LIC rides to the rescue of public sector banks

The Life Insurance Corp. of India (LIC) has been helping the government pump in money into capital-starved public sector banks. It has been increasing its stake in public sector banks for the past few years, as you can see from the chart compiled by Kotak Institutional Equities Research. The latest addition came on 31 March when IDBI Bank sold its 2% stake with the National Stock Exchange to LIC for around ₹ 351 crore, a part of the turnaround plan for the bank.

In fiscal year 2016, LIC has infused a total of ₹ 2,539 crore in public sector banks Allahabad Bank, Andhra Bank, Bank of India, Central Bank, Corporation Bank, Dena Bank, IDBI Bank, Indian Overseas Bank, Oriental Bank of Commerce, Syndicate Bank and Vijaya Bank. This after LIC infused a total of ₹ 1,850 crore in 2015 and ₹ 366 crore in 2014 in the PSBs. These capital infusions aid the government in its efforts to infuse badly needed capital into publicly-owned banks.

Given its fiscal constraints, the government has decided to infuse ₹ 25,000 crore in FY17 after infusing a similar amount in FY16 in select PSBs. But these amounts are not enough, especially because massive bad loans have severely eroded several banks’ net worth. Therefore, LIC has ridden to the rescue, increasing its stake in at least half of the capital starved small and medium sized PSBs in the past 16 months.

Clearly, “the small and mid-sized PSBs need capital badly due to low capital adequacy ratio. The smaller PSBs can’t go to the market and raise money through tier 1 bonds or do private placement because of cheap valuations and ratings downgrade. Hence LIC is bailing them out,” said Siddhartha Purohit, senior research analyst from Angel Broking.

Apart from funding public sector banks, the Kotak note also points out that a third of the government’s divestment receipts has come from LIC since FY12. It adds, “LIC has also been roped in by the Indian Railways, another arm of the Government of India, to subscribe to ₹ 1.5 trillion of its bonds over the next five years. Such internal transfers between ‘government entities’ do not provide the checks and balances that a market fund-raising does.”