Is LIC getting overloaded with bank shares? Looks like it

The year-end is approaching. The coffers are empty. So what should a government do?

Answer: call the bosses of the Life Insurance Corporation (LIC) for a bailout. The rest of the sick birds in the public sector (Air India, etc) may seek a bailout from the government, but when the government itself wants one, it goes to LIC .

Most public sector banks need capital infusions, but with the government already hard-pressed for money, it has even passed on this task to LIC. Recently, LIC invested in the preferential issues of Dena Bank and Bank of Maharashtra.

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Now, to ensure that other banks too get their shot of capital, the government has raised the 10 percent cap placed by the regulator on LIC’s holdings in banks, reports Business Standard.

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The newspaper says Canara Bank, Allahabad Bank, Syndicate Bank and Andhra Bank are in the queue to make preferential allotments to LIC.

So far, so good. But there is only one question: is it healthy for one institution to be holding so many bank shares?

According to a Firstpost analysis (see table below), the government-owned insurer already holds large stakes in 15 banks, including three private banks (HDFC Bank, ICICI and Yes Bank) as part of its portfolio.

These bank shares have a current market value of over Rs 50,000 crore. The insurer is by far the biggest owner of bank shares after the government, and these include strategic holdings in Corporation Bank and Oriental Bank of Commerce.

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Apart from banks, the LIC also holds nearly Rs 28,000 crore of various public sector shares.

As part of its rescue act, LIC is expected to not only invest in banks, but also take part in the finance ministry’s disinvestment plans to the extent of around Rs 10,000 crore this year.

The LIC management says it has headroom to invest, and that it is getting into this willingly since it will be acquiring blue chip public sector shares at low prices.

In 2010, LIC put in bids for Rs 8,000 crore when the government offered National Mineral Development Corporation shares for sale and no one else was interested.

As the buyer of last resort for all the wares that government wants to unload, the insurer has no peer. But this comes with a moral hazard: when an insurer is taking on so much risk by holding so many bank and public sector shares, isn’t it violating the basic norm of prudence and risk? Remember, with those shares come the bad loan exposures of all those banks - which is why they need the capital anyway.

For an insurer, that’s bad policy.