Just weeks ago, the government had floated the idea of a bad bank for the second time and now it has realized its folly by doing so.

After all, why risk public outrage by warehousing the toxic assets on a separate balance sheet funded by taxpayers’ money when it is far easier to just transfer the headache of managing the public sector bank with bad assets to someone else.

Enter the idea of Life Insurance Corp. of India (LIC) buying a majority stake in IDBI Bank Ltd, the state-owned lender with the most toxic asset book among banks. This proposal has now got the blessings of the insurance regulator.

LIC would fork out up to 13,000 crore for a 51% stake without management control and also with differential voting rights. The Banking Regulations Act caps voting rights to 15% of shareholding.

IDBI Bank made a cumulative loss of 13,396 crore over fiscal years 2015-16, 2016-17 and 2017-18, has close to 55,000 crore in toxic assets and another 60,000 crore that could turn non-performing.

The lender’s recovery rates are horrible and write-offs are through the roof.

Long story short, it will need large sums of capital for the next three years just to exist at the very least.

It’s a rescue mission and LIC cannot dream of making money. In fact, it can only sink in more money for the next few years.

Indeed, the life insurer seems to be the government’s preferred white knight for rescue missions. It has the highest stake in perhaps the worst of the banks, having participated in capital infusions before.

LIC holds stakes in all the troubled public sector lenders, averaging 8% in each.

Its stake is lowest—below 5%—in Indian Bank, Bank of Baroda and United Bank of India.

These banks account for roughly 8% of the non-performing assets (NPA) stock of the country’s banking system.

The six banks in which LIC holds over 10% stake account for quarter of the system’s NPA stock.

Simply put, LIC is exposed to a huge chunk of the banking system’s bad assets. If this doesn’t make it a bad bank, what will?

The Reserve Bank of India has already flagged the risks to the banking system from its dependence on the insurer’s funds.

Given the state-run life insurer’s track record, a broader question asked by many analysts is, what can stop the central government from palming off its ownership of other sick companies like Air India if the IDBI Bank experiment works?

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