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LIC to own a bank finally, but at what cost?

Author: A Saye Sekhar/Wednesday, July 4, 2018/Categories: Government, Expert View

LIC to own a bank finally, but at what cost?

Life Insurance behemoth, the Life Insurance Corporation of India (LIC), has decided to stay committed to its slogan of ‘zindagi ke saath bhee…” by picking up 51 per cent of stake that works out to a sum of Rs. 9,000 crore in the beleaguered IDBI Bank Ltd and “zindagi ke baad bhee”, giving an exit to the Government’s shareholding.

The Hyderabad-based Insurance Regulatory & Development Authority of India cleared the decks for India’s largest public-sector insurer to go the rescue of the ailing IDBI bank from the labyrinth of a whopping Rs. 55,000-crore bad loans and a growing debt without much hope to recover.

The IDBI Bank has received Rs. 12,865 crore, (of which LIC’s contribution was Rs 394 crore and the remaining Rs. 12,437 crore was in the form of capital infusion by the Government of India, in 2017-18.

In a landmark decision allowing the LIC to pick up 51 per cent stake in IDBI Bank Ltd, the Insurance regulator laid a condition that the “white knight” insurer must reduce its stake to 15 per cent in a phased manner. This means the IDBI Bank too would go the same way as ICICI Bank, and Axis Bank, which are now private banks.

This decision of the IRDAI realizes the long-cherished “me-too wish” of the LIC of India to have a bank of its own.

In fact, there are five insurance companies in which PSU Banks hold considerable stake: SBI Life; India First (Andhra Bank & Bank of Baroda); Canara-HSBC-Oriental Bank of Commerce; PNB-Met Life (Punjab National Bank); and IDBI-Federal (IDBI Bank). These apart, ICICI Bank Ltd (ICICI Prudential); HDFC Bank (HDFC Standard Life); Kotak Life (Kotak bank) are the private banks owning insurance companies.

In fact, LIC has a shareholding in excess of 9 per cent in SBI (9.98 per cent), Corporation Bank (13.03 %); and Punjab National Bank (12.24%). It has systematically begun to reduce its share in different banks in the last few years. However, LIC has considerable stake in as many as 21 public sector banks, and three private sector lenders.

Doesn’t it amount to conflict of interest in the event of LIC picking up majority stake in IDBI Bank? Since it doesn’t hold controlling stake in any other bank, it is assumed that it doesn’t lead to conflict of interest. However, All India Insurance Employees Association (AIIEA) general secretary V Ramesh has told The Finapolis that even if it means conflict of interest, it doesn’t matter as the Corporation has been an investor in many banks. 

“There would be an arm’s length distance between the LIC as an insurance company having investment in any other bank and owning IDBI. Therefore, I do not see any conflict of interest a material issue,” points out Parul Gulati, Karvy’s banking analyst.

While the banking regulator, Reserve Bank of India (RBI) too is keen on allowing the LIC to invest big in IDBI Bank to bail it out from the red, the market regulator, Securities Exchange & Board of India (SEBI), is yet to give its nod. If all three are in line with one another, LIC will have to announce its investment pattern and schedule. Would it invest the Rs. 9,000 crore at one go or in tranches is yet to be announced.

However, the public sector bank employees are skeptical about the dilution of stake by the Government.

All India Bank Employees Association (AIBEA) general secretary Ch Venkatachalam says that the decision of the Union Government to sell 51 percent of stake in the ailing IDBI Bank Ltd to the LIC of India is in complete departure of its own commitment.

The Government of India in 2003 assured the Parliament during the enactment of the piece of legislation that created IDBI Bank Ltd, which actually played a pivotal role as a Development Financial Institution (DFI), that it would hold 51 percent in the IDBI Bank Ltd any time, as employees expressed their apprehensions over a possible privatization.

The accrual of bad loans to the tune of Rs. 55,000 cr was actual due to wrong reasons and they were nothing but corporate loans. So, the Government must act on those who took the loans and the bank officials who gave those loans. He cited the former chairman of the bank Yogesh Agarwal’s arrest in the Vijay Mallya case as an example. The government should not delink itself from the IDBI Bank and initiate investigation and bring the culprits to book.

Even if LIC had to invest, Mr Venkatachalam told The Finapolis, the money getting into the IDBI Bank was policy-holders’ money. “What is the justification in allowing public sector insurer to pump in public money into an ailing bank. What is the return on investment for the LIC?” he asked.

Former Director of IDBI Bank K Narasimha Murthy says investment by LIC in IDBI Bank isn’t a solution to the burgeoning the problem of the PSB. He sought to know what’s the package LIC would offer – i) what is the investment pattern? ii) what would be the HR policy and would there be any lay-offs? iv) how would the NPAs be recovered? v) how do you dismantle the staff union structure? vi) how does LIC reduce its stakeholding to bring it down to 15 per cent, as directed by IRDA?

In fact, Narasimha Murthy said IDBI Bank was created when it did not have expertise in working capital lending. And, the banks didn’t have the term lending and project finance.

It’s surprising that neither the bank nor the Government wants to negotiate with Vijay Mallya for a one-time settlement? It appears that every stakeholder wants to be politically correct. A step in the direction of OTS with bad loans like those of Mallya could find a solution.

“Conceptually, I think the move is not a positive development as it seems the government is shifting its problem to LIC,” says Parul Gulati, banking analyst of Karvy. He doesn’t foresee much of resistance from employees to the deal, as its not being transferred to a private company as it would not disrupt PSU culture.

Ramesh of AIIEA says that the policy-holders interest is important to the employees of the LIC and that the Corporation has always been seen as a life-saver to bail out public sector institutions, be it banks or any other institutions.

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A Saye Sekhar
A Saye Sekhar

A Saye Sekhar

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1 comments on article "LIC to own a bank finally, but at what cost?"

Nitin K Parekh

7/26/2018 4:09 PM

Right exposition of the IDBI vs. LIC. LIC being a government corporation, it wouldn't have taken this measure of buying or bailing out the IDBI with the kind approval of Central government. This clearly means the loss of IDBI stands shifted to LIC which is propped up with the funds of public at large. So much for democracy in India!!!

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