Why LIC bailing out IDBI Bank is not a good idea2 min read . Updated: 26 Jun 2018, 09:53 AM IST
Since LIC's capital is funds collected from insurance policies, it is not fair on policyholders to find their money funnelled into sick banks
The government wants to sell a large chunk of its stake in IDBI Bank Ltd to Life Insurance Corporation of India, making the latter a promoter. This is not the first time it has tapped the insurance company for funds. Is this a fair thing to do?
What is the government’s plan?
The government currently holds 85% in IDBI Bank, one of the 21 public sector banks in the country. It infused ₹ 10,610 crore into the bank in FY18 to help the lender maintain the regulatory minimum in capital adequacy. IDBI Bank has the highest NPA ratio among state-run lenders. The government has been making noises on banking reforms by reducing its stake in lenders progressively. IDBI Bank is the easiest option as it is not under the Bank Nationalization Act and hence does not depend on legislative changes.
What is the moral hazard in LIC’s investments becoming a controlling stake in banks?
LIC holds a stake not just in IDBI Bank, but almost every public sector lender. As things stand today, a controlling stake in one bank (say, IDBI Bank) would mean a significant infusion of capital in the bank beyond the initial stake purchase. Since LIC’s capital is funds collected from insurance policies, it is not fair on policyholders to find their money funnelled into sick banks. Also, if LIC owns a bank, its stake in competing banks must be examined.
What is LIC’s investment policy?
IRDA has capped LIC’s equity investment in other firms at 15%, but the insurer has some leeway as it is under the LIC Act 1956, which precedes IRDA Act 1999.
Can RBI or IRDA raise any objections?
The government is said to have approached the regulators to approve the stake sale. LIC is a big player in the loan market without being a bank. The insurer’s FY17 annual report shows that it gave over ₹ 1 trillion in loans. RBI has earlier frowned on LIC’s links with banks and flagged the risk of contagion should things go awry at the insurer. IRDA has dodged demands to increase LIC’s equity investment cap to 30%, maybe for the same reason.
What are the options for IDBI Bank?
In 2004, when IDBI was converted into a bank, its stressed loans were transferred into a Stressed Assets Stabilization Fund. Repeating this by bifurcating the corporate and retail book of the bank could be an option. Another option would be to get pure private capital but the bank’s balance sheet will have to be fixed first. The third option is to merge IDBI Bank with another bank.