What is the issue?
- The government is proposing to sell a portion of its stake in IDBI Bank to LIC.
- The idea of routing policyholder funds into a worst-performing public sector bank has raised some concerns.
What is the proposal?
- The government is mulling a proposal to sell around 40-43% stake in IDBI Bank to LIC.
- State-owned Life Insurance Corporation (LIC) of India may buy a controlling stake in IDBI Bank.
- LIC is currently the largest public shareholder of IDBI Bank with a stake of 10.82%.
- If it buys another 43%, its total stake in the state-run IDBI bank will be around 55%.
- The stake sale will fetch the government between Rs 10,000-Rs 11,000 crore.
Is this the first time?
- LIC has pledged its support to Centre’s disinvestment of New India Assurance and General Insurance Corporation of India last year.
- This is already costing LIC dear.
- LIC has time and again been used to rescue capital-starved PSU banks.
- It has been subscribing to banks’ risky Basel-compliant bonds over the years.
- It has also often been bailing out the Centre by mopping up shares of public sector enterprises even in declining markets.
What are the concerns?
- LIC is arguably the country’s largest public insurer.
- It has a balance sheet of about Rs.28-lakh crore as of December 2017.
- Given this, infusing a couple of thousand crore is unlikely to cause any serious harm.
- Capital infusion - But, there is concern with the Centre’s massive Rs.10,600 crore bank capital infusion.
- Notably, this has not been enough to meet the capital requirements of the bank.
- Post capital infusion, the bank’s Tier I capital ratio should have jumped by about 400 basis points.
- Instead, the Tier 1 capital at 7.4% as of March 2018 barely meets the mandated requirement of 7.37%.
- It is clearly because of the sharp rise in provisioning for bad loans.
- Taxpayer's money - The move throws good taxpayers’ money after bad.
- It places LIC to perform the rescue act, seemingly an ill-conceived solution.
- Notably, tackling a deeper structural issue is the need of the hour.
- This is the case, not just in IDBI, but the entire banking sector.
- LIC - The string of investments by LIC has about 29 crore policies in force.
- The recent move raises questions on LIC as a prudent money manager for its policyholders.
- It also raises doubts over
- the existing internal investment policies, if any
- the overall risk to the insurer’s portfolio and its aggregate exposure to sectors and stocks
- The lack of disclosures and opacity in LIC’s investment portfolio add to these concerns.
How does the future look?
- LIC is still a market leader in the life insurance space.
- But it has been steadily losing market share to its private counterparts.
- LIC’s competitive pressures are rising, and IDBI Bank’s capital needs are going to be huge.
- Given this, adding the burden of recovering the PSU banks can seriously affect LIC.
- The Centre should think twice before using the key players of India’s financial system for its rescue acts.
Source: BusinessLine