With the cabinet’s approval for conveying no-objection for reduction
in government of India’s shareholding
in IDBI Bank to fall below 50 percent on 1st August, the decks are
cleared for LIC to infuse Rs 13 000 cr in IDBI Bank. The interim finance
minister dubbed such takeover of IDI Bank by LIC as “win-win situation for
both LIC and IDBI Bank”, for LIC will
have banking network with 1916 branches of IDBI Bank to sell its policies—an
act which LIC could have accomplished more effectively by a bank with even a
larger network by merely paying commission—while LIC agents will help IDBI Bank
to mobilise low-cost deposits.
Earlier, Insurance Regulatory and Development Authority of
India has cleared the proposal of Life Insurance Corporation of India to
raise its stake in the ailing state owned IDBI bank to 51%. The approval is
of course accorded with caveats: One, it will inject about Rs 13 000 cr in to
IDBI as equity; two, it will not get management rights; and three, it has to
reduce its stake in the bank to about 15% over a period of 5-7 years.
Before getting into the sanctity of LIC’s proposal to hike
its stake in an ailing bank, let us first take a look at the financials of
IDBI bank, for it alone can equip us to judge the investment decision of LIC
fairly. As the non-performing assets of IDBI bank raised beyond a threshold,
RBI has placed it under the prompt corrective action frame work in May 2017.
The bank has posted a net loss of Rs 8238 cr for the financial year ending
March 31, 2018. Its current gross nonperforming assets are hovering around
28%, which is the second highest ratio ever witnessed in the banking system.
As a result of this growing menace, even the capital infusion of R10 600 by
the government last fiscal, that too, over and above the R 2 200 cr added
between fiscal 2015 and fiscal 2017 could not enable it to meet its capital
requirements. As the bank’s current Tier I capital stood at 7.4 percent,
which hardly meets the mandated requirement of 7.37 percent, it has to freeze
its lending and branch expansion plans. Intriguingly, the bank has also
reported a negative RoA for the last three consecutive years. The rating
agencies (India ratings) have marked 36 % of total loan book as stressed
assets. Thus, its prospects for turning into profit in the near future
appears to be bleak. Obviously, the bank needs a rescue.
It is against this background that the government appears to have asked the
state owned LIC to bail out the bank by rising its stake in it from the
current level of 10.37% to 51%. With this capital infusion, its immediate
problem of capital inadequacy gets partly answered. But the big question is:
will IDBI bank be able to turn around within 5 to7 years for LIC to withdraw
its capital as directed by IRDA and bring its stake in it back to 15%? The
answer to this question is anybody’s guess! The way the NPAs are raising in
PSBs and the resulting continued erosion in the capital coupled with falling
net interest margin no one is sure when this bleeding will stop.
Now turning to LIC, the first thing that strikes our mind is: LIC is an
independent body that is answerable to its policyholders. The capital that it
is asked to infuse into IDBI is premium collections that are supposed to be
invested by LIC mostly in risk-free securities to earn income so as to honour
its commitments to the policyholders at a future date.
Indeed, IRDA, the regulatory authority that overseas the functioning of
insurance business in the country has set certain investment guidelines for
insurance companies to follow while investing their premium income with the
sole objective of diversifying the risk and thereby ensure safety of the
investment and the return thereof. Under the said regulations, LIC is
permitted to have an equity exposure up to 15% in a single company.
That being the rule, any deviation from the norm would only mean undermining
the safety of insures’ funds. And that’s what the present proposition of LIC
to invest funds in IDBI exceeding the 15% cut off limit, that too, in an
already ailing bank would precisely mean.
It is this underlying philosophy that is raising many irritating questions.
True, investment of 12 000 cr might be a small fraction of LIC’s balance
sheet of Rs 1.24 lakh cr. But how about the prudence of the investment? For
the government it might be an easy way out to rescue the bank but as a
principle it is bad, for the investment is in no way beneficial. Should the
experiment go wrong, will LIC be able to answer its policyholders’ claims?
Also, would it not question the wisdom of IRDA in granting such exemptions to
rules framed by it? Ironically, we are building institutions, framing prudent
regulations but take pleasure in frequently tinkering with them. This playing
with the independence of regulatory bodies and financial institutions may not
augur well for the system.
Over the years, LIC has become the unfortunate milch cow of the government at
the centre for bailing it out from many of its share disposal programmes, etc
and this is going on unabated irrespective of the political party in power.
This is the biggest worry, indeed!
So long as the going is good, and institutions continue to be
‘going-concerns’, there may not be any apparent threat to the financial
system. But prudence commands us to remember the fate of UTI, the erstwhile
behemoth of capital markets that helped government in disinvestment of its
stake in Public Sector Undertakings, etc.
Institutions of LIC’s magnitude are capable of creating
contagion risk in the system and hence command that we handle them with care.
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