LIC to bailout IDBI Bank? The insurer will have to feed a white elephant with an insatiable hunger for money

The government’s go-to milch cow is back in action; this time to bail out a bank, 28 percent of whose total loans have already turned sour, and is, hence, dancing on a shaky balance sheet.

According to a report in The Economic Times, the government may ask the Life Insurance Corporation (LIC) to acquire a substantial stake in IDBI Bank, seeking special clearance from the insurance regulator.

Under the current norms, an insurance company can buy only up to a 15 percent stake in a bank, beyond which it requires special permission from the regulator.

LIC investing in banks, and for that matter, in any institution, is not new. Its basic business model is to collect an insurance premium from the common public and deploy that money in investments, the profits of which will enable the insurer meet its commitments to the customers and keep the organisation’s financial health intact.

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.

 LIC to bailout IDBI Bank? The insurer will have to feed a white elephant with an insatiable hunger for money

Representational image. Reuters

What is the logic of the government asking LIC to acquire a significant stake in IDBI Bank? Certainly, this deal would be not in the best interests of LIC. IDBI is one of the worst performing banks in terms of profitability and bad loan handling. 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, 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 March 31, 2017.

Provisioning for NPAs were raised to Rs 10,773.30 crore in the fourth-quarter of the fiscal ended March 2018, up from Rs 6,054.39 crore parked aside in the year-ago period.

So, the question is why would LIC, whose operations hinge on collecting public money, invest in a loss-making bank? Imagine it becomes the significant shareholder of IDBI (already LIC has a 10.83 percent stake in IDBI), it will effectively then own a white elephant with an insatiable hunger for the taxpayer’s money.

A one-time investment will not suffice 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 self from the market, 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.

The government will be happy to shift at least a part of its capital burden for the banking sector to the LIC. And if LIC becomes the significant shareholder of IDBI, this burden will be with the state-run insurer, every single year. LIC doesn’t have the technical expertise or experience to promote a bank; owning a bank is not a part of its original mandate.

The government has been using LIC as its milch cow for too long now. Many of the public issues by government-run companies wouldn’t have happened if LIC decided to stay out of the picture.

There is no harm in it, if it makes sense for the insurer, but the speculated LIC-IDBI deal wouldn’t be one such. The government should seriously consider putting an end to the pratice of using LIC to bail out ailing, unworthy companies.

LIC is an insurance company, whose loyalty should first rest with policy-holders. It is not a bailout institution or a loyal milch cow as the government has been treating it.

The LIC-IDBI deal would be a mistake from day-one.

(Data from Kishor Kadam)

Updated Date: Jun 26, 2018 12:58:16 IST