The insurance sector regulator, Insurance Regulatory and Development Authority of India (Irdai), has given the go ahead for the LIC-IDBI Bank deal, which is likely to provide the state-run insurer a majority stake in one of the worst performing government banks in India in terms of bad loans ratio.
Post the deal, LIC will treat the lender as a subsidiary but it is unclear whether the insurer will go for management control. Arguably, LIC was forced to bail out IDBI just like the insurer has been salvaging many share sale programmes of state-run lenders. It has become the Centre’s favorite milch cow over the years.
There aren’t too many analysts who consider the LIC-IDBI deal as a wise move by LIC. The insurer is jumping into a deal, where it is becoming the promoter of a bank, with no prior experience in handling the banking business, and, at a time when even some of the biggest banking institutions are struggling to find financial stability on account of rising bad loans or NPAs. Already, LIC holds stakes in all 21 public sector banks (PSBs), and in at least six of them the insurer holds an over 10 percent stake.
As the IDBI Bank promoter, it can look at cross selling its products to bank customers and manage IDBI just like it treats LIC Housing Finance. But, unlike the housing finance arm, it is getting into multiple problems by picking a majority stake in one of the most problematic banks in India. The bank is already under the prompt corrective action (PCA) plan of the Reserve Bank of India (RBI) on account of financial ill-health.
In the fourth-quarter of fiscal 2017-18, IDBI Bank's net loss widened to Rs 5,662.76 crore as a higher provisioning for non-performing assets (NPAs) hurt its bottom line. Gross NPAs rose to 27.95 percent of its loans at the end of March 2018, compared with 21.25 percent at the end of March 2017. In absolute terms, gross bad loans stood at Rs 55,588.26 crore as against Rs 44,752.59 crore on 31 March, 2017. Provisioning for NPAs were raised to Rs 10,773.30 crore in the fourth-quarter of the fiscal ended March 2018, up from the Rs 6,054.39 crore parked aside in the year-ago period.
So, as this writer pointed out in an earlier column, there is no clear logic as to why LIC is going for IDBI of all banks, apart from the fact that it is following the government's orders.
LIC already has a 10.83 percent stake in IDBI; it will effectively own a white elephant with an insatiable hunger for the taxpayer’s money.
A one-time investment will not be enough to fill the capital void in the bank. The lender will require huge chunks of capital infusion ever year. This is evident from the ‘begging bowl syndrome’ of state-run banks; every year these entities line up before the North Block for survival capital and are never able to fend for themselves, which is what their private sector counterparts do.
As of now, the burden is with the government (the majority owner in state-run banks), which is struggling to meet the capital requirement of the 21 PSBs. The demand for capital is so huge that even the Rs 2.11 lakh crore capital infusion announced for PSBs late last year isn’t adequate to fill the capital void of state-run banks, neck-deep in bad loans.
Also, the LIC-IDBI deal will set a bad precedent for other state-run institutions being forced to acquire loss-making government banks, which defeats the very idea of privatisation, where private investors should ideally come in and put in fresh money to turn around loss making state-run banks.
Remember, the bailout will see LIC use the money it collected from its customers in the form of insurance premium, and should the experiment go wrong, it will have to answer the customers first.
(Part of this piece was published earlier on Firstpost)
Updated Date: Jul 01, 2018 10:13 AM