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.
Representational image. Reuters.
Representational image. Reuters.
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.