LIC to Buy a Stake in IDBI

What is the issue?

The government is proposing to sell a portion of its stake in IDBI Bank to LIC.
The idea of routing policyholder funds into a worst-performing public sector bank has raised some concerns.

What is the proposal?

The government is mulling a proposal to sell around 40-43% stake in IDBI Bank to LIC.
State-owned Life Insurance Corporation (LIC) of India may buy a controlling stake in IDBI Bank.
LIC is currently the largest public shareholder of IDBI Bank with a stake of 10.82%.
If it buys another 43%, its total stake in the state-run IDBI bank will be around 55%.
The stake sale will fetch the government between Rs 10,000-Rs 11,000 crore.

Is this the first time?

LIC has pledged its support to Centre’s disinvestment of New India Assurance and General Insurance Corporation of India last year.
This is already costing LIC dear.
LIC has time and again been used to rescue capital-starved PSU banks.
It has been subscribing to banks’ risky Basel-compliant bonds over the years.
It has also often been bailing out the Centre by mopping up shares of public sector enterprises even in declining markets.

What are the concerns?

LIC is arguably the country’s largest public insurer.
It has a balance sheet of about Rs.28-lakh crore as of December 2017.
Given this, infusing a couple of thousand crore is unlikely to cause any serious harm.
Capital infusion - But, there is concern with the Centre’s massive Rs.10,600 crore bank capital infusion.
Notably, this has not been enough to meet the capital requirements of the bank.
Post capital infusion, the bank’s Tier I capital ratio should have jumped by about 400 basis points.
Instead, the Tier 1 capital at 7.4% as of March 2018 barely meets the mandated requirement of 7.37%.
It is clearly because of the sharp rise in provisioning for bad loans.
Taxpayer's money - The move throws good taxpayers’ money after bad.
It places LIC to perform the rescue act, seemingly an ill-conceived solution.
Notably, tackling a deeper structural issue is the need of the hour.
This is the case, not just in IDBI, but the entire banking sector.
LIC - The string of investments by LIC has about 29 crore policies in force.
The recent move raises questions on LIC as a prudent money manager for its policyholders.
It also raises doubts over

the existing internal investment policies, if any
the overall risk to the insurer’s portfolio and its aggregate exposure to sectors and stocks

The lack of disclosures and opacity in LIC’s investment portfolio add to these concerns.

How does the future look?

LIC is still a market leader in the life insurance space.
But it has been steadily losing market share to its private counterparts.
LIC’s competitive pressures are rising, and IDBI Bank’s capital needs are going to be huge.
Given this, adding the burden of recovering the PSU banks can seriously affect LIC.
The Centre should think twice before using the key players of India’s financial system for its rescue acts.

Source: BusinessLine