In the recent past, this writer has tracked the precarious state of Indian banks, in particular the government-owned public-sector banks. IDBI Bank happens to be the worst of this lot. It has a bad-loans ratio of 28%. This basically means that out of every 100 rupees of loans that the bank has given, 28 rupees hasn’t been repaid by borrowers for 90 days or more.
In absolute terms, its bad loans amounted to 556 billion rupees (about US$8 billion) as of March 2018, a jump of 24% since March 2017. The bank posted losses of 82.4 billion rupees in the year ending March 2018, a jump of 59.7% over one year.
The government is now selling IDBI Bank to the Life Insurance Corporation of India (LIC). It is expected to pick up a 51% stake in the bank. Typically, insurers are not allowed to invest more than 15% in one company. The Insurance Regulatory and Development Authority (IRDA) of India has made an exception in this case on the condition that LIC will reduce its investment in the bank to 15% or lower over a period of time.
Given that LIC is acquiring a more than 25% stake in IDBI Bank, which happens to be a listed bank, it should have triggered takeover regulations. This means that in the normal scheme of things LIC would have had to make an open offer to buy an additional 26% stake from the public shareholders of the bank.
But as we have already seen, LIC’s acquisition of IDBI Bank isn’t following the normal scheme of things. With IRDA looking the other way and waving through the deal, the Securities and Exchange Board of India, the stock-market regulator, is expected to do the same.
In order to keep IDBI Bank going, the government has had to keep investing money in it over the years. With LIC becoming the major owner, that responsibility passes on to that company. Hence, to that extent the expenses of the government will come down.
It is important to understand here that the total share capital of LIC is limited to 1 billion rupees. Hence all it has is money that policyholders have handed over to it, year on year, for safe investment and insurance.
In fact, as of March 31, LIC had a total of 25 trillion rupees of policyholders’ funds. In this scenario, acquiring a 51% stake in IDBI Bank will cost around 100 billion rupees, which is not even a drop in the ocean of funds that LIC has access to.
Having said that, there are multiple issues with this.
First and foremost, the government is openly flouting its own rules to push this deal through. If insurance companies are not allowed to own more than 15% stake in a company, there is good reason behind it. Concentration of risk needs to be avoided at all costs, wherever management of money handed over by the average Indian is concerned.
Also, LIC has huge exposure to public-sector banking. It owns a stake in every public-sector bank in India. Given its size and its mandate, this is not a surprise. Having said that, it owns more than 10% stakes in six public-sector banks. In fact, it owns more than a 9% stake in 10 public-sector banks.
Pushing through a deal where an insurance company becomes a major owner of a bank in essence increases the concentration risk greatly. Basically, the average LIC policyholder is taking on the risk of banks that are in deep trouble. And that isn’t right or fair. It abuses the trust that the average Indian has put in LIC over the years. And in the financial-services business, trust is the biggest thing going.
Those in favor of the decision have been saying that this isn’t the first time that LIC is rescuing the government. But just because something has happened before doesn’t necessarily mean it is right. Also, in the past, LIC picked up minority stakes in public-sector enterprises. Further, these companies made money, unlike IDBI Bank.
But the government isn’t bothered about these technicalities. The question is why? The answer lies in the fact that elections to the Lok Sabha, the lower house of Parliament, are scheduled for May 2019. The buzz in Delhi is that they could even happen earlier. In this scenario, the government of Prime Minister Narendra Modi may want to dole out freebies to citizens before elections are announced. Freebies cost money.
By moving its prospective expenditure to LIC (where the government would have to invest money in IDBI Bank to keep it going), the government is basically trying to create space for expenditure that will have to be incurred to dole out freebies.
In fact, there is also talk about the Jawaharlal Nehru Port Trust, the largest container port in India, wanting to buy the iconic Air India building at Nariman Point in Mumbai. One government firm buying out an asset of another government firm is nothing but money moving from one arm of the government to another.
To conclude, there is nothing that suggests that the government will stop with this. There are many other public-sector banks that are bleeding and require constant infusion of funds to keep them going. In the case of IDBI Bank these funds will now come from the Life Insurance Corporation of India. What about the others? Will the government keep investing in these banks or pass them on to some other financial institution?
That only time will tell.
Meanwhile, keep watching this space.