 47.13 to Rs 52.43 but that from C-heavy molasses marginally reduced to Rs 43.46 from Rs 43.7. Commenting on the decision, Indian Sugar Mills Association (ISMA) director general Abinash Verma said: "Government's decision to increase ethanol price once again, with special emphasis and a higher increase for ethanol made from B-heavy molasses, confirms the government's commitment towards encouraging more diversion of the surplus sugarcane/sugar into ethanol."

"The second very important decision of allowing a single premium price for the ethanol made from partial or 100% sugarcane juice is another big and positive step in this direction," he said. "These decisions will help in further increasing the ethanol blend levels from the current 6% average levels across the country."

The sugar industry, he said, is responding very positively by hugely investing in new or expansion of ethanol production capacities, which will help achieve the government's 10 per cent ethanol blend targets by 2022. The world's third largest oil consumer is dependent on imports to meet 83 per cent of its needs and substituting some of the fuel with biofuels will help cut import dependence. India started blending ethanol, produced as a by-product during the process of making sugar from sugarcane, in petrol during the first NDA regime in 2002. But the programme slowed almost to a grinding halt in the 10-year rule of Congress-led UPA.

It was revived again when the BJP first came to power in 2014. Ethanol blending in petrol increased from 38 crore litres in the ethanol supply year 2013-14 to an estimated 141 crore litres in the ethanol supply year 2017-18 and 200 crore litres in the following year. India spent USD 112 billion on import of 226 million tonnes of crude oil in 2018-19.

Currently, petrol contains 6 per cent of ethanol. Pradhan said the price of ethanol from sugarcane juice/sugar/sugar syrup route has been fixed at Rs 59.48 per litre.

"Additionally, GST and transportation charges will also be payable. OMCs have been advised to fix realistic transportation charges so that long distance transportation of ethanol is not disincentivised," he said adding the use of alternative and environment friendly fuels will reduce import dependence and give boost to agriculture sector.

This comes at a time when a surplus of sugar production is depressing sugar price. Consequently, sugarcane farmer's dues have increased due to the lower capability of the sugar industry to pay the farmers.

OneIndia News with PTI inputs

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