LIC cannot be used to bail out IDBI Bank

The government is nowhere close to coming up with a solution for distressed state-owned banks. It could consider merging some of them to cut costs, but, a year ahead of the elections, it would be hard to convince the trade unions as this would need to be accompanied by big layoffs. Moreover, without a big dose of capital, a merger would not really serve the purpose, and the government is very short on resources.

However, dire as the situation is, the idea of getting Life Insurance Corporation (LIC) to bail out IDBI Bank by adding to its existing 10.80% stake in the lender is nothing short of preposterous. The move is patently unfair to the millions of policyholders because, with around Rs 55,500 crore of gross NPAs and virtually no net worth to talk of, IDBI Bank is a poor investment. RBI has initiated a Prompt Corrective Action (PCA) plan for the lender, curbing its lending and restricting loans to only low risk-weighted assets. Indeed, an investment of this nature—Rs 12,000 crore if LIC buys a 51% stake—will divert the surpluses of the national insurer and lower the returns to policyholders. Already, it is unfair to policyholders that the government taps LIC for subscriptions whenever issuances of state-owned companies are floundering. Moreover, over the years, LIC has ended up owning close to 10%, or a little more, in about a dozen public sector banks and smaller stakes in a clutch of others.

For the government, IDBI Bank is a relatively easy ‘sell’ since the transfer of shares to LIC does not need any legislation—the bank was set up under the Companies Act. As for getting a nod from the insurance regulator, IRDA, which allows life insurers to own only 15% of an individual stock, the government is hopeful it will be able to get that. The government’s intention is clearly not to privatise the bank; selling it to LIC would leave it a government-owned bank. In any case, genuine privatisation is ruled out for the present. No one will touch the bank with a barge pole in its current state, given the poor asset quality and large workforce, even if it was handed over for free. Although the CASA franchise has a value, as do some of the branches, and a part of the clientele, the lack of capital and the inability to right-size the workforce would hamper a turnaround.

There are those who argue that it makes sense for LIC to own a bank as a subsidiary. They say that LIC would be able to effectively deploy the funds that it gets by way of premiums through the bank. That seems to be fraught with risk. For one, as the licensor, RBI should decide on whether LIC should own a bank and more importantly, the insurance regulator should decide whether policyholders’ funds should be invested via a bank. Also, simply because LIC has a large number of policyholders—around 290 million—it does not mean all of them, or some of them, can be converted into deposit holders. Also, LIC already has a subsidiary, LIC Housing Finance, which specialises in home loans.

The government has infused around Rs 10,600 crore of capital in IDBI Bank earlier this year, but, it clearly cannot continue to support the lender forever. Tough as the decision might seem, the government must stop using funds from other institutions to keep the lender afloat. If IDBI Bank cannot access capital from a private sector financial or strategic investor or from the market, it will have to starve.