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LICs investment in IDBI: A good move?

  Is LICs investment in the plagued IDBI bank a good decision on the government? Although the move is to ostensibly allow the floundering bank to turn its fortunes around, the deal may have far reaching repercussions.  

Dr Suresh Srinivasan

Life Insurance Corporation (LIC) is the Indian government-owned life insurance company, a brand name in which the country has enormous trust when it comes to life insurance policies. There were two key developments in recent weeks that put LIC in the spotlight.
The financial crisis and default of the infrastructure financing company Infrastructure Leasing & Financial Services (ILFS) is the first case where LIC is the largest equity shareholder. ILFS reported to be in a dire financial condition with severe liquidity crisis, and LIC has agreed to fund additional loans to this company. The second case, a more prominent one, is the announcement that LIC will now hold a majority 51% stake in IDBI Bank and turn IDBI, which did not have many takers, into its subsidiary.
The contentious issues here is that the core objective of LIC is to issue life insurance policies to the general public, collect premiums and through this process maintain its financial health, so that redemption of policies are honoured in the normal course as they fall due. Of course, LIC has a mandate to invest the premiums and surplus cash into investment that it deems fit and that would offer an appropriate return without putting the policyholder monies at great risk.
A part of the surplus funds in LIC are parked in equity investments, which is considered to be riskier than investments in debt, but the question is whether it is appropriate and acceptable for LIC to become the largest strategic shareholder in companies and run them, which is being planned for its majority equity investment in IDBI. Does LIC have the expertise to turn failed companies around? Is this a good way to manage policyholder monies? These are some of the pertinent questions that arise.
Before we analyse this question, we need to understand the major issues that are affecting the Indian banking industry.

Indian banking sector: Key concerns
Indian banks are fraught with high levels of non-performing assets (NPA) and low levels of capitalisation. These include the doubtful payments and the restructured loans which the borrowers were unable to pay back on time. These NPAs crossed the `10 lakh crore mark, and is a significant burden on the economy of the country. While a strong and healthy banking system is considered vital for any economy and can be a saviour at the time of financial distress, India’s weak banking system has always been a concern.
Many banks are on the verge of faopiling, and the government has been announcing small packages to capitalise. Recently, an `88,000 crore package was announced to capitalise the banks in the country. The need for such capitalisation is the poor performance of these banks, driven by the lack of governance and an independent professional board that can provide management depth and execution oversight. Interference from the government in commercial decisions is a major concern.

P.J. Nayak committee
A few years back, the P.J. Nayak committee flagged precisely these problems and recommended creating an intermediary structure, through which the Banks Board Bureau (BBB) could professionally run the public sector banks (PSB) taking the burden away from the government.
Although the BBB was created two years ago, it was unable to provide an independent professionally run platform as government interference continued.
 It is very important to understand that if the government does not get out of managing banks, it would need to drain more valuable public money into uncompetitive PSBs. Instances like LIC investing in IDBI Bank are by no means an answer.
The government needs to seriously consider privatising such weak PSB’s; this is extremely difficult from a political perspective, with serious employee union issues, but is becoming inevitable by every passing day.

IDBI Bank
Earlier this year, the Reserve Bank of India (RBI) voiced its concern to the finance ministry on the poor financial position of the government-owned IDBI Bank. The RBI noted a number of issues with the bank’s operations, including the way the NPAs were calculated and reported. It aired its view and assessment that IDBI’s NPAs would be far higher than what was being reported by IDBI.
A number of cases of fraud and corruption involving IDBI were reported.
In the Kingfisher case, the Central Bureau of Investigation claimed that IDBI officials played an active role in the sanction of loans to the airline in spite of Kingfisher’s poor credit rating. In the Sivasankaran case, the CBI opened cases against many senior IDBI officials for allegedly cheating the bank to the tune of `600 crore. In other cases like the Kisan Credit Card scam, the CBI filed three cases to the tune of `740 crore and more. Major lapses in processing and disbursing loans by its officials in Andhra Pradesh and Telangana were also reported.
The RBI also moved IDBI into the prompt corrective action (PCA) framework, which brings the bank into close monitoring by the RBI. IDBI’s reported gross NPAs came out at more than `50,000 crore by the end of 2017, which translated close to 25% of its loans and advances. Its profitability figures were low and declining. Being under the PCA watch list does not allow IDBI Bank to lend, although it can still collect deposits; in essence, it is yet to restart its normal business.
The government also infused equity for IDBI to tide over its financial distress as well as for the bank to meet the minimum common equity tier capital norms.

LIC’s equity investment in IDBI
The primary concern about the current LIC-IDBI deal is that such an action is a gross misallocation of resources — valuable policyholder money is being used to bail out sinking banks. The bigger concern is whether there is a credible turnaround strategy to provide LIC with an appropriate return on investment.
There are proponents who argue that the deal is not as bad as it sounds. IDBI’s investment of around `10,000 crore is less than 2% of LIC’s equity assets under management (AUM), and the equity investment by itself is only 20% of LIC’s total assets. Although LIC’s investments in IDBI may be proportionately small, the philosophy of reactive investments, rather than a planned disinvestment of banks, is the bigger concern. Clubbed with this is the concern of using the policyholder’s money, and if such instances can become a precedent for similar future transactions, is also a concern.
Of course, there is an argument that it would be a win-win situation both IDBI and LIC, where IDBI can sell LIC’s insurance policies, and LIC’s policies can be marketed to IDBI Bank’s 140 million customers through its 1,900 branches. This is absolutely flawed, and no equity infusion is required to achieve this; a mere arms length agreement between LIC and IDBI can effectively achieve this objective.
The rationale for the government to have gone ahead with this deal could be that it may not have wanted to upset the apple cart by announcing one more failed bank at this stage when elections are looming.
These could provide wrong signals on governance, especially with the government having recently brought in many credible and worthwhile reforms in the banking industry through the recently announced stressed assets resolutions regulations. With everything said and done, it is extremely difficult to justify this deal! 

Dr Suresh Srinivasan is a Chartered Accountant, has an MBA (Bradford UK) and a Doctorate in Strategy. He is the Director of the 2-year PGDM at Great Lakes Institute of Management, as well as a Professor (Strategy & Accounting). He is also a management consultant.