The government in its zeal to address twin problem of divestments and fiscal deficit and at the same time exiting some loss making PSU which are cash guzzlers and value destroyers; comes out with an innovative idea. Here LIC becoming the core promotor of IDBI Bank is commercial decision or just mean to address above two problems only time will prove. If LIC by putting professional management team can create structure which capture capabilities of both the organization i.e. IDBI branch network and its employees and utilization huge cash generated on daily basis by LIC by grating higher returns than what LIC could make now.
Nudged by the government, the insurance regulator (Insurance Regulatory and Development Authority of India) gave its approval to state-owned behemoth Life Insurance Corporation (LIC) of India to increase stake in the debt-ridden IDBI Bank from the current 10% to up to 51%. The decision has been severely criticised by several sections including employees of the insurance and banking sectors. At the last count, the life insurance company will invest around Rs 20,000 crore to bail out the bank which is in dire straits. The Reserve Bank of India and Securities and Exchange Board of India have also given their in-principal nod to LIC for the deal.
While the exposure may be miniscule as LIC has assets under management (AUM) of Rs 24 lakh crore as on March 2018, the deal even goes against LIC’s own investment mandates, which prevents it from taking over any business. The deal will lead to a concentration of risk is the system and it is still unclear how it will work to improve the performance of the bank. Given the fact LIC has chosen to pick up one of the worst performing banks in the country, it will now depend on the insurance company’s ability to turn the business around or else policyholders will take a hit in terms of bonus payouts. For policyholders, poor investment return will reflect in the form of suppressed bonuses that they get on their participating products portfolio.
As per media reports – the final contours of the deal are still on the drawing board – LIC will reduce its stake in the bank in the next five to six years. While investment is part of LIC’s business, it cannot be that all loss making government companies are to be bailed out by the insurer at the cost of the interest of policyholders who have invested their money. LIC is already saddled with a large chuck of its portfolio as NPA and the government should take measures to address them instead to forcing it to buy loss making public sector companies.
Some Recent News of LIC – IDBI Bank
IDBI Bank in life support system
The Mumbai-based lender has the highest bad loans in the industry at nearly 28% of total advances and posted a loss of Rs 5,663 crore in the quarter ended March 2018 and Rs 8,238 crore in FY18. The total non-performing asset of the bank now stands at Rs 55,600 crore.. The bank’s NPA was 1.4 times of the book value as on March this year and 1.2 times its free float market capitalisation. Also, IDBI Bank has put the life insurance subsidiary with Aegis and Federal Bank on block a year ago though no life insurance company has shown any interest in buying the company.
Despite capital infusion of Rs 10,600 crore by the Centre in FY18, the bank’s core equity capital (CET-1) stood at 7.42% in March this year, just above the regulatory norm of 7.37%. The bank’s asset book, which depends heavily on corporate lending, is not showing any signs of recovery. As a result, the bank is in dire need for money and the LIC’s investment would be a much-needed help.
In fact, IDBI Bank has been under the RBI’s prompt corrective action framework since May 2017 due to the high level of bad loans and negative return on assets reported by the bank. The unabated surge in bad loans had prompted the bank to halt corporate lending and shrink its international presence. The bank has now shifted to a capital light model and focused on retail lending. This has resulted in lower risk weighted assets.
In the past two years, the government had tried to sell stake of IDBI Bank to private players, but no company showed any interest in the state-owned bank. Last year, too, Union Minister Arun Jaitley had informed the Parliament that the process of transformation of IDBI Bank has already started. At present, the government holds 85.96% stake in the bank.
LIC bails out PSUs in trouble
For all reasons, LIC is known as the government’s cash cow. In the past it had bailed out public sector initial public offerings, did acquisitions and even participated in government’s disinvestment programme every year. The company has made incremental investment worth around Rs 70,000 crore in public sector undertakings (PSU) in the last six years. The state-owned life insurer, with a Rs 100 crore capital base and a government guarantee, has Rs 24 lakh crore worth of AUM, or close to 80% of the total life insurance industry’s AUM. The company till date has invested Rs 6 lakh crore in equities. In fact, its PSU holding is around Rs 2 lakh crore, which was just Rs 80,000 crore three years ago.
Table 1: LIC’s Holding in PSU Banks (% Holding as of June 2018)
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